We've been writing a lot about the future of TV in these digital pages. The debate over who ultimately wins the so-called "war for the living room" has taken many forms, but mostly we've evaluated the various news and offerings from the major vendors, including:
- Microsoft (Nasdaq: MSFT ) , which has signed agreements with some 40 entertainment partners to bring content to the Xbox, where it can be surfed and organized hands-free using the Kinect remote and Bing search engine.
- Netflix (Nasdaq: NFLX ) , which is scurrying to book content arrangements with the likes of AMC Networks (Nasdaq: AMCX ) to become a channel unto itself, broadcast widely through devices such as Mr. Softy's Xbox.
- Apple (Nasdaq: AAPL ) , which boasts an enviable following of coders who write for the iOS platform that governs Apple TV and that could one day form the basis of an integrated TV set.
On balance, I believe our analysis has provided important context for entertainment investors. But I also think, as a group (me included), that we've failed to fully consider watching habits in evaluating the potential winners. We haven't thought enough about what has to change for any single vendor to win.
No longer. History tells me that usability (primary) and infrastructure (secondary) will, more than anything else, determine who dominates the digital TV market from here on.
What consumers want
Shouldn't features make the list? Partnerships? No, and no. The most successful tech products of the past 20 years have been feature-limited and partnership-poor by design. They were instead created to do something extremely simple with surprising efficiency.
Apple's iPad is my favorite example among recent introductions. Neither the most functional nor the most widely endorsed tablet at the time of release -- remember, the original iPad had precious few apps at launch -- the Mac maker won by designing to the most basic of human factors.
How so? We output most reading material to 8.5 by 11-inch paper. Designing a 10-inch tablet therefore created familiarity lacking in 7-inch alternatives. Familiarity won and is still winning.
What the TV ecosystem looks like
My experience as an investor says the most straightforward analysis is usually the best. In this case, most of us have all or some of this infrastructure in place to watch TV:
- A cable or satellite connection.
- A television.
- A set-top box of some sort, whether for digital recording, on-demand programming, etc.
This combination affords us, as consumers, both serendipity and control. We can surf and find live TV we like, or we can switch over to recorded or queued content through paid services such as Netflix.
Advertising pays for the serendipitous or recorded content we consume. Premium content comes with a cost, though most of it is accessible straight from the equipment supplied by cable and satellite operators. Comcast (Nasdaq: CMCSA ) , DISH Network (Nasdaq: DISH ) , and their peers invest to make sure their boxes are emblazoned with logos, even though someone else makes the equipment.
There's a good reason for this. Set-top boxes and gaming consoles usually aren't required to get at premium content. Only the geekiest of consumers (two thumbs, pointed inward) are likely to own a system disconnected from the remote that comes with the cable plan.
And therein lies the problem for both Apple and Microsoft.
Controlling the remote
Sound silly? Maybe it is, but observe any non-geek TV watcher for any amount of time and you'll realize that it doesn't matter whether the Xbox gaming console does a great job of controlling a digital TV. Nor does it matter that an iPhone can control an Apple TV.
What users want and expect is one remote to control a television, and maybe a separate remote to control a Blu-ray player. But even those power users would still prefer a single controller -- it's the reason Logitech still does a good business selling Harmony remotes.
Which brings us to Google (Nasdaq: GOOG ) and its rumored plan to become a cable alternative. I'm surprised it hasn't happened already. Why? Consider:
- The Big G has invested in high-bandwidth delivery options for years, including fiber to the home.
- Its newest division, Motorola Mobility, makes set-top boxes.
- YouTube, the third most heavily trafficked site on the Web, serves 3.5 billion videos daily, offers movie rentals, and is developing custom channels.
- And Google is perhaps the world's foremost expert on using technology for targeted advertising.
Controlling the living room isn't about controlling the content or having the most partnerships. It's about controlling the remote. Microsoft is getting closer to that with the Xbox yet is substituting an unfamiliar form factor for a remote. Apple TV is close, too, but suffers from being an add-on.
Only Google proposes to own the pipe in the same way that the current remote suppliers -- the cable and satellite operators -- do. It's a devastatingly disruptive opportunity for just how neatly it fits into how we already watch TV. (Assuming the remote doesn't look like an alien device, as was the case in Google's initial TV experiment.)
Challenge, meet opportunity
Sure, the content would be lacking at first. Google would have to negotiate with every major network and premium-channel supplier. The Federal Communications Commission would also probably have to approve the plan. Neither matters in the long run.
Consumers already want fast access to the Web wherever they are, which means Google has good reason to roll out high-speed wireless and fiber nationwide. Using the same bandwidth to deliver TV later would amount to a bonus worth tens or even hundreds of billions in new revenue. Apple and Microsoft want heaping portions of this same pie. I suspect they'll instead end up fighting over slivers.
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