O W N I N G I N P U T 1: T H E F U T U R E O F T H E PA Y TV S ET- T O P B O X A N D S OFTWARE

Author: Colin Dixon, Founder and Chief Analyst, nScreenMedia | Date: Q3 2016

www.nScreenMedia.com

This paper is made possible by the generous contribution of:

dtv.nagra.com

Executive Summary The consumer experience of watching television has STB-utils will find different ways to balance these changed dramatically over the last few years. The new three business needs. multiscreen environment for television means STB-primes see the set-top box as a critical component operators can no longer assume that a set-top box in delivering excellent service and maintaining control connected to input 1 gives them control of the of input 1 on the television. They typically maintain television experience. large teams of software and test engineers to develop, In light of this shifting TV room dynamic, test, and maintain the software that runs on the STB. nScreenMedia spoke with European and North These teams can cost over €50M a year in salaries American operators about the future of the operator alone, and 5 to 10 times more including other costs. set-top box. These conversations show that there are STB-primes are reluctant to consider using retail set- two quite distinct views on the future of the STB: top boxes like a Roku or Apple TV, because:  STB-prime operators believe the best experience of  They lose control of input 1 their pay TV service is obtained through their STB.  Their video service is no longer the default  STB-util operators believe the best experience of  It is harder to differentiate service their TV service can be enjoyed through other  There is no operator branding on the STB. hardware platforms. The Sky Q Silver set-top Both groups share box is a good example a common set of goals of how an STB-prime for their service: approaches service  Increase the speed of innovation. service evolution STB-utils believe they  Bring new features can achieve service to legacy STBs differentiation without  Minimize the cost of control of the STB. STB- building, deploying utils develop and maintaining STB experiences software appropriate for the STB-primes and STB- service, and look for utils take very different environments that paths to minimize service costs. support the functionality and performance they require. Though STB-utils still require an STB, some Both groups also seek to reach a balance between the have completely outsourced the development effort of following business needs: the STB software.  Maintain or increase average revenue per unit Consequently, some STB-utils maintain only a skeleton (ARPU) software development staff focused primarily on test  Improve net promoter scores (NPS) among and verification. STB-utils may not save enormous subscribers amounts in reduced development costs. They are  Maximize operator efficiency likely paying large amounts in license fees to the These three business needs depend on each other: companies providing the software. improving one may worsen another. STB-primes and

Owning Input 1: The Future of the Operator STB and Software Page 2

STB-utils are prepared to consider delivering service to reevaluate the balance between NPS, ARPU and on a retail set-top box because they attach little service efficiency. It is also becoming increasingly importance to having a branded STB in the home, and important for an operator to deliver their best do not expect to own input 1. They are willing to experience on the device the customer is using, and accept appearing on customer devices as a peer to not to reserve it for a pay TV set-top box that is other competitive services, and that it is easier to isolated from the rest of their customers’ video lives. cancel service as switching apps is much easier than Within two years expect to see several STB-util switching a set-top box and associated connectivity. operators eliminate the set-top box from new Virgin Media in the UK is an example of an STB-util, as installations of their service, and encourage existing it uses TiVo for its DVR service. Cox Communications subscribers to switch to a device they may already and Shaw Communications both have licensed own. STB-primes will continue to anchor their ’s X1 software for their pay TV services. service with a set-top box for the next several years. Both STB-primes and STB-utils are working to reduce The willingness of some operators to outsource their the cost of the set-top box by migrating disk storage set-top box development has led to the emergence of and processing power into their private clouds. STB software-as-a-service (sSaaS) vendors like Many operators will also work to bring new features Comcast Wholesale and TiVo. to existing set-top boxes, though the functionality Regardless of whether an operator is an STB-prime or will be limited to point features and user interface STB-util, the multiscreen environment is forcing them look-and-feel.

