TV vs. Cable

The Media Wonk spent last week in Las Vegas at the Consumer Electronics Show where, everybody said, 3DTV would be the big story. And sure enough, nearly everywhere you went on the show floor folks were sporting either polarized shades or the full Geordi La Forge wraparounds and squinting at the new 3D displays tucked into carefully light-controlled alcoves of the display booths, like so many bug-eyed NFL refs going under the hood.

Yet for all the hoopla over 3D, the really important TV story out of CES was the explosion of embedded applications on Internet-capable HDTVs and Blu-ray players for bringing over-the-top (i.e. Internet-delivered) video into the living room. A year ago at CES there were only a few such TV sets on display, from a handful of manufacturers, and about all you could do with them was run a few Yahoo widgets and stream Netflix movies. At this year’s show, it was hard to find a home entertainment device that wasn’t Internet-ready, and if it didn’t come with its own app store it came embedded with one of the growing number of online content platforms from the likes of Vudu, DivX, Rovi and Boxee, among others.

Far more than 3D, set-makers’ growing commitment to enabling over-the-top video delivery to HDTV screens holds the potential to shake up the future evolution of the TV business.

One of the biggest stories in the industry right now is, of course, TV Everywhere–the effort by cable operators and some programmers to make pay-TV content available on the Internet but restrict access only to those who are current subscribers to a cable or satellite service. The goal of the effort to is meet consumer demand for online access without undermining the value of a basic cable or satellite subscription.

As I argued in my last post and in my report on TV Everywhere for GigaOm Pro (sub. req.), however, the interests of cable operators and cable programmers are something less-than perfectly aligned when it comes to online distribution. While cable operators want to restrict access to their own subscribers, programmers, ultimately, would benefit from having multiple distributors for their content, serving the widest possible audience.

Right now, cable operators have the ear of programmers because they’re already paying programmers substantial carriage fees for their content. Would-be over-the-top distributors are at a disadvantage in competing for program rights because they can’t afford to match those fees. At CES, however, you could see some potentially powerful interests lining up on the side of over-the-top distribution.

As over-the-top enabled TV sets and set-tops become more common, the potential audience for Internet-delivered content will grow, increasing the bargaining power of over-the-top distributors. The licensing fees that hardware manufacturers pay to embed content applications will increase the revenue flowing to application and content-platform developers, enabling them to spend more to license content.

Another powerful constituency lining up behind over-the-top delivery is retail, especially large brick-and-mortar chains like Wal-Mart and Best Buy. Wal-Mart, in fact, isreported to be in talks to acquire Vudu, one of the embedded content platforms that made the biggest splashes at CES. The Vudu streaming video UI will be embedded on HDTV sets and Blu-ray players from seven of the nine largest manufacturers by market share, including LG, Mitsubishi, Samsung, Sanyo, Sharp, Toshiba and Vizio.

The combination of a major electronics retailer and an embedded digital storefront would be very big thumb on the side of over-the-top distribution.

Another possible retail play was on display at CES in the ActiveVideo hotel suite off the show floor. Active’s under-300 KB software client is easy to add to CE devices and works by translating remote control navigation inputs into commands sent to third-party application providers. All computational and storage functions are handled in the cloud, making it simple to add new applications, update existing ones and add functionality without needing to update anything on the device itself.

Among the charter application developers for the ActiveVideo platform is Blockbuster, which hopes to use Active’s cloud-based approach to steal a march on Netflix, which has focused on embedding its application in as many devices as possible. Part of Active’s demo  also included a Best Buy application, although Active officials said there is currently no agreement or partnership between the companies. Like Wal-Mart, however, Best Buy is keen to develop a digital store front and is in discussions with multiple platform developers about digital delivery.

 Given how many DVDs and Blu-ray discs Wal-Mart and Best Buy sell, including TV series, their interest in becoming over-the-top video distributors will get a very careful hearing from the networks and studios.

It’s not for nothing, in other words, that Comcast was so keen to get control of NBC Universal. While the incumbent distributors currently have the upper hand in controlling online access to premium TV content, the clock has begun to tick on their hegemony.