Does Ikea TV Beat Apple to the Punch?

In his biography Steve Jobs, Walter Isaacson quotes the Apple founder as saying

“I’d like to create an integrated television set that is completely easy to use,’ he told me. ‘It would be seamlessly synced with all of your devices and with iCloud.’ No longer would users have to fiddle with complex remotes for DVD players and cable channels. ‘It will have the simplest user interface you could imagine. I finally cracked it.”

Among those interested in the evolution of television, this quote has taken on a Fermat's Last Theorem-like quality.

However, it looks like Ikea -- yes, Ikea -- may make the first big step forward with a TV that simplifies the interface and, perhaps more importantly, tames the rat's nest of wires. The solution seemingly harks back to the console stereo of the mid-sixties.

Stereo phonograph, tuner, amplifier, speakers and legs

According to Engadget, this all-in-one cabinet, TV set and Blu-Ray player will be available in this fall at a price of around $960. While some of the functionality and specs are clear from the video embedded below, we'll all have to wait on the rest, like screen size. The interface is at least a little reminiscent of the pricey Bose VideoWave set, which All Things Digital's Peter Kafka noted as a potential starting point for the mythic Apple device.

If Cable Costs $200 in 2020 Penetrations Are a-Gonna Fall

According to a provocative study/press release from the NPD Group, the average US multichannel television subscriber paid $86 for "basic pay-TV service" and "premium-TV channels" in 2011 and that figure is going to hit $123 in 2015 and $200 in 2020. NPD Group says that pay TV monthly rates have risen an average of 6% per year while consumer incomes have remained essentially flat. Keith Nissen, research director of NPD sees this trend as "unsustainable in the long term" and concludes "Much needed structural changes to the pay-TV industry will not happen quickly or easily; however, the emerging competition between S-VOD and premium-TV suppliers might be the spark that ignites the necessary business-model transformation of the pay-TV industry".

Dos "Benjamins" para cablevisión

Hmmm. Let's do some analysis of these figures. According to Multichannel News, the $200 is really $196 and that breaks down to $110 for basic and $86 for premium. Filling in the rest of the numbers (hat tip, Todd Spangler for doing the reporting) and looking at the growth rates, we can prepare the following table.

NPD Group Actual/Projected Average Cable Subscriber Monthly Bills with Compound Annual Growth Rates

The current 6% basic package price increases will continue forever; that's straight-line trend extension more than analysis, but not necessarily a bad place to start. Basic rates have grown faster than inflation for probably two decades now and basic penetration is now 86% per NPD's reckoning. A rational explanation would be that  consumers are must be finding value in basic cable television, particularly with the recent stagnation in household incomes. If they didn't value it, they certainly wouldn't keep buying it. If you don't believe that, you haven't seen the data of how cellphones have eroded the market for landlines.

A further rational explanation would be that the program quality of basic cable has increased dramatically by any reasonable measure. Regional sports networks have more pro games than they used to have, typically at the expense of broadcast carriage. Entertainment networks are putting greater resources into original programming and have turned out some real quality stuff (e.g., 4-time Emmy-winning Best Drama Mad Men). Up-the-dial channels like Bravo which ran older art movies and whose marquee show was Inside the Actor's Studio developed a slate of...watercooler favorites (if you must know, see this). Less commercial concepts like The Nashville Network and America's Talking gave way to the more-commercial stylings of Spike TV and MSNBC. This bounty is now spread across dozens of additional channels (Style!, Tennis!, not just one but two food networks!), almost all of which are in high definition which is not just good but necessary because 65% of households now have sets that a 15 years ago were primarily found in the high-end room at Best Buy.

Will that all continue? It sure could. More investment in programming, more channels, TV Everywhere would allow people to use their subscription in more places on more devices, maybe a technological advance like 3DTV -- all these elements could increase the value of the basic service. In fact, I think it could grow faster than 6%.

The interesting part of the NPD analysis to me is that premium programming retail pricing will increase much faster than basic, no less than 17% annually over the next 9 years. At first blush, that makes no sense at all. Basic programming is a take-it-or-leave-it bundle and that gives it a lot of pricing leverage. If you need ESPN, you need to take the whole package. Ditto for Disney Channel or MTV. We know that basic is a fairly low-churn subscription service.

