Internet comes to TV

Major communication innovation is historically driven by the distribution mechanism; the first transatlantic cable was laid nearly a hundred years ago and has enabled the great leaps in communications for the last century that we’re only just capitalising on.

The television business is on the threshold of another great innovation leap- connected television.

Not since the introduction of cable and satellite television has such a radical transformation occurred that looks set to effect consumer behaviour & the value chain supporting current broadcast offerings.

By comparison, video recorders, flatscreen TV’s, High Definition TV, 3D television represents incremental innovation. So what’s driving the change?

• The end-to-end architecture of the internet means that programming can originate anywhere

• The addition of internet connectivity to living room devices, be they set top boxes, TV’s or games consoles

• The emergence of a software layer enabling this technology to be managed by the consumer

The music business has been fundamentally changed by digital technology that has democratised access to production but the high cost of programming may continue to insulate the television business in large part.

The addition of internet connectivity to living room devices, be they set top boxes, TV’s or games consoles

As we look across the pond we can see the impact of these devices on consumption patterns:

DVR’s have grown fastest across the population as a whole but when we look at 12-17 year olds & 18-34 year olds, the growth is through consoles and they look set to prize a massive share of market based on current growth factored with it’s penetration of younger audiences so valuable to advertisers.

Simultaneously we’re seeing a land grab to own the software layer. There are two significant groups here:

• The platform giants- Microsoft, Google, Apple

• The upstarts- ROKU, BOXEE, VUDU

The platform giants are leveraging existing resources to approach this and therefore taking very different approaches. Apple has moved cautiously, launching Apple TV set top box last year, which represents only a first step as it attempts to bring it’s renowned expertise in device connectivity, GUI and increasingly it’s content provision. Microsoft has an extensive hardware network through it’s console business and is forging ahead with gesture control technology. Google is leveraging it’s android platform built around Chrome to provide search based functionality and logically bring it’s advertising business to TV. Google’s support for flash within Chrome, could signal an intention to keeping IPdelivered video inside the browser rather than an app-based approach. The question is- is the television industry ready for the inevitable impact on its commercial model?

The upstarts have focussed on delivering embedded apps in set top boxes and through TV’s connected to the web via PCs. VUDU is furthest behind, starting out life as a set top box before migrating to a software platform and with the might of WalMart behind it could pose problems for the platform giants.

So what are the potential variables on future market spaces that we might consider? Based on this analysis and a quick peek at the impact of the internet on other industries, a set of questions occur:

• Consumers will be able to pick and choose their content

a.    To what degree will consumers want a sit forward experience? Is choice always a good thing?
b.    Will they have the same views toward privacy in front of the TV as they do on the PC?

• The future of the set top box

a.    The emergence of downloadable set top boxes
b.    The dominance of consoles
c.    Reduction in distribution costs for carriers

• The funding model

a.    What does this mean for subscription models?
b.    How will online advertising models impact the television ecosystem?
c.    Will greater targeting reduce the traditional advertising margin and/or make TV more accessible to smaller advertisers?
d.    Micropayments for TV?
e.    Bundled channel packaging fails as consumers pick and choose individual channels and programs
f.    How will this impact the current range of channels available?
g.    With nearly limitless resources, will the platform giants play a long term game and see who blinks first?

• The legal unknowns

a.    How will the almost certain patent wars end up?
b.    Will broadcasters and content providers have their own music industry-style piracy battle?

• The platform war

a.    Who will dominate and will that mean a browser or application based future
b.    Will the content providers play or pass?

• The measurement questions

a.    How will existing approaches cope with a changing ecosystem?

There is no ready answer to these questions yet but their resolution will probably map out the future TV market space. For forward facing businesses these are the early signs of what is to come and to what our insight teams should be charged with monitoring.