CE vendors will deliver alternative content universe in Pay TV homes

The CE industry will play an increasingly important role in the provision of TV services and rather than seeing their entertainment portals made irrelevant by increasingly connected Pay TV set-top boxes, they will host a rich variety of complementary content that consumers will want and which is unlikely to be hosted within the Pay TV services, led by the ever-important Netflix. Moreover, they will benefit from the arrival of premium paid content when rights holders conclude that it is in their interests to target consumers directly OTT, in addition to partnering with Pay TV.

This is how Jeff Binder, General Partner at Genovation Capital, thinks the television landscape could evolve. He also predicts that the current new generation of Pay TV DVRs, good as they are, will grow old while the CE vendors continue to innovate year-on-year with far more aggressive release cycles. And he points to the possibility that antitrust lawsuits could wreck the content bundling model and that ‘a la carte’ channel distribution could be forced upon the industry. This would level the playing field for CE vendors who want to be true content aggregators and open the door to Apple to get into the television business with an advanced TV platform concept that it licenses to other TV makers.

The only uncertainties in this scenario relate to the outcome of the current Cablevision versus Viacom antitrust bundling lawsuit in the U.S. and the likelihood of Apple, or maybe Google TV in another iteration of its platform,  providing some kind of cross-brand platform that could host the same content portal regardless of the make of television being used. These could be game-changers but even without these events Binder is sure there is a bright future for CE vendor Connected TV.

Genovation Capital is a private investment firm focused on the communications, media and technology sectors, both investing in and operating companies. The partners who make up the firm have previously invested in or held senior leadership roles at AT&T, Comcast, Motorola and Scientific Atlanta, among others. Binder argues against the idea that it is the Pay TV operators, with a new generation of connected DVRs, who will dominate the Connected TV landscape. He thinks it more likely that Pay TV services will be found on connected TV devices that also host a range of services that are valuable to consumers but not found within Pay TV, rather than Pay TV operators hosting their own service plus a range of third-party OTT content via their own boxes.

One reason for this is that operators will not want the burden of managing the various OTT apps. Another reason relates to the capabilities of their installed base of set-top boxes. “I do not think the Pay TV operator will be able to keep up with this secondary aggregation market and the associated software needed to enable those experiences,” he suggests.

Binder, who will be addressing this theme in more detail at Connected TV Summit in May, points to Netflix as a good example of the content ecosystem that will be valuable even to Pay TV consumers but which will exist outside of the Pay TV domain. He does not think it will be practical for a large number of Pay TV companies to do deals to carry Netflix as an integrated part of their own service.

“In the U.S. Netflix has proven that you can attract a substantial number of eyeballs through an OTT app that largely resides in CE Connected TV and not within Pay TV,” he points out. “There are almost no Pay TV boxes that support Netflix. We might see wholesale deals with Netflix on satellite, where their set-top boxes are broadband-capable, but elsewhere I do not think the CPE [Customer Premise Equipment] exists to support Pay TV deals with Netflix. You need an IP set-top box and few cable homes have them. Even if they wanted to do this, they do not have the products in the field to make it happen.”

Binder argues that the existing (non-IP) cable VOD infrastructure lacks the User Interface or navigation capabilities to cope with a broader catalogue. A third option, to offer Netflix as a linear movie channel, starts to undermine the chief benefit of the service, which is content quantity and choice. He points out: “Making Netflix a linear offering would put them on a level playing field with other content providers. Linear channels are a quality play. They would be up against HBO and would have a tough time with that.”

His conclusion is that there is no way to make the relationship work for Netflix and a large number of Pay TV platforms, which means this service will remain within the alternative ecosystem of OTT apps on CE devices. Binder also thinks this alternative content ecosystem will become home to more premium content that today is the preserve of Pay TV. He points to how major league sports rights holders in the U.S. are starting to sell direct to consumers via connected devices, partly because their content can have greater prominence than it does within a 400 channel Pay TV programme guide.

Binder is convinced that the CE manufacturers will win the battle to provide us with the most exciting devices, which will also have an important bearing on how the market evolves. “Set-top boxes tend to lag behind what is ‘state-of-the-art’ by five years, typically. Today’s advanced boxes will be tomorrow’s legacy devices.” Using Liberty Global’s next-generation Horizon platform as an example, he contends: “That is a terrific product today but there is no way that in five years they will be ready for the Capex associated with replacing that box.”

He expects Pay TV operators to look towards the cloud as a way to reduce the amount of processing and therefore intelligence and expense contained in their own DVRs and set-tops. There is certainly growing interesting among platform operators in delivering the UI from the cloud or introducing network PVR to slowly reduce reliance on hard drives in homes. This could decrease the cost of Pay TV devices without decreasing their functionality but some operators are looking to remove the cost of STBs altogether. Binder points out that Pay TV operators are already using connected TV devices to present their services through apps and expects closer cooperation over time. “We could end up in a world where you have a home gateway and a bunch of connected TVs attached to it,” he says.

Up to this point in his predictions, the role of the CE vendor is as an aggregator of apps rather than a content aggregator, with the content aggregation happening within the apps that are hosted on the televisions or streaming boxes. He thinks it will be very difficult under current conditions for Consumer Electronics companies to be “an OTT purveyor of services” because buyers are still looking for television features and are not about to buy a Sony television ahead of Samsung based on the connected content offering. And given that most of the connected TV vendors have their own apps development environments and still want to differentiate through their platforms, they are not necessarily ready for shared operating environments, which would make it easier to attract more content.

This could all change if Apple created a television platform that was then made available (and adopted) across different brands of TV, coinciding with efforts to build a wider content ecosystem. “It is a challenge for TV manufacturers to get into the content aggregation business but if there was a shared ecosystem then the potential exists for them to be a real threat to Pay TV many years down the road,” says Binder. He points out that Google TV represents an effort to create a cross-device ecosystem, but the product and user experience are not fit for purpose.

“If Apple had a product with the right hooks and functionality and were willing to license that platform to Sony, Samsung or all CE providers, that could be a game-changer,” he declares, adding: “Apple could buy Netflix. They could license an OS (Operating System) to Samsung or Sony or LG and the world would become a different place. It could happen.”

Interested in whether CE Connected TV portals will be sidelined in Pay TV homes and their ambitions limited to the free-to-air market, or how the balance of power between Pay TV operators and the CE industry might evolve, or how much cooperation we could see between the two camps? On the first morning of Connected TV Summit this year (May 22-23, London), Nigel Walley, Managing Director at Decipher, will be outlining why he thinks Pay TV will dominate connected viewing in Pay TV homes and Jeff Binder will set out the reasons he believes the CE industry can carve out a role as an aggregator for entertainment services in Pay TV homes. Both speakers will then appear together during a Q&A session and this will be followed by a panel discussion with Roku, Microsoft, Ziggo, Telenet, Telefonica Digital and ACCESS about how far Pay TV and CE cooperation can extend.

Connected TV Summit is the leading conference covering the post-convergence, connected TV future and you can download the full two-day agenda here.