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Cable Technology Feature Article

January 31, 2014

Cable Market Looks to Next-gen STBs to Drive a Return to Growth

By Tara Seals, TMCnet Contributor

When it comes to protecting their bread-and-butter video business propositions, cable MSOs ostensibly face a number of competitive challenges, from the over-the-top (OTT) streamers of the world to smart TVs to pay-TV rivals like IPTV and satellite. Slowly, all of these market entrants have been chipping away at their ascendancy. But next-gen set-top and cloud-based DVR approaches offer a fresh differentiator for many of these companies—if they can roll them out quickly enough.

In North America, video subscribers are declining at a pace of 1.5 percent to 2.5 percent annually—and most of the losses are coming from the cable sector. In the first half of 2013, telco-based IPTV and satellite revenue rose as these competitors leveraged new user experiences to create stickier services. DISH Network for instance has made headway with the Hopper whole-home network DVR, with an innovative commercial-skipping feature called AutoHop for catch-up video-on-demand (VOD). AT&T and Verizon, the two big IPTV players, continue to lead in terms of digital distribution and new user experiences--AT&T for instance last year revamped its on-demand storefront to implement a Netflix-like recommendation engine. And, surprising no one, it added 194,000 U-verse TV subscribers in the fourth quarter and 924,000 for all of 2013, bringing its total TV customer base to 5.5 million. In the earnings call, CFO John Stephens cited record low churn among its TV customers.

"Whether it's an improved user interface, multiscreen video, or even DVR services, there are marked differences that have allowed telcos to grow their subscriber bases at a time when others aren't," said Jeff Heynen, principal analyst for broadband access and pay TV at Infonetics (News - Alert).

In contrast, the legacy digital set-top boxes (STBs) that reside in some 40 million homes across the U.S. simply lack enough memory and processing power for cable operators to provide contemporary user interfaces, interactive program guides (IPGs) and interactive TV (ITV) applications, according to Heavy Reading research, who pulls no punches in calling them as “dumb as dirt.”

And yet, most major cablecos have upgraded to DOCSIS 3.0 and are rolling out all-IP content delivery infrastructures, which will pave the way for more advanced user interfaces.

“Cable has been working on software solutions to overcome the legacy STB issues and enable more interactive capability in new devices,” Heavy Reading noted in an analyst report. “Enhanced Binary Interchange Format (EBIF), tru2way (based upon the OpenCable Application Platform) and proprietary solutions are being used to create richer user interfaces, better on-screen guides and interactive apps. While these solutions are making headway, cable operators are looking at using Internet cloud-based applications as a new method to enhance cable television. From a larger perspective, cable's use of the cloud is another step toward the industry's eventual move to all-IP video and service delivery.”

It’s this trend that TiVo (News - Alert) hopes to catch the tail of with its plans to acquire advanced search and discovery platform provider Digitalsmiths in a deal valued at $135 million.

Digitalsmiths technology is used by seven of the top ten pay-TV operators in the U.S. already; and its advanced tech offers cloud-based personalized video search, recommendations and browsing, social trending and mood-based discovery for movies, TV shows and live events. It supports digital delivery as well, including set-top boxes, tablets, smart phones, computers and gaming consoles.

"Digitalsmiths helps TiVo in a number of ways," the analyst firm nScreenMedia noted in breaking down the deal. "TiVo is increasingly focused on becoming the multiscreen solution for pay-TV operators. The company has marquee deployments with Virgin Media (News - Alert) in the UK, Com Hem in Sweden and Mediacom in the U.S. Digitalsmiths bolsters the company's abilities in the U.S. by providing an entree into many of the top MVPDs."

It added: "TiVo also recently announced that it would introduce a network DVR. Digitalsmiths search and discovery platform is already available as a cloud service and should add to the already impressive recommendation engine provided with TiVo's DVR."

Right now, Digitalsmiths' current user base represents about 10 percent of the total potential user base licensed under its current contracts,TiVo said — but it expects the active user base to grow to over 50 percent penetration in the next few years as more operators—like flagging cablecos—rush to find new differentiation.

Analysts confirm the market prediction: as cable companies come around, the multimedia home gateway (MHG) and connected, or IP STB, market is expected to nearly double.

