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Coming to a Set-top Box Near You By: Sean Wargo, October 14, 2007
The current waves are cresting. Prices on the previous drivers of growth are in rapid decline,
pushing us towards commoditization and diminishing the benefits provided by the newer crop of technology. Sure, volumes in
some categories are ramping up, but for only so long, and at an insufficient rate of growth to offset pricing. For proof one
need look no further than the bellwether display category in which prices have fallen by more than a third over the past year
for particular types and sizes of sets. All signs point to a continuation of this trend through the 2007 holiday season. And so, with the display wave passing, the real question is ‘what’s next’?
There are some near term and obvious answers to the question, such as video games, which will continue to grow the market
in 5-7 year cycles. PCs and wireless phones are also locked in perpetual replacement cycles that crank out fairly steady growth.
But what else is out there? Allow me to put in my pitch for the lowly set-top box. 1) The volume is there. According to CEA, approximately 30 million set-top
boxes ship from factory to dealer here in the U.S. in 2007, ramping to over 45 million in 2008. This includes those for satellite
reception, cable boxes shipped to cable MSOs, digital media adapters like the Apple TV product, IPTV boxes, digital video
recorders like TiVo, and digital to analog converter boxes for DTV reception. That volume is comparable to the total TV or
PC market, making it an attractive segment.
2) Features are increasing, pulling prices up.Currently
the average wholesale price for an average set-top box is only about $100. But that is steadily increasing as new features
penetrate the market. For example, cable MSOs are upgrading their customers with advanced boxes offering DVR and home networking
capabilities. Satellite is doing the same along with TiVo. Last but not least, the Apple TV and like products, which sell
at upwards of $300 are helping to push prices up. As this happens, the total potential revenue for set-top boxes starts
to look impressive. CEA estimates already put the total market at $2.7 billion in wholesale value, which could become
$8 or even $10 billion as pricing increases. This is still a ways from the $20+ billion PC market, but could
be a great boost to the industry.
3) An open retail market for cable STB is looming.Yes
I know we’ve been hearing this for awhile, and the truth is the entire STB opportunity still hinges on opening up the
cable market for retailers. The requisite negotiations for making this happen also remain ‘in process’. But the
FCC has been pushing back on the cable industry to comply with rule-makings that are set up to enforce an open market for
cable ready products like STBs. Certainly cable continues to appeal the FCCs decisions, but in the end cable may not have
a choice but to get things moving. The reason is 2-fold. First, satellite TV continues to innovate with its set-top technology
and content services, thereby luring customers away from cable. Second, new and emerging services based on Internet distribution
of content, such as IPTV or VOD, are starting to look more and more attractive. Plus, some of these services are now linked
to hardware solutions, like the Apple TV box in the case of iTunes , a TiVo box in the case of Amazon’s Unboxed service,
and the Xbox 360 in the case of the Xbox Live Marketplace. Others are sure to emerge and as the menu of content on these services
increases they are more likely to be considered replacements for cable. With a more open market for set-top boxes, one can quickly imagine the possibilities.
Products like TiVo, the SlingBox, and Apple TV, are ultimately just examples of the kinds of features that could be built
into any box. Thus, one potential outcome could be a build-to-order STB market. This would allow the customer to choose from
a suite of options like a built-in hard-drive for recording, a DVD drive, networking support, e-mail access, gaming support,
or maybe even a home security module. After all, this was accomplished in the PC space, so why not here? The alternative is
to create an inventory night-mare for a cable company or retailer, who would have to stock a large array of product combinations
in order to satisfy the demand for variety in features. A build-to-order model may make a lot more sense in this context,
and would perhaps serve to push the average price per unit even higher. Beyond the feet dragging of cable, perhaps the biggest obstacle to the STB opportunity, from a
holistic industry perspective, is the very real potential for hardware consolidation within the home technology segment. Thinking
out to the future, it is possible consumers will use a game console or a PC as the living room content gateway. Thus instead
of having multiple pieces of hardware (a game console, a DVD player, a SlingBox, a TiVo, a Cable or Satellite STB, and a media
PC) all hooked into the living room display, the consumer may just have one. In this scenario the net is likely to be lower
overall revenues for retailers and manufacturers alike, since it is unlikely the cost of that ‘box’ would even
be equal to the sum of its parts. Then again, are we sure consumers will want an all-in-one replacement for their various
home electronics? That is yet to be decided. In the end, regardless of challenges, the set-top box sector remains one worthy of further consideration and scrutiny
going forward, if only because it may be the most logical next great hope for home technology sector… at least until
innovation pulls us into some exciting new and unexpected direction.
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