Owning Input 1: The Future of the Operator STB and Software Page 3 Introduction The environment in which an operator set-top box focus of the competition. Consumers are increasingly (STB) exists within a consumer’s home has enjoying the flexibility and low price points that are fundamentally changed. Just a few years ago, the only the hallmarks of SVOD. 56% of US SVOD users said source for live video and broadcast content on they used their service because it was convenient, and television for most people was through their pay 47% said because it was cheaper.5 television STB. To a very real extent, the operator MVPDs are acutely aware of these trends and are owned the experience of television for all its customers. beginning to make adjustments to cope. Some are Those days are most certainly over. In the US today offering so-called “skinny bundles” of content. For 56% of consumers have at least one subscription example, Comcast provides a bundle of broadband and video on-demand (SVOD) service.1 Though somewhat a TV basics package along with access to premium behind the US in penetration, Europe is heading in content through HBO GO. Sling TV from DISH Network the same direction. 1 in 4 UK homes have delivers 23 linear channels, including cable stalwarts a subscription to . ESPN and TNT, for $20 a month. Signs are that these skinny bundles will need to go further. 74% of US The preferred screen for viewing SVOD services is the consumers say they would like the ability to select television. Ericsson talked to consumers across 20 their own channels to create their markets, and found that 75% of own bundle. SVOD users used a television with access to the Internet, versus 47% Change is the new constant in the of non-SVOD users. 23% used pay TV world, and the set-top box Google’s Chromecast, versus 10% must change to reflect this new of non-SVOD users.2 reality.

One group in particular has In this white paper, we will look at gravitated toward SVOD: the how operators are moving to more millennials. 51% of US 18–24 year- flexible software platforms, and olds identify Netflix as a video adopting new development source they can’t live without, techniques to keep pace with the while 36% say they can’t live changing needs of their customers without television.3 Despite all this and the content world. Drawing on online video consumption, as with the experience of operators in the the rest of the population, the North American and European television remains the favorite place to watch. 70% of markets, the paper presents how attitudes are 16–24 year-old viewing in the UK takes place on changing to the role of the STB in the delivery of pay a television, despite the almost ubiquitous ownership TV services, and what the future of the device may be. of smartphones.4 76% of video watched by German About this white paper 14–25 year-olds occurs on the television. Australia, Scandinavia, and France all are seeing the same The examples and data points attributed to operators trends: increasing OTT video usage coupled with an used in this paper are derived from a series of undiminished interest in watching on television. interviews with European and North American pay TV providers conducted between January and March For multi-video program distributors (MVPD), the 2016. Given the sensitive nature of the information sobering fact is that their service must now compete they provided, interviewees have asked that they not for attention every time a subscriber sits down in front be identified in the paper. of the television. And it’s not just attention that is the

The Two World Views of the STB No operator we spoke to questioned the importance of STB-primes look to the STB hardware and software to: the STB in the delivery and experience of their pay TV  Tightly control the TV experience service today. Simply put, they would not be in  Provide market leading features and functionality business without it.  Cement ownership of input 1 That said, how operators view the on-going value of STB-utils look to the STB hardware and software to: the set-top box is a different matter. Operators we spoke to articulated two broad attitudes towards the  Reliably deliver the service device and the software running on it. The first group  Support the features and functions that are a part of views the STB as a primary part of the service and the experience a tool for creating differentiation from competitors.  Minimize the costs of service delivery Put another way, the best A great example of an STB-prime experience of the first group’s STB-Prime: is DISH Network. Its Hopper and service is obtained through the Joey whole-home DVR solution is An operator that believes the best operator’s STB. We will call this the focus of much of the group STB-primes. experience of their pay TV service company’s marketing. Features The second group recognizes the is obtained through their STB such as automatic ad skip, Netflix utility of an STB in the home, but integration, and out-of-home views the features and functions STB-Util: access to subscribed content are that differentiate their service as uniquely associated with the An operator that believes the best separate from it. Put another hardware/software platform. experience of their pay TV service way, the best experience of the Canada’s Shaw Communications second group’s service can be can be achieved through other is a good example of an STB-util. achieved through other hardware platforms The company has licensed hardware platforms. We will call Comcast’s X1 platform and is this group STB-utils. using it to deliver services on the set-top box, as well as on mobile platforms.6 Other companies are following a similar approach with TiVo, including Suddenlink Communications, and the UK’s Virgin Media.

