Will Apple, Google, or Amazon topple legacy TV providers? A look at the upstarts' strengths and limitations.
The battle for the living room is on! In this corner we have massive media companies like Comcast, DirecTV, and Time Warner; and in that corner we have a group of plucky upstarts like…Apple, Google, and Amazon? Okay, David and Goliath it's not. But it remains a dramatic fight, with huge implications for how we all consume content going forward.
The first part of this column looked at the history of what is generally known as "interactive TV" and how legacy providers have tried to bring Web content to their platforms through apps. In short: the content variety and control that started on the Web, moved to smartphones, and has so flourished on the tablet, has produced a consumer who now requires improved tools for accessing Internet content on the biggest screen in the house.
In the first installment, the focus was on the providers with the biggest networks. While their existing hooks into homes gives them a huge advantage - 22 million Comcast homes, 15 million DirecTV homes, and so on - that same massive scale can also act as a millstone around their necks. Imagine replacing 20 million set top boxes with even a $100 new product in each home; it's a whopping $2 billion expense. As a result, you can guarantee it won't be done quickly or easily.
On the other side of the battle are the non-legacy competitors known as "over-the-top" or "OTT" providers. Rather than using coaxial cable (like the cable companies), copper or fiber (telcos like AT&T and Verizon), or satellite (like Dish and DirecTV), OTT companies use the Internet to provide video, text, and services, bypassing the existing methods.
What's Good About OTT?
Current technology: Because everything accessed by OTT services comes from a web server, it's much harder to get outmoded. You can redesign your video service in the same way you redesign a website. Each time a user accesses it, he or she gets the latest and greatest technology and features. Within the world of cable, implementation often takes three to five years.
The app metaphor: Rather than forcing apps into existing systems, OTTs mimic mobile and Web infrastructures. Rather than having an "apps section," think of OTT services as a collection of apps; apps that play recorded video, access social networks, stream content, etc.
Simple: The hardware (think set-top box equivalent) does not have to be very sophisticated; it's a simple, low-end computer with some kind of local storage. Imagine browsing the Web on a very cheap PC; if your Internet connection is fast, there's no marked difference from a super fancy computer. In fact Roku has just released its most recent streaming service on a thumb drive, showing just how simple these devices can be.
Responsive: OTT device responsiveness tends to be much better than legacy. The latency experience of pressing a button several times and not getting a reaction - only to have all of the presses happen at once several seconds later - is one of the primary annoyances with legacy systems. OTT has wait times for downloads, but once something's on the screen, navigating and choosing are quite seamless.
Price: Generally speaking, OTT options are going to leave you significantly more in your wallet each month. While you give up choice, you have the opportunity to pick "à la carte" in a way that none of the established players allow. If, like most people, you use a tiny fraction of the services and channels your provider gives you, you can pick what you really want and leave everything else behind.
Portability: Nearly all OTT services allow access wherever you have an Internet connection. This is a huge step up from the byzantine rules that the legacy providers have for access on any device but the TV.
"Good guy" halo: Consumers generally don't like their legacy providers, and if they are given a compelling option, they'll be excited to switch.
Where Is OTT Behind the Curve?
In a few places.
Reliability: When we moved from landlines to cell phones, we were sad to lose the nearly flawless service, but cheerfully exchanged it for mobility and functionality. OTT is a similar shift, and consumers have to weigh the benefits. Requests time out, Internet congestion makes video playback erratic, downloads can slow or stall - basically all of the web's downsides.
Professional TV content: This is the key differentiator, and the reason OTTs are having a tough time getting significant market share. What they do so well with web content is shadowed by their lack of a subscription model. As noted below in "The Rise of the Virtual MSO," this might change, but for the moment it's an incredibly mixed bag of content. Netflix has been the most successful, and has made deals to amass a significant library in their instant streaming. But if timely access to prime time content is a priority, it's hard to get past this issue.
Confusing: Many of the OTTs overlap. You can access Netflix in so many different ways through most of the OTT services, but Netflix itself is an OTT.
If CES 2011 showed us anything, it was that everybody is trying to slam as many apps as possible onto their TVs, often with confusing results.
The Purchasing Psychology Problem
A big issue for OTTs is around hardware. Currently the model for these services tends to be "the consumer buys the box." It's a huge - maybe insurmountable - barrier to entry. I was once on a team creating an amazing interface for a set-top manufacturer. Just after we finished the design and it was going into production, the client let us know that the product would be in big box electronics stores, retailing for $1,200. Right then and there we all knew the project would be killed, and it was. It's vitally important to understand that consumers don't like making big purchases.
We're happier paying monthly fees because it doesn't feel like a lot of money. Emotionally, we feel like we get our cable and satellite boxes for free, when in truth nearly everyone pays a rental fee of around $10 a month. Most boxes are in the field for six years or more, so while we actually pay around $700 for our cable boxes, we don't have a big cash outlay, so it feels better. The cell phone industry has also figured this out, providing heavily subsidized hardware to entice monthly expenditures that more than pay for the cheap phone.
