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How These Companies Plan to Win the Smart TV Industry

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One of the main technology trends that will dominate next year is the transition from traditional to smart TV. By integrating the Internet into television sets, smart TVs will allow consumers to use on-demand streaming media services, such as Netflix (NASDAQ: NFLX  ) or Amazon Prime, listen to Pandora Radio, access interactive media,  use social networks, and download apps.

Roughly 123 million smart TV shipments are expected for next year, up 46% from 2012. This promising industry will first take off in developed economies, such as the U.K., where smart TV sales have captured more than 20% of the entire market already. As demand for smart TVs increases, we will observe strong competition between smart TV manufacturers, such as Samsung (NASDAQOTH: SSNLF  ) and Sony  (NYSE: SNE  ) . At the same time, content providers will try to differentiate their services by becoming content creators. How can the retail investor benefit from these technological trends?

Source: Independent regulator and competition authority for the UK communications industries

Fierce competition between manufacturers in the making
Samsung is an early mover in the smart TV industry. According to Strategy Analytics, the Korean giant holds the largest market share of global smart TV shipments, occupying 26% of the market.

Aware of increasing competition, Samsung is adding premium features to its smart TV sets. In particular, the Korean giant is investing heavily on its software development kit, which allows third-party developers to build applications for its TV sets, from games like Angry Birds, to educational software like Discovery Channel. As a result, there are already more than 1,400 smart TV apps available. Furthermore, the number of third-party developers has grown from 550 to 25,000 in less than two years.

Bottom line, the company has a great product both in terms of performance and user experience, thanks to its easy-to-use interface and dual-core powerful processor, which allows viewers to download multiple apps while watching live TV or movies via online streaming. To explore cross-selling opportunities, the company recently released Samsung Link, an app that connects all devices -- from Galaxy smartphones to compatible PCs -- in one place for integrated usage.

Smaller competitors like Sony, which occupies 11% of the market, will need to offer a fairly different experience in order to remain competitive. For example, Sony has paid enormous attention to its smart TV's design, which beats the competition according to most reviews.

Notice that among all major Japanese TV manufacturers, Sony may be the strongest player in the smart TV arena. This is because as the manufacturer of the massively successful PlayStation consoles, Sony can offer optimized integration between its TV sets and its consoles. The company, which recently saw a $2.2 billion loss in market value after a revenue forecast cut, needs to find growth catalysts to avoid seeing a downgrade in its credit rating.

Content providers will gradually become content creators
As households change their traditional TV sets for smart TVs, on-demand video streaming companies are set to experience stronger demand for their services. In the U.S., there are plenty of competitors, with Netflix, Hulu and Amazon Prime, as main players.

Just like manufacturers, video streaming companies will also need to differentiate their services to remain competitive, for example, by acquiring exclusive content in advance. This is why Netflix has to pay high premiums for some of its content, which has negative direct impact on profitability. 

To avoid this, Netflix started to create its own content. From political drama to gangster series, the company's original series looks very promising. For example, its House of Cards series won the Primetime Emmy award, received positive reviews and scored 76 out of 100 on Metacritic. In order to maximize show engagement, Netflix relies on heavy data analysis. The company collects huge data from its more than 30 million users, from the date a movie is watched to the time the user pauses, rewinds, or fast forwards.

My Foolish take
Smart TV shipments are expected to reach 123 million next year. Manufacturers like Samsung and Sony are betting on this new segment to improve their top line performance, while Netflix is increasing the amount of original content it streams. Because of fast-growing competition, it seems that the key to success will be constant product differentiation.

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