Google TV Is Ready to Change the Game

Google (s GOOG) TV has the potential to be a game-changer in the pay-TV business, by bringing web-like search navigation to traditional channel surfing, according to a new report I wrote for GigaOM Pro entitled Google TV: Overview and Strategic Analysis (subscription required). I also foresee an eventual clash between Apple’s (s AAPL) App Store and Google’s search-based platform for supremacy on connected consumer electronics devices.

I expect a slow initial ramp-up for the Android-powered Google TV devices, due to the high cost of implementation and uncertain consumer demand. The Intel Atom-based system-on-a-chip and software licensing costs are expected to add a significant premium to first-generation Google TV-enabled devices, including the Logitech set-top box and Sony HDTVs and Blu-ray players announced at the Google I/O conference. Consumer interest in surfing the web on a big-screen TV is also yet to be proved. If Google TV does prove popular with consumers, however, it could pose a highly disruptive challenge to traditional video service providers, set makers and competing TV app stores, according to the report.

“Google TV’s integrated search, combining results from the web and from traditional sources in a single user interface, encourages the user to separate the content from its source, or at least to treat the source as irrelevant,” I note in the report. As more content becomes available on the web, that dynamic will increasingly pose a challenge to traditional video service providers, whose business model is based on bundling content into high-margin subscription packages. “Search, by its nature, is the enemy of bundling,” it concludes.

Google TV could be a boon to TV set-makers by providing the software-driven functionality that spurs sales of Internet-enabled devices, the report states. On the other hand, adopting Google’s non-proprietary platform could rob manufacturers of a key point of differentiation for their products.

The Google TV announcement also comes just as fledgling TV app stores are starting to find their footing in connected devices, including the Yahoo Widget Channel, Vudu, DivX and the Roku Channel Store. While those providers obviously will be challenged by the arrival of Google TV, the report suggests a potential for market segmentation, with app stores dominating low- and mid-range connected TVs and Google TV reserved for premium models, particularly early on, given the higher costs associated with implementing the Google platform.

One app platform unlikely to concede the high end of the market to Google, however, is Apple’s iTunes App Store. Although Apple has not disclosed its plans for the digital living room, the report calls an eventual assault on the $53 billion pay-TV business “inevitable.” When it comes, it’s likely to involve extending the iTunes App Store platform to the TV, either directly, through an Apple-branded HDTV set, or through a set-top box.

In the report, I also envision a seamless, cloud-based version of the iTunes platform that will enable access to video and other content from Apple TVs, iPads and iPhones. At that point, the battle between Apple’s app-based and Google’s search-driven models for content acquisition and distribution will be fully joined.

Check out the full report, Google TV: Overview and Strategic Analysis, on GigaOM Pro (subscription required).