Why connected TV devices will follow the phone market’s model
This week’s news that Roku has expanded its casual game efforts may not have caused Microsoft or Nintendo to lose sleep just yet, but they should note that the connected-TV-device landscape is growing wider. In particular, as the market for net tops and connected TV devices matures, a new middle tier of connected devices for TVs that goes beyond basic video streaming and widgets is emerging, and it’s this middle tier that will increasingly compete for consumers in the ever-growing audience for connected entertainment.
The (mobile) theory of evolution
Up until this point, streaming-TV appliances had largely been segmented into high- and low-end devices, with basic streaming net-top boxes like Roku 1 and Apple TV occupying the low end of the range, while game consoles sat proudly atop the high end, where streaming was just one of many types of entertainment applications they performed.
But as the market for streaming-video appliances begins to mature and connected TV platforms become big business, there will be even more stratification of devices that consumers can buy for streaming video and other types of entertainment.
To understand how this will work, one can look at the mobile phone market, which is divided into three basic segments: low-end/feature phones, basic smartphones and high-end superphones. The phone business has largely grown through expansion at the top, where basic smartphones like Blackberry and Symbian have ceded market share to competition from superphones like the iPhone and high-end Android devices over the past three years. But the connected-TV-appliance market is seeing growth in the middle, as an emerging class of connected device platforms such as the new Roku 2 XS and Google TV devices take on more functionality over time.
The commonality between both markets is a wider set of products that offer more choice in varying price-to-feature ratios, which in turn will appeal to what is a growing customer base.
This stratification, illustrated above, is exemplified by looking at the Roku 2 lineup, where Roku appears to be targeting the mid- and low-tier markets. On the low end, you see two Roku 2 devices (Roku 2 HD and Roku 2 XD), offered at $59 and $79, respectively, that have basic streaming and some lightweight widget/channel capability. For the mid-tier device you see the XS, which is taking on casual gaming and has other features, such as better connectivity options, at a slightly higher price of $99.
This mid tier is where Google TV devices will find a sweet spot, if indeed Google has success with its revamped Google TV 2. By bringing the Android app market to the new Google TV 2, you can envision some fairly robust new devices where higher-end applications such as gaming or interactive education apps, or even multiparty video calling, could potentially flourish.
Alongside net tops are smart TVs. Over-the-top and app frameworks are increasingly being put into the TVs themselves, where the “price” of connected TV app platforms is rolled in and not a discrete additional cost to the consumer. In this sense, these smart TVs and net tops are more competitive with one another, at least for the time being, than with the high end of the market currently occupied by the gaming consoles. Together, three categories compose the new three-tiered market: Net tops and smart TVs make up the low- and mid-tiers, and consoles are at the top.
Over time, game consoles will see some market share erosion on the high end, particularly as more and better games begin to become available on high-end connected-TV platforms. However, the game-console manufacturers have a two-to-three-year window of opportunity to expand downward into the middle market through cost reducing and, as a result, price reducing their consoles.
At the same time, traditional set tops, which today do not do a good job of integrating over-the-top and app frameworks, represent another segment-disruption threat, particularly as Google TV’s integration of Motorola set tops takes hold and is adopted by carriers.
What does all of this mean? Quite simply, a bigger product spectrum means more choice, which is never a bad thing for consumers.
Technology is moving towards better compression, higher-quality of video even over unmanaged networks. This is favoring cloud-based, or hardware agnostic, consumer solutions. This also frees content from the constraints of cable/satellite delivery which means that consumers have more hardware options to consume from. The segmentation issues will be different and slightly more complex than what happened with mobile phones.
Discussions about Google’s acquisition of MMI pretty much ignore this part of the puzzle. This is an area where Google could keep the hardware manufacturing without disrupting other distribution channels. One has to wonder what would it take to launch a serious effort for Google to enter the cable TV set top box market…
I agree that Google isn’t really competing against its customers here, as they are w/mobile, and instead the biggest source of resistance here will be pay TV operators (the carrier). I think operators would be wise to work with Google here, but as always when you let the fox into the henhouse, you need to monitor and stay in control.