The Smart TV Market

I (and many others) have opined on the need for Microsoft to have a device to compete in the lower-priced mass market segment for smart TV add-ons.  I want to refine my thinking and explain why Microsoft may not have done so yet.  At the same time I’ll put Microsoft and Apple into the same boat.

First off I believe we need to start really analyzing Microsoft in the context of a separation between its Devices and Services businesses.  As I’ve pointed out in previous postings on this topic one of my fears about Microsoft’s current positioning is that the services side (e.g., Xbox Video) is not represented on non-Microsoft smart TV offerings.  So, for example, it makes more sense to buy Season 3 of Downton Abbey on Amazon Prime than on Xbox Video because with the Amazon offering you can watch on a much broader range of devices.  You might watch some episodes on your Internet-connect TV (e.g. in the bedroom where there is no gaming console), some on your iPad, some on your PC, and others on your Family Room Xbox One.    You can’t do this with Xbox Video.  And that will continually push people towards Amazon and away from Microsoft.

Of course this doesn’t necessarily argue for Microsoft delivering a sub $100 device as a way to promote Xbox Video, but it does illustrate that devices and services are mutually reinforcing businesses.  By pushing customers away from Xbox Video and towards Amazon Microsoft is making the tablets like the Kindle Fire family more attractive.  And leaving more of an opening for Amazon to introduce its own smart TV offering.  So I consider it crucial for Microsoft to make Xbox Video (and Music) broadly available services that appear in TVs as well as Roku and similar devices.  As far as I’m concerned that is a necessary component to long-term success in the entertainment space.

Now let’s switch gears to the devices world and here is where things get very interesting.  To begin with, sub-$100 smart TV add-ons have not been particularly successful for two reasons, one being that many TVs sold in the last few years have come with this functionality built-in.  For example I have a mid-range LG TV purchased 5 years ago that is Internet connected.  The user interface is primitive (e.g., its Netflix app can only play things from your queue), but I still use it to watch video.  It was on special when I bought it and the Blu-Ray player they gave us also was Internet connected.  I put it on the TV in our second home’s bedroom.  So now that condo has two smart TVs without me investing in any special smart TV add-on boxes.

The second reason sub-$100 smart TV add-ons haven’t taken the world by storm is that the early adopter target community for smart TVs had a huge overlap with the gaming console ownership community.  So they experienced the smart TV revolution primarily through their Xbox 360 or PS/3.  Take a software update or buy a new box?  The software update was the easier path by far.

So now let’s talk about the smart TV capabilities as I think of them.  I see three classes of smart TV capabilities: Basic, Enhanced, and Transformative.  Five years ago all the focus was on Basic capabilities, like enabling you to watch Netflix on your TV.  Or display some content from your home network.  Since few TVs actually had this capability (two years ago about 25 million smart TVs were in American’s hands with about half actually connected to the Internet) devices like the Roku and Apple TV came along to add these capabilities to existing TVs.  There continue to be improvements to what constitutes basic capabilities, but the point is that with most new TVs containing the basic ability to view Netflix, Hulu Plus, Vudu, and other services the market for low-priced add-ons in the “Basic” segment of the market is at best modest.  In effect, Basic capabilities are now free (though the services themselves, of course, are not).

Then I think there is a market segment for an Enhanced experience over Basic.  For example, the ability to use gestures or voice to control your TV.  Or the ability to control the TV from other devices, primarily devices made by the same manufacturer as the TV.  The cable and satellite companies are also adding the ability to integrate multiple set-top boxes in your home, make their own video services more attractive, and integrate media beyond just the content they offer.   Over the next few years I think these Enhanced experiences will take over the mainstream of the market, meaning that they essentially become free as well.

Ok, that was a lot of background on my thinking so let’s jump into Microsoft, Apple, and the market segment they both want to address.  What I call the Transformational segment.  There is continual talk about when Apple will bring its “real” Apple TV product to the market and its become a bit of a joke.  Although Apple entered the market with a Basic product they quickly realized how uninteresting that is.  It does address my earlier point about the need to make Xbox Video universal as it pertains to iTunes.  And given that Apple has distanced themselves from industry standards for media sharing in favor of Airplay, it Airplay-enables TVs as well.  But otherwise it is a me-too product offering no functionality outside the Basic capabilities found in smart TVs.  Apple wants to transform the big screen home entertainment experience, and it makes no sense for them to introduce another product in the TV space until they have something they believe can successfully do that.

Microsoft is in the same position as Apple with one key differentiator, it has the Xbox family as an already in-market device.  The Xbox 360 lead the way in terms of the Enhanced category I described above.  And Microsoft has made numerous attempts over the last 20 years to transform the TV experience.  From being one of the early creators of video-on-demand technology, to an early player in the DVR space, to trying to integrate living room media experiences with Media Center and its original 10′ experience, to being a player in software for set-top boxes, to….  The Xbox One is the place where Microsoft is bringing all these efforts together to create a transformative experience.  And while I very harshly criticized the state of the initial software, they are clearly on track to lead in this space.

If Basic, and soon Enhanced, capabilities are essentially free than it makes little sense for Microsoft to offer a low-cost device unless it is actually part of the Transformative segment of the market.  Looking at the initial release of the Xbox One software we can see that Microsoft struggled to bring a transformative experience in to the $500 gaming-dominated part of the market, so it makes sense that they couldn’t (or wouldn’t want to) bring an immature solution to a less tolerant mass market with a less expensive device.  I’m still hoping that next year we’ll see both software updates that address my complaints and further the experience Microsoft is trying to promote, as well as a lower cost addition to the device family.

