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 now 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 Comcast’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 Netflix. 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.