Google vs Apple: Connected TV Battle Ahead

The combination of lightweight operating systems, low-power processors, and near-ubiquitous high speed broadband will empower the disruption of the living room paradigm in 2012, says an analyst.

Thanks to the large part of developments in mobile over the past 4-5 years, the industry now has simple yet robust operating systems like Android and iOS that are well suited for managing TV functions and low-power ARM processors that can be added to TVs with relative ease, according to the tech research team of Robert W. Baird.

Additionally, widely available high-speed broadband access makes the delivery of rich, HD streaming media via the Internet truly possible, the brokerage has said.

Although much of these developments have already lead to successful commercial offerings (e.g., Netflix), 2012 is beginning to look like the year when the connected TV movement could reach a boiling point.

Netflix's streaming model, combined with Roku's ultra-cheap, ultra-simple hardware, demonstrated the combustibility of connecting the TV to the Web.

Google Inc.'s chairman Eric Schmidt said in early December that the majority of televisions you see in stores would have Google TV embedded in them by mid-2012.

In the late Steve Jobs' biography, Jobs mentioned that he had cracked the code on connected TV, fueling speculation that Apple would enter the TV market in a bigger way.

The Baird research team expects both Google and Apple to make a more serious run at this market this year with smart TVs that feature built in software, Internet connectivity, and apps.

Whether smart TVs merely serve as a bridge for existing Internet content or whether Apple, Google, Amazon, Netflix, and/or others introduce new IP-based service offerings remains to be seen. What we can count on is media becoming more centralized, with content that was previously recorded on DVRs migrating to the cloud, removing the need for transcoding IC functionality, says the Baird team.

Video streaming requires H.264 decoder ICs. Video quality is paramount, and barriers of entry are high as a result. The proliferation of Roku boxes and other TV-centric streaming devices will continue to drive demand for H.264 (MPEG4) decoders.

The Baird team believes that gaming could be a logical extension of smart TVs, which could spell disruption for video game hardware vendors like Nintendo, Microsoft, and Sony over the long term. For now, the majority of core games are not ripe for digital distribution or streaming due to file sizes, storage capacity, and network latency.

The team believes that Google Inc. is very well positioned to power the growth of connected TVs and streaming content with the extension of Android, and corresponding deployment of the Android App Market. The team also views Google TV as a Trojan Horse for extending a suite of Google services (e.g., Google+, Maps, YouTube) into the living room.

We believe that Apple Inc. has the right tools to build a compelling TV and service offering, though details remain murky. We believe that iTV has the potential to become another 'leg of the stool' and could add tremendous value, but much of that will depend on execution and margin structure, says the Baird team.

Intel's early partnership with Google, pairing its Atom processor with Google TV, positions Intel well in the emerging smart TV segment. Intel's Atom is also finding traction at key IPTV service providers including Free. The team believes Intel will be successful diversifying away from its traditional PC base and into set-top boxes, where processor performance is paramount (complex video signal processing).

Broadcom is the leading IC supplier in the U.S. set-top box market (cable, satellite) and in the Mediaroom-based IPTV segment (notably AT&T). As a leading supplier of connectivity solutions, Broadcom is well positioned to respond to the growing trend of wireless connectivity among devices (TVs, gateways, thin client boxes) for audio/video signal transport.

STMicroelectronics is a leading IC supplier in the worldwide set-top box market, and has a strong position in Europe notably in TVs, where some countries are already mandating an H.264 decoder embedded in each new TV. Its acquisition of Genesis Microchip positions it well to add advanced de-interlacing technology.

How connected TV impacts Verizon and AT&T depends on their level of participation. To the extent that new IP-based content delivery platforms extend to wireless, both carriers could stand to benefit from this trend despite direct competition with their respective FiOS and U-Verse offerings. The team would also note that Verizon is reportedly considering a Netflix-like service, according to a Dec. 6 Reuters article.