Owning Input 1: The Future of the Operator STB and Software Page 5

Uncommon Views, Universal goals Though they have very different outlooks on the role One casualty of the need for speed is reliability. In the of the STB in their service, STB-primes and STB-utils web world problems frequently make it through to share some common goals and technologies to help to customers, but are fixed in the next daily update. achieve them. Similarly, bugs are making it through to pay TV operator customers on their STBs. In our conversations with operators the number one issue that came up time again was speed in evolving Luckily, many of these bugs are invisible, though they service features and functions. Whether the operator tend to accumulate over time.* One operator admitted relied on a custom STB and software which it owned that to prevent their STB from crashing due to this and developed (STB-prime), or accumulation they had to reboot licensed software running on By leveraging AB testing to the STB every day. Fortunately, a generic STB (STB-util), delivering customers are rarely aware that new service features quickly and assess improvements to the app this happens as it occurs when reliably was of critical importance. user interface, one tier 1 U.S. they are not using the service.

To do this, operators have been operator was able to reduce call Another common goal is to forced to reorganize internal center volume by 10% to 15%. minimize the cost of building, teams, both large and small, to deploying and maintaining the adopt new agile development and software that runs the service test methodologies. Software maintenance and update experience. This has led to an almost universal move procedures are also being reinvented to speed to adopt more common web standards for the app delivery of software updates. development and deployment. Using web standards brings many benefits, including: They have also begun to adopt development environments based on web standards that support  The ability to use standard tools to develop, test and rapid development. There is an almost universal move deploy the software toward browser based HTML5 apps. This environment  Leveraging the work of the greater Internet is well suited to connected application development community in the advancement of platforms and and is the lingua franca of web app development. It features allows operators to move toward the “constant app  A plentiful supply of well-trained web developers to evolution” model with their now-connected STBs. assist in the app creation process Today, many operators update their STBs on a daily  The ability to use more standard, and cheaper set- basis. For example, a senior engineer managing an X1 top boxes powered service told nScreenMedia that there were As we shall see, this drive to contain the cost of daily software updates to the HTML5-based platform. development can lead to very different cost structures This is a far cry from the days of year-long between STB-prime and STB-util oriented teams. development cycles.

Having adopted HTML5 at the client and an agile software development process, one operator is able to use AB testing for the first time. The company is segmenting out small numbers of set-top boxes in the * customer base and testing new features before they The most common type of invisible bugs are memory leaks. Over time, these leaks rob the system of all its are committed to all set-top boxes. Using this working memory and cause the device to freeze or technique to refine the user interface has reduced call crash. Rebooting the box frees the lost memory for the system to use again. center volume by 10% to 15%.

Owning Input 1: The Future of the Operator STB and Software Page 6

Balancing the Business Needs Both STB-primes and STB-utils are seeking to optimize These three needs are fundamentally connected: the delivery of their service. As we spoke with a change in one will impact the other two. operators, it became clear they all have three The balance between these needs is liable to be key needs that must be met by any service different between STB-primes and STB-utils. delivery solution: To understand why, consider an extreme 1. Maintaining or increasing revenue example: where an STB-util has completely 2. Improving customer satisfaction eliminated the STB. With no hardware to 3. Maximizing operator efficiency. install in the home, operational efficiency increases dramatically. Subscriber Tracking the revenue earned from acquisition costs (SAC) plummet as each subscriber (average revenue the need to buy and install the STB per unit, ARPU) is one critical vanishes. A purely software client measure of service also allows the operator to performance. Net promoter innovate the user interface score (NPS), which tracks quickly and deliver the same how many subscribers experience everywhere much would recommend more easily. a service to others, is a good measure of customer satisfaction.* Maximizing operator efficiency seeks to minimize the cost of delivering the service at a given service level.