Premium television, in contrast, churns all the time (HBO churns 10 of its 28 million subs annually) and the channels are often sold a la carte, not benefiting as much from being bundled with others. If HBO is too expensive, or if the season of Game of Thrones has ended, subscribers drop it. This happens all the time. [Even premium services that are not sold a la carte (e.g., Verizon packages Showtime and The Movie Channel in a third level basic tier with a dozen or so ad-supported channels, but the premium services provide most of the value of the tier) it is hard to argue that the packages in which they reside are "basic".]

The other part of premium television is transactional -- pay-per-view movies, events and things like out-of-market sports packages (e.g., NFL Sunday Ticket, MLB Extra Innings). Many of these offerings have substantial competition from over-the-top players.

The only way that premium television retail pricing will go up by 17% annual leaps (and bounds!) is if the cable operators are tapping other revenue streams (e.g., DVD purchases, movie theatre tickets) and that will only happen if the service itself becomes much more compelling that it is today. If that happens, it is more than likely that the program quality of these offerings will have increased and/or the convenience of using the service will increase (for example, the highly compelling HBO Go) or both. In short, if the average bills are going up this much, that's probably very good news for viewers of premium television.

[If NPD is considering DVR service to be part of premium television, that's another element that would support an increase in the average bill. DVR penetrations are going up even as operators have raised the prices for it. It is simply a very compelling service.]

So, at second blush 16-19% annual increases in premium television revenue still don't seem to make sense. I would be very surprised if the average bill for premium services from a multichannel provider will grow by that much over the next decade unless...the business is very different from what it is now. [Hold that thought.]

If the average bills go up that much, it also means that Netflix, Amazon, Xbox, Vudu and iTunes are not providing as much competition for the video dollar as it appears that they are currently. One notes that result would be the exact opposite of the conclusion from an earlier NPD study on the results to date in that area of the business (my earlier post on that study). It isn't impossible to imagine pay-TV service improving over the next decade, but it is pretty hard to imagine that it will improve faster than over-the-top delivery of video. [Unless the cable/telco ISPs defang OTT video via broadband caps, throttling or price increases.]

So how do we reconcile these conflicting projections? The way that I see it is that multichannel television may longer be a 90%-penetrated service, but will morph into more of a luxury good as the prices go up. There is a nugget of this point-of-view in the NPD study findings:

"In fact, 59% of pay-TV subscribers preferred having one single provider for their pay-TV services, compared with 21% who desired multiple providers, and 21% who expressed no preference. Sixty-two percent of subscribers wanted premium TV either delivered by their pay-TV provider directly, or from a service affiliated with their pay-TV provider."

The key word here is "preferred". Consumers would "prefer" to get everything from one provider (less technical hassle, fewer bills to pay, etc.), but if the cost differential is significant..."the lure of convenience may not be enough if the content is available and people can access it without going over some set broadband cap." (well put, Stacey Higginbotham in GigaOm's The cable industry isn't stupid, is it?).

This is the future that I see for multichannel television, because the cable industry is many things, but stupid is not one of them. The cable guys will choose to hold onto the high-quality, high-price segment of the market and effectively give up the lower end to alternative solutions in whatever forms those solutions may take. Right now 14% of households rely on antenna service for television. Maybe 10-20% of the multichannel households leave the increasingly spend-y pay-TV market  That's a business different from the one now, but consistent with the major driving economic factors.

Pandora is Not the Future of Television

Peter Stern, the Time Warner Cable Executive Vice President and Chief Strategy Officer, sent the cable media abuzz with his comments at a recent industry conference that television is going to evolve into a Pandora-like experience. With all due respect, by and large, that's not going to happen and it has happened already.

Pandora, for those unfamiliar with it, is an Internet-delivered service which is most easily thought of as a substitute for listening to the radio. On the radio, a series of songs are played. Songs are short-form programming -- usually 2 to 5 minutes in length with some exceptions. The listener expectation is that there will be variety, but within a limited area. No one expects to hear Mozart after Madonna on a commercial radio station, even if some people undoubtedly do listen to them back-to-back at home. That limited area in radio is called the station's format (e.g., Top 40, hip hop, rock); in Pandora the format is formed by algorithm from the user's initial choice and subsequent thumbs-up/thumbs-down feedback. It is the nature of a short-form medium that making a dozen or more programming choices per hour of listening would require some work on the part of the listener. Another quality of short-form programming is that a bad song (i.e., one that the listener does not like) lasts a relatively brief time. Also, radio is an audio-only medium. It is common that listeners use it while participating in other activities, like driving a car.