The business of renting hardware is messy, but it's a great way to move the OTT business away from single transactions and lock in repeat customers.
So How Do the Various OTT Players Stack Up?
Apple TV : Everyone expects Apple to make a big move in 2012. Everyone is speculating that an actual television (essentially a TV with AppleTV built into it) will be released this year. At the moment, Apple TV (below) is unspectacular out of the box and on its own. Yes, you get a great selection of titles, but it's a lot to ask consumers to pony up for another box that doesn't do any more than their computer does - and with a worse interface. Two concepts make AppleTV interesting:
Netflix: The former OTT golden boy has had a tough six months. Currently, Netflix is a service on over 400 devices and a great value add for any consumer; but it's not going to enable anyone to actually cut the cord with legacy providers. People might cancel all of their movie channels when they have Netflix, but most won't go beyond that. Can Netflix increase its library, and figure out a way to get a semblance of live (even if it is all through IP sources) content? Or will the content owners let their contracts expire, leaving the emperor with no clothes? (A content owner I work with whose content is on Netflix once explained the economics to me: they get 18x to 25x more revenue when a movie is bought from iTunes than when it is watched on Netflix).
Amazon: The company is continuing its desktop battle with Apple in the living room. As with music on the desktop, Amazon is fighting Apple's closed system with more open standards. Amazon is available on dozens of devices: TVs, TiVo, Blu-ray players, Roku boxes, and more. And while the primary use is the 100,000 Amazon titles that consumers pay to buy, Amazon Prime members (who pay $79/year) get over 3,000 streaming titles for free. It's a typical Amazon move to use digital media to support its primary business (see: Kindle) but as the library gets better, it could be a big draw.
Google: What the hell is going on with Google TV? The big splashy launch and Kevin Bacon commercials segued into pulling the product off the shelf. Google TV started 2012 with a slew of partner announcements - then was basically nowhere to be found at CES. So it's out there - kind of - but until Google TV's strategy is clear, it doesn't make any sense for consumers to make a purchase decision based on Google TV. In December, Google Executive Chairman Eric Schmidt prognosticated that "By the summer of 2012, the majority of the televisions you see in stores will have Google TV embedded in it."; While it's never wise to count Google out, at the moment that would be as big a trick as making Yahoo and Microsoft nearly irrelevant in the search space….
Sony: In addition to a small number of apps, Sony recently launched its "Video Unlimited" service, allowing people to use nearly any Sony device (PS3, PSP, Xperia smartphone, etc.) to buy or rent movies and TV. (Full disclosure, my team partnered with Sony on the design.) Sony has continued making inroads into selling digital media and looks to go beyond merely providing the hardware device to become a seller of content as well. The multi-platform part of this is a particularly interesting. As you can see in the video below, content can be purchased and accessed on mobile devices, giving Sony an ecosystem that, while currently smaller, is similar to Apple's.
Xbox: In December, Xbox360 unveiled the "dashboard" for the nearly 60 million consoles in the market. And while those numbers are big, the app marketplace is pretty small. The dashboard is beautiful and very much within Microsoft's "Metro" look, but there's not much beyond the ubiquitous Netflix, Hulu Plus, Epix, Dailymotion, and a bunch of others. A rich app environment this is not.
The Rise of the "Virtual MSO"
If one of the OTTs can turn itself into a virtual MSO, the legacy providers will get true competition. MSO ("multi-system operator") is the label used to define Comcast, DirecTV, Time Warner Cable, Verizon FiOS, and the other TV providers. Industry expert Rich Greenfield of BTIG (subscription required) has been using the term virtual MSO to describe a provider without an existing infrastructure providing live, multi-channel access over the Internet. Barriers are very high, and they aren't just financial. Developing relationships and making deals with the network programmers is a substantial task. Greenfield believes that 2012 will yield one of these deals, making it the year where interactive TV truly comes to the forefront.
When consumers have a modern, lower-cost option to get the channels they want and the interactivity of the web packaged for TV, it's going to be time for legacy providers to get nervous. But don't feel too bad for them; remember, they're the ones providing all the bandwidth to the home, so while they stand to lose revenue and customers from the TV, they'll still be providing the pipe.
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Andrew Solmssen serves as managing director of Possible's Los Angeles office, leading the firm's West Coast client teams and determining best practices for engagement management.
He previously served as managing director at digital firm Schematic, where he played a key role in developing some of the earliest advertising models for delivering broadcast content via the Internet. Andrew was also responsible for providing strategic guidance to clients such as Comcast, ABC Television, and NBC Universal in the areas of digital strategy, content distribution, mobile entertainment, and Internet TV. Before Schematic, Andrew served as executive producer at Web design and consulting firm Kaufman Patricof Enterprises.
A frequent speaker at industry events such as Digital Hollywood and CES, Andrew is also regularly quoted by business and trade media on the topics of digital advertising and technology innovation. Prior to his involvement in digital media, Andrew lived in Namibia as part of the Harvard Institute for International Development.
Follow Andrew on Twitter @asolmssen.
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