We’ve had two big announcements in two weeks – first Google announced it would be bringing Google Play movies, TV shows and music to Google TV, then on Monday Microsoft announced that it is launching a new music subscription service on Xbox, dubbed Xbox Music.
It’s a clear signal that the big technology platforms (Apple included) are putting content at the centre of their TV strategies. And rightly so; consumers turn on a television to be entertained. But what does it mean for the likes of Spotify, Netflix and Amazon for whom these platforms present a critical route to the consumer?
Why the pure device play doesn’t work
For anyone to suggest that a pure device-play doesn’t work would be to disregard several decades of success for consumer electronics (CE) companies like Samsung, Sony, LG, Philips, etc. Global CE industry revenues for 2012 are estimated at $790bn, representing a 5% growth on the previous year driven mainly by sales of mobile, tablet and laptop devices, with TV sales making up a significant proportion.
But despite these massive revenue figures, the CE industry suffers from low levels of profitability. With the exception of Apple that has been able to maintain profit margins in the 25-30% range (although many analysts now believe they too are coming under threat) consumer electronics manufacturers are facing a margin squeeze due to intense competition and increasing costs of components. In the TV industry for example, flat panel prices which account for 30-40% of the cost of a television are rising rapidly and to the human eye there are fewer points of differentiation in picture size and quality between manufacturers. In Q1 2012, LG’s TV division reported an operating profit margin of 4.1% and Samsung performed similarly on 5%.
For Google and Microsoft, the device itself is part of a much bigger story; a vessel on which to carry a far more profitable content business. My estimated breakdown of Microsoft’s Xbox revenue yesterday showed that hardware sales contribute just half of the $8.3bn revenue generated in 2011. And the figure would be significantly lower were it not for the launch of the Kinect.
Virtuous circle of platform and service
This isn’t to say that the device is no longer relevant – quite the opposite, it is because they own the platform that they leverage far greater control over the consumer relationship, the data they are able to collect and the content services they are able to promote. It’s a virtuous circle of platform adoption and service provision, the digital equivalent of the “razor and the blades” (well not quite, but nearly). If you’re a Google user across Google+, YouTube and Google Play, then there’s only one TV platform for you. Similarly if you’ve got an Xbox, a Windows Phone and a Windows PC, then Zune is probably the best content library service you could use.
The key capability of these services is that they can be accessed from any platform (smartphone, tablet, laptop and TV) and effectively act as the glue knitting these devices together.
The challenge comes for those third party services that rely on these platforms to reach the consumer. Spotify, Netflix and Amazon Instant Video, to give three examples, are well established content services with a dedicated subscriber base. But it will become increasingly difficult for them to compete when the consumer is continually defaulted to the native platform-defined content library.
We haven’t reached a point of any meaningful competitive concern yet: Xbox LIVE has only reached 40m subscribers worldwide, Google TV is but a fraction of that and Apple hasn’t really launched yet. In the UK today, Sky’s 10m subscriber base and premium content offer present far greater competitive challenges for Netflix than Apple, Google and Microsoft combined!
But as adoption of these platforms increases and they leverage their strengths in seamless multi-device capability, technical R&D and improved data collection, interpretation and targeting, consumers will be ever more enticed to buy into the native content service. I already hear friends comment that they’re an “Apple household” when it comes to their laptop, smartphone and tablet, and this probably means they will default to the iTunes Store as their content library of choice on these devices. And this will make it ever more difficult for third party services to compete.
Is this anti-competitive? It’s all hypothetical at this stage. If they were to become the default platform for TV entertainment then yes, defaulting to Google Play/Zune/iTunes could be deemed an abuse of their position (although Sky has been getting away with it for years). In their defence, these companies will only have reached this position of power through significant financial investment, superior product development and a highly compelling consumer story, in what today feels like an incredibly competitive market. Who’s to deny them the reward for their hard graft?
Who knows – we could be about to see a re-run of the Microsoft Windows-IE case…
In the UK, the 2003 Communications Act put in place legislation to grant “appropriate prominence” to public service broadcasters on television platforms. It’s a form of compensation for broadcasters who have accepted a set of obligations to invest in and air content deemed to be in the public interest. How this principal translates into a connected TV world has been a big part of our recent thinking at Redshift. Unfortunately these protections will do nothing for the likes of Netflix, Spotify and Amazon. Just like other app developers, they’ll have to compete ferociously to make themselves available across all platforms no matter who the manufacturer is, maximising exposure and device neutrality.