Tuning in the future of OTT video

For years, the set-top box provided to subscribers by cable and satellite-TV companies has been the key to their control of the business. Steve Jobs famously noted in 2010 that the service-provider subsidized set-top box effectively precluded disruptive innovation in the pay-TV industry by ensuring that the incumbent providers would control the interface between viewers and the content:

The problem with innovation in the TV industry is the go to market strategy. The TV industry has a subsidized model that gives everyone a set top box for free. So no one wants to buy a box. Ask TiVo, ask Roku, ask us… ask Google in a few months.

So all you can do is ADD a box to the TV. You just end up with a table full of remotes, a cluster of boxes… and that’s what we have today. The only way that’s going to change is if you tear up the set-top box, give it a new UI, and get it in front of consumers in a way they’re going to want it.

Just before his death in 2011, Jobs even more famously told his biographer Walter Isaacson he had “finally cracked” the secret to TV disruption, but if he shared the secret with Isaacson the biographer has not seen fit to share it with the rest of the world.

Jobs’ boast was probably premature in any case, as Apple’s slow progress in the TV space since then testifies.

There are signs that the legacy pay-TV providers’ hold on the set-top box is finally starting to crack, however. Not because of anything Apple has done but in response to broader shifts in the business and the accumulating stresses on the providers.

The surest sign of cracks forming comes from Korea, where IPTV service LG UPlus, which last week announced it would offer subscribers a set-box integrated with Google TV, marking the first time a pay-TV provider has agreed to put Google TV in the same box with its own tuner, blurring the distinction for users between content and services provided by the pay-TV company and those enabled by Google TV.

While no pay-TV provider in the U.S. has yet taken so dramatic a step, TV tuners are nonetheless starting to find their way into OTT set-top boxes here as part of OTT providers’ growing ambition to integrate their platforms and services seamlessly with viewers’ existing TV habits. This week saw the unveiling of the new $99 Boxee TV set-top, which includes an antenna a tuner for receiving over-the-air broadcast channels and a DVR, along with Boxee’s various OTT offerings.

Aereo uses thousands of antennas and tuners to enable subscribers to record and stream broadcast TV content to PCs and mobile devices where it lives along side whatever web-delivered video the user may also be accessing.

The reason U.S. OTT providers are starting with broadcast tuners is that they don’t require the cooperation of pay-TV providers. Anyone can put a TV tuner in a device by complying with FCC regulations and starting receiving over-the-air signals. Fully integrating OTT with pay-TV would require tuners to be aligned with the pay-TV providers’ channel lineup, including encrypted channels, and to incorporate the appropriate program guide and conditional access module.

That degree of integration may be on the horizon, however. At the Digital Hollywood conference in Los Angeles this week, Wedbush analyst Michael Pachter claimed to have confirmed that the next version of Microsoft’s Xbox console, due in early 2014 will include a full TV tuner and will be able to communicate with “any piece of glass” in the home. “If you have 10 TV sets, you’ll be able to pull 10 signals and send them to any TV,” he said.

More critically, Pachter said he expects pay-TV providers to be far more open to integrating their service with Microsoft’s platform than in the past because the cost savings of not having to put their own advanced set-top box into homes would be substantial.

Apart from cost, there are other reasons for pay-TV providers to reconsider their reluctance to integrate their services with third-party set-tops and tuners. Co-opting over-the-top services and whatever other functionality is supported by a set-top — like gaming — into a single, seamless experience for their own subscription service could give pay-TV providers greater leverage with content owners in their increasingly pitched battles over programming costs. The richer their users’ overall experience, the easier it is to live without any particular program or channel.

Making the use of broadband service and traditional video service as seamless as possible for subscribers could also discourage cord-cutting by enhancing the value proposition of the bundle.

In short, the traditional pay-TV set-top may not need to be cracked from the outside after all because it’s already cracking on the inside.