The Connected TV Device Landscape
Almost all entertainment devices entering the home now have connectivity capabilities. These connected TV devices include smart TVs, gaming consoles, streaming video media devices such as a Roku or Apple TV, and Blu-ray players.
Currently, more than 50 percent of U.S. broadband households have at least one consumer electronics home entertainment device that streams video and is connected to the Internet. Among consumers, the prevalence of connected devices varies by age, with the majority (70 percent) of consumers 18 to 24 connected, but even one-fourth of consumers 65 or older have at least one connected CE device.
Over-the-top streaming continues to grow in popularity and in consumer awareness. For the first time, consumers are watching more than twice as much Internet video on a TV set each week than pay TV video-on-demand. Also for the first time, consumers are watching more online video on a TV set than video provided by DVDs and Blu-ray discs.
The percentage of consumers who view only streamed OTT content is small but growing; however, the vast majority of broadband households haven't given up their cable and satellite subscriptions. Even among the youngest households, cord cutting has remained static, with pay TV penetration steady at 70 to 80 percent and price increases -- not OTT -- remaining the top reason for those who do cancel pay TV services.
Simply put, consumers still want their live TV. A 2012 Nielsen study noted that consumers watch 34 hours of live TV per week and that viewing habits haven't changed materially in about four years, although this varies by age. Younger consumers watch 22 hours, and older consumers watch 48 hours.
The number of consumers watching online content and the time they spend doing so will only increase, however.
Internet traffic will continue to grow -- by more than 40 percent by 2016 -- with online video accounting for more than 50 percent of the traffic in North America. By 2017, almost 200 million consumers will watch online movies and TV shows.
In 2013, Sandvine reported that Netflix and YouTube account for almost half of peak downstream traffic in North America. Netflix grew 35 percent year-over-year from 2012 while YouTube traffic increased 24 percent.
Players need to strategize now to establish a unique position in the connected TV ecosystem. The opportunities for connected TV devices will derive from finding their natural fit within the content-distribution ecosystem and then defining the potential for generating revenue beyond the initial purchase of the device.
Most providers will have available if not the same content then the most popular content apps. While content will provide some level of differentiation, the key differentiators that drive sales and usage will come from interface-related features and ease of use. Unified search capabilities will be of paramount importance.
As a result, ownership of the primary interface is significant and remains a subject of discussion and negotiations.
When consumers turn on a TV now, the majority see live TV, although some operators have recently been showing an interface with content options and a live TV picture-in-a-picture. Device manufacturers want viewers to see their interface, and then, if the viewer opts to go to live TV, the viewer can do so either through an operator app or a live TV picture-in-a-picture.
All original equipment manufacturers want to own the overall interface and remote functionality for their device and services to leverage potential opportunities, such as monetizing the streaming service through content placement and advertising; promoting products; and developing stickier relationships with customers.
Recurring Monthly Revenues
The advantage of owning the interface is the ability to monetize the service. Most consumer electronics manufacturers have single-digit margins; if they gain ownership of the interface, it opens up the possibility of recurring monthly revenues.
Operators will own their own experience within their apps and for their live TV and VoD. Content providers will also own their own user experience, but only after the viewer selects the app. The use of operator apps also has the potential to open up a new market for operators by enabling subscription sales of some content outside of their current physical footprint.
In summary, as household streaming continues to increase, home entertainment device manufacturers want to develop recurring monthly revenue cash flow from owning the streaming user experience. They are competing for that ownership with pay TV providers and content providers.
Manufacturers seek differentiation by offering unique experiences through delivery of content and development of features and functionality. They are focusing particularly on the user interface and content discovery options, with the belief that if these features are superior, they will propel them into the lead.