Television, in contrast, is a long-form medium. Programs are typically 30 or more minutes long. A viewer typically does not need to make more than one programming decision for an hour of entertainment. Second is that a poor programming choice (e.g., a bad show) lasts a lot longer than a bad song. Third is that television is used more frequently than radio as a primary activity. In fact, some television programs are pretty difficult to follow without paying attention.

As many have pointed out, YouTube Leanback has been doing the Pandora-for-video thing for years...without getting a whole lot of traction.

It's not usually too much work for the viewer to select the next television program.  Also, even more importantly, there is already a great passive system for watching television. It's called "not changing the channel". Cable channels are often formatted by genre, not unlike radio stations. All television channels - niche or general entertainment - pay attention to audience flow when setting up their schedules. "Channel up" and "channel down" are simple, if crude, controls for finding another program, and often pretty useful for channel lineups organized by genre (and they'd be much better if viewers could organize their lineups themselves, per an earlier post).

One area in which Peter Stern's observation about a Pandora-like future is spot on is in video-on-demand. The video-on-demand experience generally sucks at segues -- a DJ's term for the transition between two songs. A show ends and then the viewer is deposited back at a screen where the show was originally selected. Is the most likely thing that I want to do after watching a show is to watch it again? Music videos are a popular part of Time Warner Cable's Video on Demand offering. This is what the screen looks like when your choice has finished playing.

I just watched "We Found Love"; watching it again is not my only logical next choice.

Netflix is better. After watching Season 1, episode 4 of Mad Men, it will make it very easy to zip right into episode 5. It's my experience that Netflix's recommendation engine can be pretty good at turning up suggestions of things I might like, but I have rated about 100 movies to give it something with which to work to understand my tastes. (And that works well if only I rate the movies; it gets pretty wonky in a household with mulitple members with disparate tastes).

Lord knows there are some elements of TV navigation that need work, I would humbly suggest Peter Stern sic Pandora on those first.

Wired Article on the Nimbleness of Cable

Tim Carmody has written an excellent article for Wired "The Nimble Empire: In Defense of Cable". He shows a keen grasp of the how the issues of the cable television and entertainment programming business models intersect with piracy and the Internet using HBO as a case in point. I had been searching for a way to incorporate Matthew Inman's brilliant cartoon I tried to watch Game of Thrones and this is what happened into a posting for this site, but now there is no need -- Carmody worked off of it and went further. I recommended both highly.

Another Wrinkle in Over-the-Top Competition: Second Set Set-Top Box Costs

This recent Multichannel News article about Verizon raising the price of its DVRs and set-top boxes made me think: why do these boxes still cost so much and is that a good thing for cable?

In the early days of digital cable, the late 1990s, a set-top box cost a cable operator about $300. Since that time, the price of the components of a box have likely gone down quite a bit and the boxes have gained some capabilities (decoding HD, better graphics, new connectors like HDMI and, the big change, DVR capabilities). The price of cable modems has dropped from $400 in its early days to $54 (when I last checked this one at Amazon). I would imagine the digital cable box hasn't fallen, that much, but it sure has fallen.

On my system, Time Warner Cable New York City, any set-top box (whether SD or HD or DVR) rents for $10.00 per month or $120 per year (pricing schedule). To have digital cable on a second set ("digital program duplication") I pay an additional $4 per month, bringing the total to $168 annually.

I was thinking about this issue recently from the perspective of the opportunity it presents for over-the-top.

From the standpoint of the primary set, OTT alternatives have a lot of shortcomings, notably the lack of the name brand cable channels and, without an antenna or a service like Aereo, the major broadcasters.

However, consumer expectations of service on the second set might not be as high.