"Consumers increasingly are demanding connectivity from their electronics devices, and STBs are playing a central role in the networking of products," said Daniel Simmons, senior principal STB analyst at IHS (News - Alert). "Connected STBs perform all kinds of useful functions, including distributing digital video recorder (DVR) streams to televisions in multiple rooms, as well as delivering video-on-demand (VOD) and Web content to various platforms. Furthermore, MHGs and their associated thin clients, which also employ connectivity, are being used by pay-TV operators to provide advanced services and content to all kinds of IP-connectable devices, including mobile products like smartphones and media tablets."

MHGs, which directly process video signals for all IP distribution and routing to multiple client devices within a home, and thin clients for cable systems will represent a major growth driver for connectable STBs, he added. These devices will account for 25 percent of connectable box shipments between 2013 and 2017.

Last year, IPTV pay-TV operators accounted for the largest share of the connectable STB market, with 39 percent of shipments. However, the coming years will see a rapid increase in shipments of cable HD STBs, and cable will be the major driver of growth in connectable STB according to IHS, with shipments rising at a rate of about 25.4 percent a year to reach 45.8 million shipments in 2017.

No. 1 U.S. cable MSO Comcast (News - Alert) has already jumped on the bandwagon though, and is seeing results. It added video subscribers in the fourth quarter of 2013, for the first time in more than six years: 43,000 of them, to be exact. The additions broke a 26-quarter losing streak (it lost 7,000 video customers in the prior-year quarter) and spurred Comcast to a 26 percent jump in profit. As of the end of the year, Comcast had 21.690 million video customers (still down 1.4 percent year over year).

The stemming of the subscriber drain can be directly linked to its efforts to embrace new technology, like the X1 cloud-enabled DVR system that it started deploying during that quarter.

“Comcast completed its major technical innovations, such as DOCSIS 3.0, all digital networks and a multi-platform content delivery network,” said Zacks Equity, in an investor note. “Moreover, launch of innovative services such as Xfinity Home, Wi-Fi, Streampix, X1, upcoming X2 and the high-speed Metro Ethernet will not only drive subscriber growth for the company but will also safeguard its position against major carriers like Verizon Communications Inc. and AT&T Inc., and online video streaming service providers like Netflix.”

X1 integrates Comcast’s collection of video with social media features and interactive apps. It includes a modern user interface that enables one-click access to programs and a highly visual guide to entertainment options and related information. It also offers recommendations based on search input and previously watched shows and movies. Users can search simultaneously across live TV, Xfinity on-demand and DVR recordings – and see the last nine programs watched across all services.

"The X1 Platform is a huge leap forward for us and transforms traditional television viewing into an entirely new entertainment experience," said Jim Samaha, senior vice president of Comcast's Keystone Region. "X1 uses cloud-based technology to make the TV smarter, richer and more personalized, and allows us to deliver new features to our customers faster than ever."

Comcast also looks to continue the innovation. At the National Cable & Telecommunications Association’s (NCTA) annual Cable Show last summer, CEO Brian Roberts unveiled the X2 platform, which would set Comcast up for streaming DVR content to set-top boxes, tablets, smartphones and other IP-connected connected devices from the cloud. It also dovetails with a cloud DVR service, which the MSO is testing in the Boston and Philadelphia markets.

X2 will also work with Comcast’s planned Xi3, an all-IP, cloud-based HD set-top box that lacks an internal hard drive. The MSO said that it will process signals four times faster than a traditional set-top box, while consuming one-third the space and half the power.

These types of approaches will also help cable MSOs fend off the perceived threat from smart TVs, gaming consoles and other over-the-top (OTT)-friendly devices angling to control “Input 1” to the TV screen. Satellite and IPTV operators are already doing so.

“The reality here is that smart TVs are not entering a level playing field,” said Hamish McPharlin, analyst at Decipher Media Research. “[Pay TV operators] have an ace in the hole: it’s easier to move around within the environment they create than move in and out of it. For smart TVs to eat into this they can’t just fight it with content. Content is hardly lacking on pay TV platforms. They will need to deliver some compelling other reasons why you need to leave your Sky TV experience, load the smart TV portal and engage in the world of the device manufacturer. Just how they are going to do this is not yet clear.”

Edited by Cassandra Tucker

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