* NPS is usually calculated by subtracting the percentage of customers who would not recommend a service from those who would. A large positive number is good; a small or negative number is bad.

Owning Input 1: The Future of the Operator STB and Software Page 7

Eliminating the STB will also impact ARPU and NPS, Internet is beginning to change the balance. For though it is much harder to say how. One of the example, it’s crucial for an operator to recoup the cost downsides of not having a set-top in the home is that of the set-top box and installation. Asking customers disconnecting service is much easier. This could result to agree to a one- or two-year contract is how in higher churn, which can act to decrease ARPU* and operators typically handle this. However, this is out of increase operations costs†. The increased reliance on step with Internet SVOD practices, where one month broadband and the Internet to deliver service could agreements are common. Since more than half of pay also be accompanied by an increase in video quality TV customers also have SVOD, this could be affecting problems, like pixilation and buffering events. While NPS negatively. the flexibility that an all-software solution provides to That said, STB-utils could be looking to their shift in customers should act to increase NPS, an increase in reliance away from the STB to help improve poor NPS video quality problems will do the reverse. scores, particularly when compared to SVOD. In It would be reasonable to expect the balance between a multi-country study, Ericsson ConsumerLab found ARPU, NPS and operator efficiency to be better that traditional television services received an NPS of understood for STB-primes. After all, this has been the 10%, while SVOD services received an NPS of 36%. standard model of delivery for decades. However, the

* High churn can result in a decrease in the average number of subscribers during a specific period, even though the total number at the beginning and end is the same. † Since there are no STB or installation costs, an increase in churn will have much less impact on an operator with a purely software solution than one dependent on an STB for service.

Owning Input 1: The Future of the Operator STB and Software Page 8

STB-Primes: Doubling Down on the STB One of the reasons STB-primes are so focused on The net result of this is that STB-primes frequently creating the best experience through the set-top box is segment their development teams, with each group because they know how important the television is to taking responsibility for each middleware or operating their customers. The traditional role of system supported. This makes it very hard to deliver in many regions of the world has been that of the new functionality across all the devices. For example, default provider of that experience, and STB-primes search is basic service that many consumers expect to are intent on keeping it this way. Owning input 1 on have available. While it is relatively easy to include the television is of paramount with newer devices, it can be importance and the STB and “If it booted into my UX and my difficult to retrofit it to older STB software is the way to achieve it. branding, but certainly not while software. That ownership does not come Netflix is the number 1 icon It should come as no surprise that cheap. STB-prime operators STB-primes are reluctant to in the interface.” typically maintain large consider using retail set-top development teams. Frequently Senior Operational Manager, Tier 1 boxes like a Roku or Apple TV as hundreds of software and quality European Operator, describing the their primary television delivery assurance engineers labor to devices. Operators cited many circumstances under which he develop and maintain the guide, reasons why they would not VOD apps, DVR functionality, and would use a retail STB consider migrating to such other video apps necessary to a device, including: support the service. These teams  Loss of control of input 1 are expensive to maintain, costing the operator  The operator is no longer the default video service upwards of €50M annually in salary costs alone.*  Harder to differentiate service is all apps are on the Factoring in software licensing and maintenance fees, same hardware development and test environments, facilities, and the  No operator branding on the box many other costs associated with development, these costs can reach 5 or 10 times the cost of the engineers. To emphasize how passionate some operators are about this issue, one senior STB group manager In their desire to always provide the best television described the conditions under which he would service possible, STB-primes are more likely to roll- consider using a retail STB as his service’s primary TV out new STB software platforms. One US operator said delivery device: “if it booted into my UX and my the company had three branding, but certainly not completely different while Netflix is the number 1 middleware solutions icon in the interface.” deployed and active in the network.† This is fairly Control of another kind is common. In addition, many of the older STBs do not factor at many STB-prime operators. One tier 1 have middleware, and the apps are written directly for operator engineering manager described how the the operating system. television service started out with many third party components, including the STB middleware. However, he and his colleagues became frustrated by the slow * Assumes a fully loaded engineering cost of €150,000 pace of innovation, as they couldn’t get the features per year. they wanted in the time frame they needed them. The † STB middleware is a software platform that allows company made the decision to buy the source code for the same app to be run across different types of STB. the middleware and bring development in-house. This

