Living room wars
Control of the TV screen is seen as a major step in the next iteration of computing. The field can be divided between hardware manufacturers, content providers and end-to-end players who are looking to provide a complete solution. The net result is that while everyone is trying to get into every other player’s field, the emerging winners may not be the ones who grab most of the headlines.
Content aggregators: Distribution is key
While most people focus on Netflix against traditional media, the number of players in this field has exploded. Apple, which has established de-facto control of the music business, is trying to do so again with iTunes. Similarly, Amazon has extended its lead in the distribution world by providing both rental services (through its Amazon Prime offering) and video-on-demand (through its Amazon Instant store). Meanwhile, secondary players like Wal-Mart (with its Vudu subsidiary), Best Buy (with CinemaNow) and Coinstar (with its upcoming Redbox service) are vying for a different piece of the pie. Of those, Vudu is probably the most interesting as it attempts to differentiate itself through higher quality streams and special features (for example, offering 3D movies for capable TV sets).
In this arena, an emerging pattern appears to be that movies are increasingly an on-demand type of service, with television programming being a monthly rental one (Hulu+ is another player in this space), turning services like Netflix into catchup TV services instead of true movie delivery ones. While back catalogs of movies are slowly making their way into streaming collection, it appears the movie industry has decided to mostly hold back its content.
But aggregation alone is not a sustainable business model for companies as it increases their reliance on the content providers who thus can hold them hostage for higher fees. This is why we are now witnessing Netflix, Amazon, and Hulu slowly veering into the area of content creation (or at least content underwriting), which will put them in direct competition with existing TV networks.
Distribution, for those players is key. Netflix has gotten an early advantage on its competitors as the first mover, getting embedded into just about any piece of connected consumer electronic that attaches to a TV today. If Amazon and others wish to catch-up, they need to ensure that their presence is as widespread as Netflix’s is. It would not be at all surprising if next year, we were to see Netflix starting to pop up on cable TV services, as another channel alongside the likes of HBO or Showtime.
Cable TV: Google’s missed chance
Control of the living room is an area where there are many potential gatekeepers. From the lowest end of the stack to the highest one, content must pass through first a cable or phone company provider (who control the pipes that get content into your living room), then through a specialized piece of consumer electronic (either embedded into your TV or delivered through a set-top box), all the way up to a piece of software that resides within the consumer electronic.
Control of the pipes is the area that gets the most visibility, with continuing discussion of net neutrality and the ability to deliver all content in the same fashion on a cable or telecom network. However, most of the control these days may be sitting farther up in the stack, as the set-top boxes that pump content into the living room are more limited. Thanks to a series of acquisition throughout the last decade, American households, for the most part, get their TV content from either Cisco or Google. Cisco first entered the field when it bought Scientific Atlanta and last year Google ended up as a dominant player in the market when it acquired Motorola.
But Google seems to have misunderstood the value of its new asset as it is now shopping the unit around at a rumored US$2 billion price (note that Cisco is also trying to sell its Scientific Atlanta unit, as it is scaling back its consumer presence to focus on its core networking capabilities.) Interestingly, Google is trying, unsuccessfully so far, to get at the living room through a new Google-TV product that aims to offer the capabilities of Android devices onTV screens. This is an attempt to follow in Apple’s footsteps, as the Cupertino company offers an inexpensive AppleTV device that allows iOS devices to move content to their TV screens.
Why Google is trying to be a follower when it already has a stronger position in the living room could leave external observers scratching their heads: Google already owns a content aggregator (YouTube) which, if integrated with the Motorola set-top boxes could give it almost instant control of American living rooms. In a similar fashion, the company could look at the upgrade cycle of their boxes and introduce their GoogleTV offering in that cycle if they wanted that operating system to represent their position there.
Ultimately, Google abandoning the TV set-top business may speak to the company deciding that cable, as a business, is dead and that rebooting their TV offering is the safest course. Whether this works will depend on how other players react.
Set-top boxes: Hardware only or end-to-end model
And there are many other players, which can be broken into roughly two categories: on one side, you have companies that are looking to make their money mostly through sales of consumer electronics. For example, Vizio (with its VIA service), Panasonic (with its Viera line), and Samsung (with its SmartTv platform) are all trying to get content developers to offer programming on their TV platforms. In parallel, companies like Western Digital (with its WD TV product line), Tivo, Roku, and Boxee, want to become the next generation of content aggregators, offering decoder boxes for internet streaming content.
And then, there’s the end-to-end integrators, who see revenue coming not from the hardware itself (which they often sell at or below cost) but from the fees they will get when content is bought through their platform. AppleTV is the clearest example of this, as it serves as a way to get people to buy more content from iTunes; Microsoft (with the Xbox), Sony (with the Playstation) and Nintendo (with the Wii line) are also trying to expand beyond the gaming world which allowed their devices to enter into the living room and into a world where they are providers of all forms of streaming content into the living.
Amazon: The emergent winner
An interesting hybrid of this approach, however, is Amazon, which offers its store as a piece of software on most of the platforms I’ve highlighted above (though Apple won’t let it on the AppleTV) and also works on its own integrated and subsidized hardware with the Kindle Fire HD, a device that works as a tablet but can also be connected to your TV to stream to it.
What is fascinating about Amazon is seldom mentioned as the possible winner in the living room battle. Its prime offering has largely been seen as a me-too approach to content, mirroring what Netflix does in the space with little innovation. Meanwhile, its video-on-demand store has been seen as less relevant than the iTunes store because it does not have the polish Apple brings to its product. And the Kindle Fire HD has been laughed at as a low cost tablet that cannot possibly be considered anywhere near as good as an iPad.
But put all the pieces together and you are seeing an emergent player that is quietly striking deals across the whole value chain to embed itself in the key areas of control. Today, Amazon can be found on most gaming station (It’s on the Xbox 360, Sony PS3, and Nintendo’s WiiU), inside TVs (Vizio, Sony, Panasonic, LG, and Samsung latest TV models all carry it) and it’s starting to make its way through streaming boxes (Roku, Tivo). This gives it a level of distribution that is rapidly matching Netflix, the leader in the space.
And finally, Amazon has started to invest in original content, with the creation of Amazon Studios, a movie production company (with a first look deal in place with WB) which already has 23 titles on its development slate.Meanwhile, the company has built up a substantial collection of titles, acquiring rights to stream either through its monthly service or VOD one, hundreds of thousands of titles. Looking at the Amazon VOD catalog, which offers movies for between US$4.99 and US$5.99, one can find most of the titles that are available on DVD or BluRay disks. They may not come with all the features that come on physical media but the on-demand nature is enough to make it competitive in the space.
All and all, while other players have been making a lot of noise, Amazon appears to have been busy quietly assembling what could be the leading player in your living room in the future. One may see it as a set of happy accident but knowing Jeff Bezos, I would not bet it is.