• Option 1 is to pay $168 per year and enjoy the same service on the second set as the first.
• Option 2 is to pay $50 for a Roku box and use the second set to watch HBO Go (if your operator permits it), Netflix, Amazon Instant Video, Roku Newscaster and the like. While that's not everything, it might be plenty to kill time while on the treadmill or for a little entertainment before sleeping, for example. (This assumes that the household already has a broadband Internet connection and that that service is effectively unlimited). This amount drops to $0, if your second set is an Internet-connected set from Samsung, although Comcast does not want HBO Go on that either.

The much-considered threat of OTT competition has not to date played out as an either/or situation with cable. DirecTV, Dish Network, Verizon FiOS and AT&T U-Verse are head-on competitors offering the same services in essentially similar bundles. No OTT player yet has pursued that strategy, likely because the content to do so is not available to them.

But the lack of a head-on threat does not mean that OTT is not a real threat to traditional multichannel offerings. The multichannel distribution players do recognize this -- TV Everywhere became a whole lot more important when Netflix demonstrated that part of the value of its service was that it was broadly available -- it wasn't that iPad viewing was that big a threat on its own.

That said, as the set-top box expense example demonstrates, there are lots of places for OTT video to worm its way into consumers' hearts, or, as Clayton M. Christensen puts it in The Innovator's Dilemma, find a protected foothold from which they can launch their attack on the main market.

Broadcast TV comes to Time Warner's iOS app

The big news in the new version of TWC TV, the iPad/iPhone/iPod touch app from Time Warner Cable is the addition of the broadcast stations to the channel lineup, at least for the New York DMA. The app is also available for Android phones and web browsers at www.twctv.com. This conquers one of the big remaining holes in the channel lineup of the app (the holes that continue are most of the top sports services -- ESPN's main channels are available to authenticated Time Warner Cable customers on their own WatchESPN app and website -- and the services owned by Viacom). You can follow the progress of the app via my earlier posts on it (first version, second version and third version).

The post about the app on TWC's corporate blog Untangled notes the channels being carried, but interestingly doesn't identify them by the station of origin, just by the name of the channel (e.g., Living Well HD is not identified as being a services broadcast over the airwaves of WABC-DT) and isn't entirely accurate (see below). Other notable things:

• The broadcast channels are organized alphabetically, not given the priority of their over-the-air channel postions.
• The channels are not identified by call letters, but by a mix of network affiliation (e.g., NBC, not WNBC, Fox, not WNYW) and nickname (PIX11, not WPIX or CW); although that is how they are identified on the Untangled blog.
• All of the primary feeds of all of the stations and some of their digital multicast feeds are carried on the app.
• All of the channels carried on the app are carried on the cable system's channel lineup, except for the SD versions of the services which are carried in HD (which are carried on cable, but not on the app).

The broadcasters likely did not not enter into new agreements with Time Warner Cable; TWC likely put them on and is seeing what happens. TWC probably has no retransmission consent agreement with some of these stations; they are likely carried under the "must carry" rules, which do not address the in-home Wi-Fi carriage that the app utilizes, but do address channel placement. WMBC, which primarily carries ethnic programming likely elected must carry. It would be surprising that CBS would agree that WCBS could be carried, but that the app would not also carry its thinly-distributed CBS Sports Network, which would certainly benefit from additional exposure.

TWC's blog post 26 broadcast channels as part of this addition, but one of them, ABC News Now, is not a broadcast service (it is not carried over the air on WABC)  and I can't find it in the app. Create (on the 21.2 digital channel of WLIW/PBS Long Island) and WNJN HD (50.1 PBS/Montclair NJ) are supposedly available, but, I have not found them on the app or web browser version of the service.

WNBC HD - an actual broadcast station on the TWC App as seen on iPhone

The list below is channels in the order they appear on the app (sprinkled in more-or-less-alphabetical-order among the channels that were already carried, of course) along with their over-the-air channel numbers.

