Black Box Strategy

With the announcement of the Amazon Fire TV and the leak of the alleged Android TV, all of the major players have (or soon will have) a TV offering. There’s been a lot of talk about how similar the products are, but those similarities are for good reason; what is more interesting to me are the very different motivations.

Note: The specifics of this article are going to be US-centric

Why TV is So Attractive

As I’ve written multiple times, the scarcest resource for consumer tech companies, especially ad-supported ones, is user attention. There are only so many minutes in the day, and their consumption is zero-sum: a moment spent doing activity A is not spent doing activity B, and then that moment is gone.

Meanwhile, TV continues to monopolize a significant amount of that user attention. Although digital products have overtaken the amount of time spent on TV, primarily due to the accretive time spent on smartphones, the absolute time spent on TV has remained stubbornly persistent at about four-and-a-half hours per day per U.S. adult (source).

That four-and-a-half hours really is the gold at the end of the rainbow for tech companies: just over the next hill/technical hurdle, yet never actually attainable.

Why TV is So Persistent

The primary reason I haven’t written much about TV recently is that I really haven’t had much to add to my series from last year. Everything still applies:

  • The Cord-Cutting Fantasy discussed why unbundling cable is economically unworkable
  • Why TV Has Resisted Disruption was primarily about great content; it’s expensive to make and doesn’t have many substitutes
  • The Jobs TV Does identified the role TV plays in our lives; traditionally it has kept us informed, educated, given a live view of sporting events, delivered enlightenment and story-telling, and provided escapism

While the Internet has unbundled information and education, the final three remain, and they are proving much more of a challenge.

Bunches of Black Boxes

Most of the tech players are coalescing around the little black box strategy Apple pioneered with the Apple TV: an inexpensive add-on with most of the major streaming services built-in. Crucially, none of them live on HDMI1, the primary input on your TV that is usually owned by your cable box. The strategy seems to be centered on chipping away at the time spent on HDMI1, until you finally realize it’s really not worth however much you’re paying. It’s not a particularly inspiring strategy, but like I said, TV has resisted disruption for good reason. The exception to both points is Microsoft: their box (the Xbox One), while black, isn’t little by any means, and they are absolutely gunning for HDMI1.

What is interesting is that while the products (except for Xbox One) are increasingly homogenous, the motivations of the various companies making these little black boxes differ tremendously, and that may give a hint as to who will be successful, and who will simply fade away.

Apple TV

Apple has one of the most differentiated black box offerings: it’s the only one to include iTunes content, and it’s the only one with Airplay. While iTunes has long been a differentiator for Apple’s devices,1 I believe that over time it is Airplay that will be of increasing importance as a way of differentiating and thus selling more iPhones and iPads. This makes sense: while Apple differentiates primarily through software, they make their money through hardware.

To that end I expect a new Apple TV soon with a specific focus on improving the Airplay experience, perhaps by combining the Apple TV with an Airport to reduce Airplay lag, thus enabling more and better iDevice/TV gaming scenarios (with the additional benefit of increasing the Apple TV’s reason-to-buy). It’s a rather elegant solution if you think about it: most people’s Internet comes in through their cable line anyways, so it’s already in the correct physical location.

Amazon Fire TV

I know I don’t spend nearly enough on Amazon, which is a shame: they have a dominant strategy based on superior selection AND superior pricing, and everything they do is primarily focused on driving ease-of-purchase, primarily through Amazon Prime.

Fire TV fits right in: it’s another reason to be an Amazon Prime customer, which isn’t really about streaming video. Instead, the end result is you buying everything from Amazon without thinking twice. The decision to add gaming was a curious one though: on one hand, it’s more stuff to sell, and another reason-to-buy; on the other, it made the device more expensive, which reduces the addressable market. If the end-game is Prime, as I believe it is, then trying to get digital game sales seems shortsighted.