I’m not expecting Microsoft to introduce a sub $100 device in 2014 for two reasons.  The first is that it may not be possible from a cost perspective to introduce a transformative device at that price point for another couple of years.  The second is that absent competitive price pressure from other transformative devices there is no reason for Microsoft to take the margin hit.  Those who want the transformative experience will pay for it, though for non-gamers you might need a price point about half of where the Xbox One is today.  So could we see something like a $299 offering in 2014?  Sure.

By the way, I’m sure you are thinking that I haven’t defined what I mean by “transformative” and I have to say that is because if I knew exactly what it was and how to do it then I’d have formed a startup and be on my way to a $multi-billion IPO!  But there two things I think about as necessary components.

The first thing is a new user experience that puts streaming media on the same level as broadcast media and unifies the experience.  It must make finding, organizing, scheduling, and viewing of all this content seamless.  It must allow for extreme personalization of the experience at both a household and individual level.  It must bring the gamut of technologies we have become familiar with in the last twenty years (e.g., search, natural language speech recognition, apps, etc.) to bear on the problem, and be designed for rapid exploitation of the technologies that will be introduced and mature over the next twenty years.

The second thing is that the transformative TV experience is an end-point on an ecosystem-driven environment rather than being standalone or even the center of the entertainment experience.  It’s the whole “3 screens and a cloud” thing on steroids.  My phone, tablet, PC, smart watch, smart glasses, and other devices will be equal parts with TV of the overall experience.   One implication of this is that ecosystem ubiquity is likely to be a strong factor in success or failure.

There are only three players who I believe have the right set of assets to succeed in creating this transformative experience.  Only Microsoft, Apple, and Google.  Not that others won’t try, but only those three are in a good position right now.  Microsoft is already in market, has a strong set of assets, and is probably the most committed to the concept.  Apple is obviously working on it and will eventually find something to wow us with.  They can expect great success with the (large number of) faithful, but its unclear if they can create something that brings in a massive number of new customers as they did with the iPhone and iPad.

Google wants to transform TV and keeps throwing things at the wall to see if anything sticks.  With Google TV they made friends (e.g., Sony) in the OEM community but alienated the content owners.  A big part of Google’s problem is finding an answer that fits in their business model.  If they can do that, maintain the OEM relationships, and come to an understanding with content owners, then they’ll be a formidable competitor.

Right now Microsoft is in a good position, but if they don’t solidify it fast they could easily go from first place to third.  On the devices front they need to evolve the Xbox One media capabilities quickly.  And they need to address a price point more appropriate for media consumption for non-gamers.  On the services front they need to make Xbox Video and Music more ubiquitous by getting them into TVs, set-top boxes, Roku and friends, Sonos, and (non-Microsoft Auto-based) vehicle entertainment systems, etc.  That will help make the ecosystem ubiquitous without Microsoft having to play or succeed  in non-strategic segments of the devices business.

Microsoft has the opportunity to win this, but they have yet to demonstrate they can pull it off.  2014 is likely the pivotal year, perhaps the last year, for them to go from contender to presumed winner.

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8 Responses to The Smart TV Market

  1. Sumit says:

    I think for non-Xbox connected TVs MS wants tV vendors to go with the Play To spec and end users to use Surface or other Win8 tablet’s play to functionality to be used. Certainly a safer bet than yet another device!

  2. Bob - Former DECie says:

    The reason I bought a Dell Venue 8 Pro rather than the 8″ Amazon Kindle Fire HD is I have a few Win32 apps I want to run on a tablet and I can’t do that on an Amazon product.
    I’m not a gamer so in a sense, whatever is done on a gaming console is not even on my radar.
    Three years ago I bought a 55″ LG TV that didn’t have internet access and a Blue-Ray player that did. Why? Because the only way to get the LG TV with internet access with internet access was to buy the 3D model. The 40% price increase and the fact I wear glasses, so putting 3D glasses over my glasses to watch a not very good 3D picture was a non-starter for me. Unlike many people, I do use the Blue-Ray player. My wife and I like British comedy and have purchased the complete set of several Britcoms on DVD/Blue-Ray.

    • halberenson says:

      Now if only they’d bring Qi to the U.S.A.! I’d take it on DVD, but prefer streaming.

      • Bob - Former DECie says:

        I live in an AT&T U-verse monopoly area. This means I have a cap on my internet access. Given that I work from home, I can’t have an MSDN download blocked or slowed to a crawl because I exceeded my download limit the night before streaming a movie. As a result, we rarely watch anything streamed.

          • Bob - Former DECie says:

            That’s why I laugh when I read all those “cut the cable” articles, or the “How to cut your cable bill” articles that start out with, “See what your current provider’s competitors are offering.” What competitors????

  3. Aaron says:

    The question I’ve always had for MSFT is whether or not they make any money whatsoever from Xbox Video and Xbox Music. Both these services are a nightmare in my opinion. Yesterday on a flight my kids tried to watch a movie I purchased and downloaded for ‘Offline’ viewing on their Surface. It refused to let them watch the movie because it couldn’t verify their license without an internet connection. What does ‘Offline’ mean to MSFT?

    Like you stated, I buy all my music and video from Amazon because I can use it pretty much anywhere, from any device. Would MSFT just be better off abandoning their own services and aligning themselves with Amazon? Yes, they are competitors, but together they stand a decent chance against Apple.

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