Owning Input 1: The Future of the Operator STB and Software Page 9

allowed the manager and his team to develop the primary television input (assuming the customer opts features they needed much faster. to use HDMI1), and ensures Sky’s brand is front and center on the box beneath the television. A good example of how an STB-prime approaches the set-top box is the UK’s Sky. The company has just That said, STB-primes like Sky are being forced by introduced a new premium suite of services called Sky market conditions to deal with the same issues as STB- Q. These services are anchored by a new set-top box, utils. Sky launched an OTT video service called Now Sky Q Silver. This is a high-end DVR with 12 tuners, TV in 2012 to reach consumers that either couldn’t ultra HD support, a 2-TB hard drive, and in-home receive Sky satellite or simply didn’t want a regular access by tablets and smartphones, and it prominently pay TV service.9 The Now TV app appears on many displays the Sky brand on the front panel.7 popular devices including Apple TV, Roku, Android and iOS devices, and game consoles. Not only is this a new set-top box for Sky, but also a whole new software platform. Cisco is providing the However, even here Sky still displays STB-prime middleware and conditional access for the solution.8 tendencies. A year after the Now TV service started, Sky has other middleware solutions in use already, Sky sort to wrest back control of the experience. Sky including software from OpenTV. OpenTV is used on struck a deal to allow it to release a version of Roku’s the Sky+ DVR and other Sky STBs. popular streaming media player under the Now TV brand. On this box Sky controls which apps appear and Sky Q allows the company complete control of the which do not, and sees all the user usage data. television experience, secures ownership of the

Owning Input 1: The Future of the Operator STB and Software Page 10

STB-Utils: Moving Toward Screen Equality STB-utils are equally as passionate about the Does that mean STB-utils are saving enormous experience of their service at the television as STB- amounts of money over STB-primes in the primes. However, they believe they do not need to development and delivery of STB software? Not own the STB, or the associated software, to deliver it. necessarily. Substantial license fees must be paid to license the software, and for the ongoing Rather than develop features and functions that take customization and development. Also, certain license unique advantage of specific hardware, STB-utils fees must still be paid by the operator. For example, develop experiences appropriate for the service. They Rovi requires a substantial fee for the use of its grid then look for environments that support the guide intellectual property.* functionality and performance they require. There is one big downside to A tier 1 North American pay TV operator outsourcing all of the set-top Since the STB and associated box software. Since solutions software is not viewed as said he would be prepared to deliver providers are delivering to strategic, some STB-utils have service through an Apple TV or Roku multiple operators, an decided to completely immediately “if our STB software individual customer might not outsource the development, provider supported it.” be able to get a specific need testing and maintenance of the addressed as fast they would software. For example, an like. A tier 1 North American operator could license Comcast’s X1 platform, contract pay TV operator said he would be prepared to deliver with Cisco to customize and maintain it, and leverage service through an Apple TV or Roku immediately “if S3/Accenture to test it. Alternatively, an operator our STB software provider supported it.” could contract with TiVo for its DVR software with updates, and make minor features enhancements This highlights another characteristic of STB-utils: using TiVo’s built in app interface. Operators such as they are prepared to consider using a customer Virgin Media, Suddenlink, Shaw Communications and purchased STB, such as Roku or Apple TV, as their Cox are using a mix of these approaches to deliver primary television delivery device. This willingness to service on their customer’s TVs. use customer purchased devices means STB-utils:

When an operator begins to outsource much of the  Attach little importance to having their brand on development of the STB software, the make-up of the the STB internal development team can shift dramatically.  Do not expect to own input 1 on the television. Most of the core development resources are no longer Even the very largest operators are willing to consider required. Instead, a much leaner test-oriented team is doing this. Comcast, which has invested heavily in its maintained. One large North American operator, with web-based infrastructure for the X1 television service, several million pay TV customers, told nScreenMedia is moving toward supporting customer purchased set- that their STB software team consisted of no more top boxes. The company launched the TV than 20 to 30 test engineers. Partners Program to encourage CE manufacturers to support Comcast’s TV-Everywhere apps.

