While we have the greatest respect for iSuppli, the US electronics research company, its recent forecast in an area it has only recently entered, that of IPTV set top boxes is deeply flawed. But then so is everyone else’s IPTV forecast.
iSuppli makes two major points, pretty much in line with everyone else, saying that IPTV set tops will rise from 19.4 billion now to 58 million units by 2014, but that this will not prevent the incumbent pay TV businesses of cable, satellite and the mostly free to air services of digital terrestrial DVB-T set tops to dwindle ‘ far from it, they will rise from 132 million to 199 million by 2014, at a CAGR of 8.6%.
We apologize in advance to all our set top makers out there, but don’t rely on these numbers. This will not happen. While the great bulk of copy is wasted on Comcast’s legal action over net neutrality on the other side of the ocean, and we all dwell slavishly on the machinations of the BBC’s Canvas set top architecture and Europe’s HbbTV set top architecture, the trends are becoming clearer. Pay TV will drift into hybrid devices ‘ part cable part internet or part satellite part internet or part DVB-T part IP, and at the same time as OTT services emerge from broadcasters, cable players will push TV Everywhere and telcos will develop three screen strategies ‘ all of which will lead to standardized devices sooner, rather than later.
This is a potential disaster for the existing set top industry, but for some it is an opportunity. IPTV set tops are inordinately complicated and companies that specialize in them use massively complex software stacks to keep rivals at bay. When these become standardized or competitive with devices which are standardized, then the ability for operators to subsidize set tops will diminish. How will Fastweb in Italy, one of the oldest IPTV players in Europe continue to subsidize expensive set tops, when its rival Telecom Italia pushes services based on a retail proposition. The same goes for Free and SFR versus Orange in France and the same will go for Google TV and Apple iTunes TV in the US, and this will change the nature of set tops, and hugely consolidate the business.
The companies that get early contract wins in the OTT space, who develop their architectures around hybrid opportunities will grow and traditional markets will suffer. It will take a long time granted, but the writing is on the wall and it will not take 5 years, the duration of these forecasts. We’re not saying this is easy. Faultline may come out with its own set top forecasts shortly, but just how to adjust them for the rising tide of OTT services is hard to be sure of.
Meanwhile iSuppli says that IPTV set top revenue will rise to $6.2 billion, up from $2.9 billion in 2009. at a CAGR of 16% with unit shipments CAGR growing at 25%. This represents price erosion of just 9% per year during this period, when we know that really commoditization will creep in sooner rather than later and this will savage prices due to the standardization of devices.
If you take the iSuppli figures it suggests that IPTV set tops will still be averaging $107 each at the end of this period, which means it is clearly thinking in terms of QoS IPTV continuing unabated by OTT, which we cannot see. A more likely outcome will be a drop to something at the $75 level in the same time frame, which will have a radical outcome on the revenues figures.
iSuppli reckons that there are 60 vendors offering an IPTV set top, but that 15 of these supplied 92% of the market in 2009 with Motorola globally at number one with a 32% market share, followed by Cisco with 14%. A look at the financial figures of both these companies, show that in Cisco’s case there are no figures broken out, and that in Motorola’s figures the division will shortly have its figures broken out once more, but that the overall business unit it was previously in reported dramatically falling revenues. Our contacts in the set top market tell us these two companies only figure strongly in Microsoft Mediaroom contracts, and until Microsoft comes up with a series of offerings which allow hybrids and IP OTT services, these are the most threatened in the market.
Mediaroom is said by iSuppli to account for 25% of the market with 4.8 million set tops shipped in 2009 with Thomson second with its SmartVision software on about a third of that number. These numbers have a queerly US oriented feel about them, what about the fact that Pace has already overtaken Cisco in shipments, and what about the fact that France has added around 4 million IPTV set tops last year, none of them Mediaroom, shared across three suppliers serving France Telecom, Free and SFR (Netgem is the recipient at SFR, while we understand that Pace and Thomson dominate the other two).
While iSuppli is right in saying that Broadcom will make great gains in the chips that supply the set top market, attacking and likely to supplant Sigma Designs, it fails completely to look at Chinese suppliers or ST Micro’s chip contributions here, or the idea that the Intel CE4100 may take a big chunk of the hybrid and IP set top market, or that Apple’s A4 which is based on an ARM core, or Android which will also be driven by ARM and potentially Qualcomm Snapdragon chips, or the new Intel-Nokia OS MeeGo which runs on both ARM and the Intel CE4100, could likely all make a home in set tops as Apple and Google launch OTT service in the coming year. ARM devices will be the first target for both in the portable market but will most likely retrofit into set tops.
About the only thing you can really predict about the set top market is that it is changing and those companies which are best able to adapt to change will prosper, and on past performance the least likely to cope with change are Motorola and Cisco. However the new set up at Motorola whereby it will report through Sanjay Jha and the handset division, gives room for some optimism at Motorola.