Analyst Report: The Set-top Is Dead! Long Live the Set-top!


For years, the electronic programming guide has been an impediment to navigating the ever-increasing content choices available on cable TV. But its limited search and discovery capabilities have been driven primarily by the hardware on which it’s built, and because of that, many operators are now looking for new ways to reach consumers without the set-top box. What will replace it? A wide range of devices — connected TVs, Blu-ray players and gaming consoles — are potential successors.

IP: Not Just About the iPad

On Time Warner Cable’s earnings call this month, CEO Glenn Britt imagined what a world would be like without the box between the cable coax and its subscribers’ TVs. And according to him, the world could be better not just for consumers but also for the cable company.

The conversation started as executives discussed the controversial iPad app Time Warner Cable rolled out more than a month ago, which includes live video feeds from more than 70 cable networks. Some programmers, such as Viacom, have complained that the app violates their licensing agreements and that Time Warner doesn’t have the necessary mobile rights to launch such a product. But based on comments from Britt, the app is just one step toward an all-IP future in which Time Warner Cable will no longer need set-top boxes.

“Later this year, we’re planning to launch a new navigation application, which will be hosted in our network instead of in our set-tops, providing a much more intuitive and graphically rich search environment for millions of customers using our set-top boxes,” Britt said in his opening comments on the call. But the company could take that concept even further by extending the new user interface not just to its own set-top boxes but directly to other third-party connected devices. By doing so, Time Warner Cable could skip the set-top box altogether.

Noting that the reason for set-top boxes has always been that TVs were never smart enough to take advantage of two-way connectivity, Britt said that new smart devices could offer up a better user experience because they have better search and discovery capabilities. Time Warner Cable has already taken the first steps toward integrating its program guide into new devices, announcing at CES this year that it was partnering with Sony and Samsung to build apps for their connected TVs.

TV and Blu-ray and Xbox, oh my!

Time Warner Cable isn’t the only company contemplating a life without set-top boxes. At CES, Comcast also announced it was building TV apps for Samsung devices, and it, too, has a popular iPad app. IPTV provider AT&T already allows its subscribers to connect to its U-verse pay-TV service without a set-top box, enabling subscribers to connect through their Microsoft Xbox game console instead.

The Xbox implementation shows the type of opportunity that is available to pay-TV operators. The Xbox, Sony PlayStation 3, Roku broadband set-top box, Boxee Box and Apple TV all have live video capabilities. So even if consumers aren’t in the market for a connected TV or Blu-ray player, there are still plenty of ways cable companies can reach subscribers without a set-top box. Meanwhile, those device makers are interested in delivering video services over IP for more traditional distributors. In late April, Roku CEO Anthony Wood told Light Reading that he expects to see at least one traditional multichannel video operator go over-the-top over the next 12-24 months.

From Hardware to Software

So what’s that mean for the actual set-top box manufacturers? According to IHS Screen Digest, Pace and Motorola led the set-top box market in 2010, shipping 20.7 million and 19 million worldwide. Technicolor, with 12.9 million units, and Cisco, with 11.2 million units, followed.

But Cisco CTO Dr. Ken Morse warned last month that the future of the set-top market could soon change: He publicly said that in the future, what we think of as set-top box hardware could disappear and the set-top technology will eventually just become software.

Moving to a software model as opposed to a hardware model could lower the cost of deployment, but more importantly, it could improve the pace of innovation in the industry. With more of the user experience controlled by servers in the cloud, as opposed to on a proprietary device, distributors and content companies alike will be able to make updates faster and be better able to adapt to changing consumer needs and preferences.

Implementing IP-based control could also improve the ability of operators to create new interactive features and provide more personalization in the program guide. Both capabilities will be important as the industry seeks to add value for consumers, programmers and advertisers.

However, cutting out the set-top box also has its drawbacks: In addition to the technical integration work needed to build apps for multiple devices, operators would also be missing out on some revenues. Since Time Warner Cable and other pay-TV providers lease digital set-top boxes and DVRs to their subscribers, the move could reduce their revenues. However, doing so could improve customer satisfaction, and eventually profits.

“If we move to a world without set-tops… we will probably have lower revenue because we do charge for them,” Britt acknowledged on the Time Warner Cable earnings call. But, he added: “We will also have lower capital costs — and I may be slightly wrong in this statistic, but I think about 40 percent of our service calls relate to set-tops… So my guess is, if we magically snapped our fingers and have no set-tops, which will only happen over many years, we would have a somewhat smaller balance sheet, somewhat smaller revenue, probably a more profitable company and much happier customers.”

In the short term, there will be some costs associated with the transition from hardware- to software-based control and navigation. But in the long run, both consumers and distributors stand to benefit.

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