With IPTV, TV manufacturers tried to get into the content distribution business. It didn't work out. What happened?
A bit more than 10 years ago, connected TV emerged as a way to revolutionize consumer entertainment. Leading the way, TV manufacturers were creating IPTV portals for on-demand content, trying to become major content destinations for consumers. Some TV OEMs even dreamed that their TVs would become consumers’ major entry points for all kinds of web applications. The revolution happened. All kinds of on-demand services are flourishing, new companies entered the business and are growing almost exponentially. However, the manufacturers’ expectations did not materialize. TVs are just screens, and the interaction has moved to other devices, from boxes like Apple TV and Roku to phones and computers. Let’s take a look at what happened!
Connecting consumer devices to the Internet often completely reshapes entire markets. Traditional manufacturers are being sidelined; their products become commodities. New entrants grab consumers’ attention and experience explosive growth. A common denominator in many cases is that once devices are connected to the Internet, content becomes more important than the devices used to consume it. One example is the music business, where content streaming is dominating the market for devices to listen. Speakers, headphones and ear buds have to fight for the privilege to create the sound. Who remembers the Sony Walkman other than as device that didn’t catch up with the Internet?
Another, even more intriguing example is the market for smart phones. The iPhone defined the market by not just defining the product, but by also creating the associated content platform. Today, the content value dominates the value of the devices. The total value of apps on the various smart phone platforms is far greater than the value of the phones themselves. New business models made possible through the Internet connectivity, for instance, streaming music or buying it by the song, accelerated the shift. The market today is dominated by two monopoly-like players whose different strategies are driving their success and profitability. Through tight control of access to their content platform, Apple has maintained high margins on their phones and associated devices. Combining platform control with content delivery has made Apple one of the most valuable companies in the world, with a market capitalization that exceeded $2T several weeks ago. Phones using Google’s Android platform are completely at the mercy of Google who controls the content platform. The phones themselves are exposed to fierce competition. This leads to lower margins for phones, effectively creating a commodity market. The device-agnostic Android application ecosystem has shifted the value from the hardware to the common content platform. Samsung, the most valuable provider of Android phones has a market capitalization of $323B, while Google’s market cap is $1T. Both companies have other businesses, but their smart phone activities contribute greatly to their market value. The fact that Google entered the device business with their Pixel phones makes it even harder for other manufacturers to compete. This brings us to the main topic of this blog: how has Internet connectivity impacted the TV business? Around 2007, television manufacturers started to experiment with Internet connected TVs. Two years later, the high-end TV lines of major manufacturers came to market with Internet connections, supported by branded IPTV portals operated by the manufacturers. The basic services were free to consumers, with some subscription options to premium content. The manufacturers looked to monetize the connectivity in several ways.
Add long-tail content that was not available through broadcast distribution.
Collaborate with traditional broadcasters to provide catch-up TV after the broadcast.
Provide new services to content owners, such as tracking and targeted advertising.
Generate advertising revenue for themselves.
As they were focusing on differentiating their brands, the manufacturers developed and operated their own branded platforms, each with slightly different services, content, business conditions, and user interfaces. A group of manufacturers formed the Smart TV Alliance to create a technical standard with the objective to reduce development cost and evolve common content format approaches. Others went completely on their own. The ambitions were great, as shown by this display at the 2011 Consumer Electronics Show: TVs wanted to be consumers’ entry point to all Internet services.
Now, 10 years later, it has become clear that none of these efforts resulted in strong differentiation or profitable businesses for the TV manufacturers. Internet connectivity of TVs has matured. It is not a differentiator, but a basic requirement. TVs remain low-margin commodities subject to intense price competition. Alternative connection means such as low cost TV “streaming sticks” or boxes like Apple TV have come to the market. They manage the user interface and on-demand content access over IP. Linking to TVs via a standard HDMI connector, they relegate the TVs to the role of “dumb screens”. While the OEMs’ dreams did not materialize, the smart TV ecosystem has flourished. It just has become TV brand agnostic. The value has shifted “up the stack”, from the TVs to content. Connected TVs have created a new path for content owners and distributors to bring their content to consumers. As usual when new technologies turn a marketplace upside down, many start-ups emerged, looking to shape the emerging market. As the new industry structure matured, the winning business models became clear. The market consolidated, leaving a small number of dominant players. Some, such as Netflix, have grown due to their innovative distribution and business models. Traditional content owners such as Disney are succeeding based on their large content portfolio. Amazon entered the marketplace by capitalizing on their Amazon Prime consumer base. Telco and cable ISPs are using their consumer access and distribution systems for on-demand content distribution. The business models run the gamut from subscription, advertising, and pay-per-view, to bundling with general commerce services. Why did the OEM-branded IPTV portals not find a profitable place in this ecosystem? In hindsight, several aspects undermined the TV manufacturers’ position in the on-demand content ecosystem.
Content is the key for the TV experience, not the TV brand used to watch it. Consumers want to access all content on all their TVs, regardless of brand. Content owners and distributors want access to all TVs, not just to individual brands. They don’t want to have separate business relationships with individual TV brands.
Content viewing expanded to other devices such as mobile phones, tablets, and computers.
Consumers were not yet ready for large scale on-demand viewing. The cord cutting movement has been accelerating only recently, largely driven by pricing and greater availability of on-demand content.
The additional content provided by the TV OEMs was not compelling enough. Using IPTV to access long-tail content was not attractive to consumers.
Using apps on TVs was a change for which most users were not ready, and for which the user interface was confusing.
Where the TV OEMs looked to expand the foundation of their businesses by adding content delivery, the content distributors were in a stronger position, having the consumers on their side. This battle is over. The content owners and distributors won. The TV manufacturers are left to fight for market share using hardware features such as 2k, 4k, 8k Ultra High Definition (UHD), High Dynamic Range (HDR), quantum dots and high definition audio.
As content distributors are growing their business, the cord cutting movement has opened up the next major opportunity for them. The dramatic increase of the Internet bandwidth is enabling on-demand viewing of most content. Consumers are enjoying their freedom to watch what they want to watch when they want it. Broadcast is required only for events such as sports where consumers want the immediacy of a live experience. This pits the content owners and distributors against the classical broadcast and cable TV operators.
The next great entertainment business battle is on!