Friday, October 30, 2009

Put a Roku in your Cable Set-Top Box

For years, I've doubted the ability of third-party set-top boxes from companies like Apple and Roku to make much market impact. Consumers generally detest adding more boxes and more wiring to their televisions. That's why home theater-in-a-box systems have been so successful, and a big reason why TiVo, which still has the best PVR, has struggled to build a viable business selling hardware. Consumers know that they have to have a set-top box from the cable or satellite company, and they accept two other boxes: DVD players (slowly morphing into Blu-Ray players), and game consoles.

In turn, both Blu-Ray players and game consoles are morphing into Internet digital video players. Netflix's streaming movie service is integrated into many Blu-Ray players, and with Microsoft's XBOX360. Earlier this week, Netflix made official support for Sony's Playstation 3, and support for Nintendo's Wii is right around the corner. However, none of these devices have anywhere near the household penetration of the ubiquitous cable or satellite set-top box.

Cable and satellite set-top boxes have always been closed, monolithic devices--they act as the gateway to the service provider's content, and nothing gets on them or through them without the service provider getting a cut of the action. Even with initiatives like Tru2Way, there's been little progress on opening up service provider STBs. Perhaps now is the time for them to do so.

Network-enabled Blu-Ray Players and game consoles represent the first viable competitors to the service providers' programming hegemony in the living room. The cable and satellite operators can rail against the competition, try to keep their content suppliers from working with them, and try to limit the value of competitor's services with artificial release windows for movies, none of which are likely to work in the long run. Or, they could add network-enabled features to their own set-top boxes and make the competition irrelevant.

Consider a cable or satellite set-top box that allows subscribers to access the same content as Roku. That means Netflix, Amazon, Major League Baseball, and in the near future, YouTube, Hulu, Revision3, Mediafly and a host of other services. You may be thinking, "Netflix? Amazon? Are you out of your mind? Don't the cable and satellite operators have their own Video-on-Demand services that they've spent millions of dollars to build?" Yes they do. But, those VOD systems have limited capacity and are extremely expensive to expand.

According to Comcast, in the first quarter of 2009, over half of its new VOD movies were available the same day as the DVDs. To limit the impact of $1-a-night services like Redbox, the movie studios are pushing to require Netflix and the kiosk operators to get their titles a month or so after the DVDs are shipped to retailers. The way things are going, if you want to see the movie as soon as it's out on DVD, you can buy the DVD or Blu-Ray, or watch it on cable or satellite VOD and pay a premium. If you're willing to wait a month, you can watch it on Netflix.

But, under the model I'm proposing, even if it's from Netflix, you'll still watch it on your cable or satellite set-top box. The service provider will charge Netflix a small fee for access to your set-top box--perhaps pennies per title viewed or a dollar a month. The service provider will get to brand and sell advertising on the interactive program guide and menus that subscribers access in order to find titles. A similar approach would work for other content providers: The cable or satellite operator gets the right to surround the content with advertising, and possibly to even insert advertising directly into the content.

Is the service provider cannibalizing itself? Yes, but it's capturing a chunk of the revenue that it's now losing, and will lose in even greater amounts in the future, from over-the-top (OTT) services that completely bypass the cable or satellite operator's set-top box.

The OTT services also offer leverage that the cable and satellite operators can apply to providers of conventional cable networks. For example, many service providers have long wanted to move ESPN to a premium sports tier, but ESPN demands a fee for every subscriber, even if they have no interest in sports and never watch any ESPN channels. OTT services like Major League Baseball can be integrated into the service providers' offerings to make a premium sports tier more popular and provide negotiating leverage to move ESPN's services into the same tier.

It's time for the service providers to stop trying to prevent the growth of over-the-top services like Netflix, and to start working with them.
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