* Some European operators are refusing to pay these fees, and the courts are increasingly supporting their position.

Owning Input 1: The Future of the Operator STB and Software Page 11

When the television is turned on, the operator service “Through this new program, we will is no longer the default television source. Users must expand the range of retail devices our actively choose to watch the pay TV channels, and customers can use to access Xfinity TV they might select a competitive service from providers such as Netflix or instead. However, cable service without the need to lease this could be a case of the operator simply bowing to a set-top box.” the inevitable. Roku powered televisions from TCL do not automatically go to input 1 when turned on. Mark Hess, SVP, Office of the CTO, Business Instead, the home screen is displayed and the user and Industry Affairs, Comcast Cable in TV must select from the various inputs and service icons available before they watch television.12 Comcast has this to say about the Xfinity TV Partners Program:

“Through this new program, we will expand the range of retail devices our customers can use to access Xfinity TV cable service without the need to lease a set-top box.”10 Figure 1. Roku TVs default to the home screen when first switched on The operator has already signed several prominent electronics manufacturers to the program, including Since somebody else owns the software running on Samsung for smart TVs, and Roku and NVidia for the device the operator does not see all the data about streaming media players. how the owner uses it. Though the operator will see all the usage data while a subscriber is within its app, There is perhaps another reason why STB-utils are all of the box usage data will be unavailable. For comfortable using customer-purchased STBs: it example, operators would like to know which other relieves them of the enormous expense of buying and apps are used or what shows are searched for using maintaining the STB in a subscriber’s home. All of the cross-app discovery tools. That information, however, expense of developing new features, fixing bugs in the is only known to the box providers. software, and testing on all the set-top boxes is handled by someone else. Most significantly, it becomes easy to cancel service. With a set-top box in the home, it is logistically Virgin Media in the UK uses TiVo to develop new difficult for subscribers to switch operators. Switching features for its co-branded DVR, as do operators like apps is trivial by comparison. That said, operators still Suddenlink and Cogeco.11 have triple and double play pricing packages to Ceding ownership of input 1 is an enormous change dissuade frivolous cancellations. for pay TV operators, and it has its dark sides as well.

Owning Input 1: The Future of the Operator STB and Software Page 12

The Future of the Set -top Box As you might imagine, STB-primes and STB-utils have DVR storage into their private clouds. Ultimately, that radically different views of the future of the STB. For means the end to spinning disks in DVRs in the home. example, a senior engineering manager at a large Both STB-primes and STB-utils are moving North American STB-util operator is blunt in his functionality that would traditionally be executed assessment. The gating factor preventing his company on the STB in the home into their private clouds. from dumping the For example, set-top box today is search and the speed at which recommendation it could go all-IP. functionality is He believes his increasingly being company could run on servers in have every part of the operator’s data the video delivery center. Some chain over IP features simply within two years. can’t be effectively At that point implemented in customers will be a home STB at all. instructed to use Voice recognition their smart TV or and control needs retail streaming media player to access service. a lot of processing power and most solutions rely on cloud resources to shoulder the burden. Other operators are also looking to stop providing the STB sooner rather than later. Time Warner Cable’s The trend in operator set-tops for many years has CEO Rob Marcus recently commented: “Where we’re been to increase raw processing power and storage to headed is the ability of customers to access the keep pace with the DVR evolution. This has acted to complete video product without having to rent a set- keep the cost of operator set-top boxes relatively high. top box from us, whether they use a Roku or another With functionality migrating to , it looks like IP-enabled device.”13 the cost of the set-top box could be headed down for the first time in years. Conversely, all the STB-prime operator employees nScreenMedia spoke with said they couldn’t foresee One feature of the STB that will continue to improve is a time when the operator set-top box would not be the graphics processing. Since many operators rely on needed. That doesn’t mean the STB to render the user STB-primes think things will interface, advances in graphics “It’s just naïve to believe that the not change with the set-top processing will continue in box. One operator said it is set-top box will be the same as it is order to keep pace with naïve to believe the STB today in five years.” advanced interfaces on wouldn’t change over the next smartphones and tablets. That STB-Prime Tier 1 five years. What changes said, this does not contribute should we expect in the coming North American Operator nearly as much as the cost of months and years? the processor and hardware in current set-top boxes. It is very likely the set-top box will become a lot simpler in the near future. For However, that cost-reduced future could be a little example, many operators are in the process of pushing further away than many operators would like. Charter

