Debunking the set-top box safety net – “Entertainment Bypass” will rule

The set-top box is becoming less important. That’s right, less important. Wow, how can you say that? Cisco just paid bazillions for Scientific Atlanta. Microsoft is plowing money into its IPTV set-top box-driven initiative. No doubt you are shaking your head at this statement and thinking: You’re NUTS!

The set-top box is becoming less important.  That’s right, less important. Wow, how can you say that? Cisco just paid bazillions for Scientific Atlanta. Microsoft is plowing money into its IPTV set-top box-driven initiative. No doubt you are shaking your head at this statement and thinking: You’re NUTS!

Well maybe, but we think that this market is ready to implode and in a big way – here’s why: It’s not about the middleman, it’s about value.  The cableTV and telcoTV industries are middlemen whose value today is founded in their exclusive relationships with the content providers.  These service providers offer entertainment in a nice bundle – in fact, bundled with wireless, local, long distance, and other stuff as well.  But these are closed environments – you watch what they decide you want to watch, and in their interface –  and if the Internet, TiVo, AOL, and other environments have shown you anything, it’s that consumers want to do their own thing. We flock to cable, telcos, and satcos today because there are no obvious choices, but those choices are coming rapidly in all sorts of different flavors.  We’re seeing all the pieces in place now – and the ‘outsiders’ are busy putting the pieces together.

Everyone knows that content is what really drives this market. The content guys aren't really interested in how the content gets to people, as long as it is secured by digital rights management (DRM) and content owners get paid for their content.  Until now, the only trusted players in the market who could deliver DRM were those with closed networks and lots of money.

Well last week Intel made a big move to change this situation when it announced its media content partners for its new Viiv platform for home media PCs and consumer electronics. Viiv-driven PCs themselves aren’t anything radically new or different – it’s just a nice evolutionary enhancement to what Intel was already providing to PC manufacturers involved in the Media Center PC market. What is interesting with Viiv, however, is the fact that Intel is aiming the Viiv system not just at PCs but also at DVD players, media servers and even TVs – providing a mechanism for those devices to directly (and easily) connect to Internet-based content without a PC as an intermediary device.

The really scary part of the Viiv announcement – from a service provider’s perspective – is that Intel has lined up over 40 content partners for this platform (folks like MovieLink in the U.S. and Sky Broadcasting in the U.K.). As Intel grows this list of content-owner partners, end users will have less and less reason to turn to a traditional service provider for their entertainment needs. They can go directly to the source.

Intel is making this easy by putting it all on a chip – inclusive of the DRM and licensing concerns.  Any device company can be part of the entertainment family – just prove out the DRM and ensure money flows, and you’re all set.

You’ve got a lot of device companies that are trying to offer a more direct route to the consumer.  Apple we think, along with MovieLink, TiVo, and others, have really shown that there are other platforms that are capable of taking part in this trusted relationship. (By the way, rumors of a truly “living room ready” media center version of the Mac Mini are flying around left and right these days, with good reason we think.)

So why do you need the middlemen to serve up entertainment over a closed proprietary network?  You don’t really, you just need reliable transport – transport that can be complemented with in-device buffering and hard drive capacity to smooth over any long haul transmission issues.  The set-top box is just software – and there are several leading edge alternatives for TV middleware on the market that are much better than anything Microsoft or the cablecos are offering.  They just need the licensing deals with the content players.

So we think someone like Intel (and its Viiv partners) or Apple with a Mac Mini set-top box will be the next real full-scale competitor to these closed environments, and their successful platform is going to have these characteristics:

1. Big honking hard drive for storing not just recorded TV but the most commonly viewed content (predictively downloaded for you) to allow for fabulous performance.

2. Open fields not closed garden.  Browsing, random access interfaces, and mouse-driven motifs for users to be able to do what they want, and what they are used to.  I’m tired of TV people telling me they know best – they came up with a 180+ button remote control for gosh sakes.  The market will trend towards portals for doing common tasks, just like we use Google and Yahoo! for the PC.  The market will determine many of these next gen interfaces, not the providers (learn from the AOL example where open and inclusive competitors took away much of the legacy provider’s advantages, and did it more cheaply too).

3. New interfaces that are distinctive.  Telcos, cablecos, and satcos move TOOOOOOO slowly when it comes to re-inventing the users’ relationships to the TV set.  They deserve to get their butts kicked here.  The consumer electronics folks know how to get distinctive products to market much faster than the service provider middlemen. Hillcrest Labs has its new freespace navigation engine – light-years better than Nintendo’s first gen approach. AgileTV offers the ability to talk to the TV set and get it to do the user’s bidding – this will be great for specific applications too. Next gen set-tops won’t be limited by one interface but will sport new ways of getting to content.  We’re waiting on the first Amazon.com appliance to hit the streets so we can shop on our TV set.

4. New ways of getting content to the market.  Products like EAT.TV’s ImageGuide – which provides customized interfaces and content presentation over any transport system, including the Internet (along with advertising delivery mechanisms that customers may actually WANT to watch) – help give content owners the ability to create their own direct channels to customers.  They don’t need to negotiate for scarce TV channels on a closed interface.

5. Bundles of similar competitor services.  Slap Vonage together with resold Sprint wireless and movies on demand and you’re close to a Verizon bundle. Throw in a Sling Media and gaming console manufacturer and it could get fun. It’s not hard to bring competitors together when they have the same enemies.

We would not be surprised to see a bidding war break out for content, just like we have in sports, where telcos, cablecos, and others will start bidding for the exclusive rights for shows.  Despite that, the sheer amount of content out there, and the realization by consumers that if you don’t see it now, you can see it later just as well, will limit this as an effective strategy and it will be a short-lived experiment.

So we’re going to be entering a new era of choice for users and service providers. Up to now, users have had a Hobson’s Choice – you can watch whatever you want, as long as we, the service provider, provide it to you.  Now users are heading into an era where they’ll finally see true choice in getting content to their living rooms.

And herein lies the Sophie’s Choice for service providers: Start charging by the drink for Internet access to stop the competitive alternatives to the billions you’ve invested in your closed TV platforms – and risk losing customers to unlimited Internet plans – or allow “Entertainment Bypass” and lose customers to interfaces and platforms that can innovate faster than you can.  What’s left will be a hugely price competitive arena.

We urge our service provider clients that they need to embrace platforms that can embrace the innovation, not clam it up.  If you think you’ve already got that, think again after CES 2006, where a lot of this neat new stuff is going to start coming out.

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