Android TV

Given that attention is the lifeblood of advertising, Google has more motivation to succeed in TV than just about anyone. As I noted when Google acquired Nest, there’s reason to believe that Google’s growth could start to flatten soon, and TV is an obvious place to reverse that trend, particularly with Google’s valuable YouTube asset.

Google’s problem, though, is that their business needs aren’t necessarily aligned with consumer needs: what would an Android TV offer that the other black boxes don’t? YouTube is already available everywhere, befitting its role as a horizontal service. Just as it would make no sense for a vertical company like Apple to share iTunes, it makes no sense for a horizontal company like Google to hoard YouTube. The Android TV, if it exists, seems to be primarily for Google’s benefit, not consumers, and I would expect sales numbers to reflect that. I’m a much bigger fan of the Chromecast, primarily because of its price, and again, sales numbers seem to agree with me.

Roku

The last of the black boxes is a bit of a misfit: Roku is a relatively tiny company for whom the black box is their raison d’être. Unsurprisingly, this means they have many consumer-friendly features like lower prices, innovative designs,2 and the ability to search for shows across services. However, it’s difficult to see how they compete effectively as a standalone company.

In fact, there is an obvious acquirer: Facebook. They are the one technology giant without a TV play, and, like Google, they are advertising based. TV watching is certainly a social activity: it’s thought of as a Twitter stronghold, although Facebook has challenged that assumption. I think the angle for Facebook, though, would be more on the data side: what you watch is likely incredibly valuable information, and better targeting is the most sustainable way to increase ad revenue. Facebook could buy Roku, sell the device at cost, and increase the richness of their profile information, even as they increase their optionality when it comes to the most attractive advertising medium of all.

Microsoft

Once again, Microsoft was early to a category; from day one the strategy for the Xbox has extended far beyond gaming to a dominant presence in the living room. Unfortunately, once again Microsoft erred in the details. The advantage of starting with a console is that there is a built-in market; for all of the little black boxes I discussed the various reasons-to-buy, which aren’t always clear, whereas the reason-to-buy an Xbox is obvious – you can play games on it. However, this reason-to-buy comes at a cost, quite literally. The Xbox One launched at $499, putting it far beyond the reach of non-gamers, and making it wildly uncompetitive with the little black boxes. There is also a cost when it comes to flexibility; Microsoft must focus first-and-foremost on gamers, whose needs are not necessarily aligned with normal consumers, and this is compounded by the long console cycles driven by the massive upfront development costs.

What is most worrisome for Microsoft is that this strategy duality has hurt them with gamers, too. The Xbox cost $100 dollars more at launch than the PS4 despite having slightly less power, primarily because of the built-in Kinect. While this does have a gaming function, the main reason it was included was to enable the Xbox to make a play for HDMI1. Microsoft has certainly made it much further down this road than any of the other players, but close doesn’t cut it; without DVR functionality and full programming guides, it’s simply not a viable competitor for the lowly cable box. This is a truly distressing outcome for Microsoft: they handicapped themselves in gaming in pursuit of their original goal, which they’re not going to realize. It’s another muddle.

I expect the Xbox One to have decent success as a console, due to Microsoft’s dominance of first-person shooters if nothing else, but after three generations it doesn’t seem any closer to fulfilling the original Xbox charter of winning the living room.

So Now What?

All that said, and despite all these new products, nothing substantial has changed on the content front; we have the system we have because, all our kvetching aside, it benefits most of the main players most of the time, including consumers. Whatever finally topples TV will win not because it delivers the same content better, but because it steals more and more user attention.

To that end, I actually ranked these companies in the order I like their chances, and I still give Apple the clear lead. Airplay remains very compelling both from a technical and business model perspective; Amazon has the business model, while it’s more difficult to see the long term upside for Google or Roku, and Microsoft is stuck in its niche.

  1. Seriously people: iTunes is not going to be on Android []
  2. I love the headphone jack in the remote []