Owning Input 1: The Future of the Operator STB and Software Page 13

first began working on its cost-reduced WorldBox in an HTML5 browser based app running on a new 2013 and only began network rollouts in the middle of powerful STB. That is not enough for a senior last year.14 technology manager in the company: “Our goal is to extend our new experience to our legacy boxes, even One thing that every operator is anticipating is the those dating back to 2005 and beyond.” persistence of existing set-top boxes in consumer homes. Given the high cost in Several operators told switching these devices it’s “Our goal is to extend our new nScreenMedia they would bring likely they will remain for many new features to older set-top experience to our legacy boxes, years to come. This leaves boxes by upgrading the operators with a problem: how even those dating back to 2005 onboard web browser to to keep customers with older and beyond.” support HTML5. Since set-top boxes satisfied with the processing power and memory Senior STB Software Development experience. is limited in these legacy set- Manager, Tier 1 European Operator top boxes it is unlikely the Many operators are looking at operator will be able to bring the opportunity to bring some the complete new experience to of the new user features and interface designs to them. Instead, the likely focus will be on adding key existing STBs and legacy software environments. For features such as search and upgrading the look and example, a tier 1 European operator we spoke to has feel of the interface. been rolling out an entirely new experience leveraging

Owning Input 1: The Future of the Operator STB and Software Page 14

Conclusions The increasing willingness of some operators to For many operators, following customer eyeballs onto outsource the development and maintenance of the connected devices is more important than completely STB software points to a new trend in the technology controlling how their service is enjoyed. Even if it of pay television: the emergence of STB software-as-a- means an increased risk of cancellation and reduced service (sSaaS). With capable platforms such as Nagra information about how customers are engaging with IntuiTV, TiVo, and Comcast X1, there is an opportunity media. for operators to license all the STB software needed to That said, for the majority of consumers pay TV run a modern pay TV business. Guide, VOD, DVR, remains the dominant way they enjoy television. And browser and even extensible app interfaces come with continuing to provide an excellent experience through these platforms. Vendors such as Cisco and an operator provided set-top S3/Accenture can be hired box is an essential part of the to perform the ongoing It is becoming increasingly important for business. maintenance and testing. an operator to deliver their best The operator need only select One final note on the effort experience on the device the customer is an STB, decide on minor by the FCC in the U.S. to customization for branding, using, and not to reserve it for a pay TV unlock the pay TV set-top and let vendors worry about set-top box that is isolated from the rest box.* The main thrust of the proposed rules is to allow the details. of their customers’ video lives. consumers to access their Today there are few MVPDs pay TV subscriptions through employing a pure sSaas third party devices without the compliance of the pay model. The reality is that most operators have legacy TV operator. As is evident from this white paper, this set-top boxes and software platforms that they need to is already happening without the requirement for maintain, and in some cases improve. That means they additional regulation. In our discussions with may have internal development teams that are operators, the FCC’s proposals are not a part of their handling the legacy technology, while at the same time current planning or thinking about the future of the moving to new platforms that are entirely outsourced. set-top box. For that reason, we have not included a For now, at least, the biggest operators seem reluctant detailed discussion of the FCCs proposals in this white to cede control of the set-top box environment. They paper. remain committed to owning the software, development and maintenance of the set-top box. They also remain committed to developing new hardware/software combinations to differentiate their service, and retain control of input 1 on television.