1. ABC HD 7.1
2. CBS HD 2.1
3. Fox HD 5.1
4. Ion HD 31.1
5. Kids Thirteen 13.2
6. Live Well HD 7.2
7. My9 HD 9.1
8. NBC HD 4.1
9. NBC NY Nonstop 4.2
10. NYCTV Life 25.1
11. PBS 21.1
12. PIX11 HD 11.1
13. Rise/Al Jazeera English 48.2
14. RNN 48.1
15. Telefutura HD 68.1
16. Telemundo HD 47.1
17. Thirteen HD 13.1
18. TV 10/55 55.1
19. Univision HD 41.1
20. V-Me 13.3
21. WMFE 66.1
22. WMBC 63.1
23. World 21.3

The branding of these services is seems kind of mixed up and inconsistent. That suggests that it wasn't entirely in the control of TWC or that TWC is not completely on top of it or both. "PBS" takes you to WLIW's SD feed, not the flagship WNET HD feed (which is under "Thirteen"). I don't think either TWC or WNET (which runs also WLIW would have chosen to do it that way). More confusingly, the graphic on the guide says WLIW, even though it is filed under PBS. Al Jazeera English does share a channel with a service called Rise, but Rise programs one hour per day, while AJE programs 23 hours. (AJE is likely leasing the space from WRNN the station that controls the frequency). TV 10/55 is WLNY, a Long Island-based TV station that is usually on Channel 55 on Time Warner Cable, but Channel 10 on Cablevision (where most of its distribution is); it an app without channel numbers, I would think WLNY would want to be listed as TV55 on the app (or better still, Channel 55, to be higher in the alphabetical order). Also, if the services are in alphabetical order, why is WMFE before WMBC?

Intel-evision?

According to an article in the Wall Street Journal, Intel is looking to develop at web-based video service to compete with cable and satellite. Intel's plan is to create a virtual MSO, a business idea that many have been kicking around in one form or another.

Consumers would welcome another choice of video provider. As one measure of customer satisfaction, Consumerist's cheeky "Worst Company in America" 2012 bracket features eight providers of multichannel television (Comcast, DirecTV, Dish, Time Warner Cable, Charter, Verizon, AT&T and CenturyLink), among its 32 "contestants".

However, facts are stubborn things (hat tip, John Adams). Multichannel penetration is very high ~90% -- there are relatively few households who do not see it  as a worthwhile purchase, despite the fact that subscription prices increase every year. That suggests that the customer satisfaction issue is likely less the service itself (not that it doesn't have its frustrations - long times on hold, among them), than frustration with the price and general lack of choice. (If it didn't, Charter wouldn't be doing things like this.)

If Intel were to offer a me-too service (i.e., a comparable package of services) at a lower price, it would likely attract some customers. However, multichannel providers are already cutting prices in a de facto way, as they offer sweetheart deals for new customers, particularly in areas of high competition. It isn't easy to compete on the low end with customers churning through the introductory offers in search of the best deal.

The me-too offering would have a competitive advantage if its operating cost of delivering the service were lower than the incumbents. It won't be because of lower programming costs. A new entrant into the market, like Intel, can expect to pay 20% or more greater programming costs than the incumbents. Intel wouldn't have to build the expensive distribution system (laying cable, launching satellites) that the incumbents did, but would be on the hook for the variable cost of delivering bits to its customers. The jury is still out on how much less expensive that would be. However, that does make Intel, like Netflix, highly dependent on the ISPs (who are the cable and telephone companies) to continue to provide unlimited service to their customers.

There are alternatives to a me-too service, of course. A la carte offerings of channels is a popular request, but one that it is hard to imagine the programming community embracing. (LA Times: Don't hold your breath for a la carte cable -- is that clear enough?) Given the high penetration of multichannel television, there isn't much reason for the programmers to look at a different, potentially less lucrative business model, unless they have to do so (as the music industry had to, after rampant piracy ended their chokehold on packaging and pricing). However, the multichannel subscription television market probably has less piracy today than it did in the past, due to the changeover from less-secure analog systems to more-secure digital ones). So, it won't be driven by piracy, at least not today's piracy, but maybe tomorrow's.

This is not the first Intel over-the-top story. GigaOm reported earlier this year that Intel was "in talks to buy Roku". BTW, Roku is now looking to raise some $50 million to expand...hmmm.

It is always interesting to see new entrants to an industry as that's often the origin of the new ideas that shake things up (Walt Disney's theme parks, Apple's iPod, iPhone and iPad). If Intel has that sort of idea, there will be a place in the market for them. There is certainly room for innovation in the distribution of television.