June 12, 2013: The War on TV – The Attack of the Boxes

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New devices are stepping in front of TV set-top-boxes, wresting platform control of the living room from multichannel operators. The latest, MSFT’s Xbox One, raises the bar, delivering a powerful voice/gesture driven interface that puts on-line content on equal footing with TV. With pent up demand from gamers, Xbox One should be fast out of the gate, adding to the pressure on ambitious and deep-pocketed rivals, like AAPL, GOOG, AMZN, and INTC to deliver their own disruptive innovations to a TV platform. With further competition from Sony’s new PS4 console, innovative next-gen set-top offerings from Roku, Boxee, Dish and others, and the growing influence of portable platforms, consumer awareness of superior alternatives to the set-top box and its cumbersome remote control will rise quickly and erase remaining barriers to the consumption of streaming media in the living room. This will be a significant boon to purveyors of on-line video, such as NFLX, Hulu, GOOG, AMZN, AAPL, YHOO and others, and, in the long run, an existential threat to the channelized TV model.

 

For years, the cable set-top-box ruled with an iron fist. From its birth, cable TV grabbed the default input 1 to the television, establishing the set-top-box and its cumbersome remote as the primary interface to the living room entertainment system. VCRs, game consoles and DVD players were shunted to the secondary inputs, unable to control channel selection on the TV feed. This inside position has allowed multichannel operators to co-opt valuable functions, such as DVR recording, pay-per-view, and on-demand, for themselves, and to force on-line video services to reach the living room via peripheral devices attached through secondary inputs.

 

Innovative living room devices beginning to challenge set-top-box hegemony. In the past few years, technology companies have begun to attack cable domination. TV makers have begun to employ their own “smart” interfaces to give consumers better ways to navigate between TV and other services/applications. Game consoles – Xbox360, Sony PS3 and Nintendo Wii – added streaming media access to their internet-based gaming networks. Alternative set-top-boxes from TiVo, AAPL, Roku, Boxee, Dish and others have delivered significant innovations – AAPL’s Airplay integration with iOS devices, Boxee’s Cloud DVR, Dish’s ad skipping Hopper, etc. – and have gained footholds in US households.

 

Tablets/smartphones vying for viewers, augmenting TV experience. The proliferation of portable devices drastically changes the TV proposition. Individual household members can opt to view alternative programming directly, or to “multitask” drawing attention from the television, particularly during commercials, and offering an alternative vehicle to advertisers looking to reach viewers. MSFT with its SmartGlass application, and AAPL, with its Airplay, have both moved aggressively to integrate portable devices into the big screen experience. With continued tablet penetration and ever more sophisticated integrated viewing apps, the portable threat to the traditional TV value proposition will only grow more intense.

 

Xbox One ups the ante. MSFT’s recently announced Xbox One steps in front of the set-top-box on input 1, replacing the clunky grids and menus with a slick voice/gesture/portable device controlled interface that seamlessly shifts from TV, to on-line, to games, and allows split screen multitasking. That interface is tied to a comprehensive list of on-line programming partners, including an exclusive deal with the NFL for multi-screen content, and a powerful cloud infrastructure, with 300,000 servers explicitly assigned to Xbox One. MSFT will also benefit from the community of 77M Xbox360 users, 46M of whom subscribe to the Xbox Live on-line service. MSFT sold more than 10M of the 8 year old Xbox360 in 2012 – the new model will likely sell MUCH better, given pent-up demand from the gamer community. This is a serious play for the future of the living room.

 

We expect AAPL, GOOG, AMZN and others to step up their efforts. Sony will offer its recently announced PS4 console to compete with MSFT. AMZN is widely believed to be readying its own next-gen TV device, almost certainly to feature AMZN content and to sell at a highly subsidized price. The constant yet unfulfilled rumors of an iTV have been nerd comedy fodder, but the more pedestrian Apple TV box has sold more than 13 million units, offers some cool features, and is due for an upgrade. Roku just secured an additional $60M in funding, and intends to pitch its next-gen set-top software to smart TV makers. Boxee has announced a Cloud DVR service for storing programming. GOOG has whiffed a few times with its GoogleTV concept, but its skills, assets and ambition suggest that the company is unlikely to give up. INTC has confirmed that they are also at work on a TV solution that would combine a next-gen box with an associated programming service – rumors have suggested support for 4K video and significant progress on programming deals with network partners. All of this could hit the consumer market for this Holiday season, a potential living room rout for traditional TV.

 

On-line video viewership could spike up into 2014. We believe that innovation and competition amongst new living room devices will spur a step function increase in category demand. Combined with interface designs that will make users source agnostic as to whether programming is available on traditional channelized TV or on-line, important barriers to video competition will have been broken. We believe strong adoption of these devices will greatly exacerbate the downward trend in television viewership evident over the past two years. We believe that Microsoft and its Xbox One will be clear beneficiaries, with the success of would-be rivals like AMZN, AAPL, GOOG and INTC determined by the quality of their yet-to-be revealed solutions. The changes will be unambiguously good for distributors of on-line video content, such as GOOG, NFLX, AMZN, and YHOO. In contrast, this phenomenon is a bad sign for channelized networks, such as DIS, VIA, TWI, NEWS and CBS, and multi-channel distributors, such as CSMA, TWC and DTV.

For our full research notes, please visit our published research site.

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