However, control of input 1 is not what it used to be. Consumers are no longer bound to it, and are spending more time than ever away from it watching video on their mobile device and connected televisions. It is becoming increasingly important for an operator to deliver their best experience on the device the customer is using, and not to reserve it for a pay TV * FCC, FCC Proposal to Unlock the Set-Top Box, FCC, Jan set-top box that is isolated from the rest of their 27 2016, https://www.fcc.gov/document/fcc-proposal- customer’s video lives. unlock-set-top-box (accessed on 7/6/16)

Owning Input 1: The Future of the Operator STB and Software Page 15

References

1 Digitalsmiths, Q4 2015 Online Video and Pay TV Trends Report, Digitalsmiths, Q1 2016, www.digitalsmiths.com/q4-2015- video-trends-report-web/ (accessed on 3/24/16) 2 Ericsson Consumer Lab, TV and Media 2015, Ericsson, September 2015, p6 3 Defy Media, Why They Watch Video, Infographic, Defy Media, Q1 2016 4 Advanced Television, TV dominates Millennials’ media lives, Advanced-Television, Nov 20, 2015, advanced- television.com/2015/11/20/tv-dominates-millennials-media-lives/ (accessed on 3/23/2016) 5 Digitalsmiths, Q4 2015 Online Video and Pay TV Trends Report, Digitalsmiths, Q1 2016, p21 6 Jeff Baumgartner, CES 2016: Shaw Put’s Comcast’s X1 to Work, Multichannel News, Jan 6, 2016, www.multichannel.com/news/content/ces-2016-shaw-puts-comcast-s-x1-work/396295 (accessed on 3/27/2016) 7 Chris Hall, What is Sky Q, how much does it cost and how can I get it, pocket lint, Mar 15, 2016, www.pocket- lint.com/news/134738-what-is-sky-q-how-much-does-it-cost-and-how-can-i-get-it (accessed on 3/29/16) 8 Julian Clover, Sky Q: Cisco declares involvement, broadbandTVnews, Jan 6, 2016, www.broadbandtvnews.com/2016/01/06/sky-q-cisco-declares-involvement/ (accessed on 3/29/16) 9 Mark Sweney, Sky takes on Netflix with Now TV Internet service, The Guardian, July 16, 2012, www.theguardian.com/media/2012/jul/16/sky-netflix-now-tv (accessed on 6/17/2016) 10 Mark Hess, Comcast seeks TV and other consumer electronics partners to bring Xfinity TV cable service to more retail devices, Comcast Press Release, April 24, 2016, corporate.comcast.com/comcast-voices/comcast-seeks-partners-to-bring- xfinity-tv-cable-service-to-more-retail-devices (accessed on 5/23/16) 11 TiVo Website, US Operator Business, www.tivo.com/for-business-partners/cable-operators (accessed on 5/27/16) 12 Colin Dixon, New TCL 4K TVs lead with Roku advanced functionality, nScreenMedia, Mar 25, 2016 13 Brian Fung, Time Warner Cable wants to end the hated set-top box once and for all, Washington Post, Oct 29, 2015, www.washingtonpost.com/news/the-switch/wp/2015/10/29/time-warner-cable-wants-to-end-the-hated-set-top-box- once-and-for-all/?tid=a_inl (accessed on 5/23/16) 14 Seeking Alpha, Charter Communications Management Discusses Q4 2013 Results - Earnings Call Transcript, Seeking Alpha, Feb 21, 2014, seekingalpha.com/article/2040673-charter-communications-management-discusses-q4-2013-results- earnings-call-transcript (accessed on 5/20/2016)

www.nScreenMedia.com For more information contact: [email protected]

This paper is made possible by the generous contribution of:

dtv.nagra.com

Owning Input 1: The Future of the Operator STB and Software Page 16