While set-top box manufacturers such as Pace Micro Technology, Thomson and Philips are looking to gain business by expanding into new areas such as Internet protocol TV (ITV), satellite will remain a key revenue driver for set-top box manufacturers, industry executives said, with personal video recorders (PVRs) high definition television driving growth.

“In the past, people were happy with one box in the house,” Koen van Driel, vice president, Satellite and Terrestrial Worldwide, for Thomson, said. “This is clearly no longer the case as the number of boxes in the home increases both in terms of individual boxes and multi-output boxes. The U.S. has quite clearly been leading the global market in this respect. If you subscribe to a U.S. operator, for example, you will probably start with three to four boxes. This trend is also on the rise in a number of other markets such as Europe and Asia.”

Trends Emerging

John Dyson, Pace’s CEO, said in the digital television arena will help spur the set-top box market.

“I think that is mostly due to the cost of rolling out digital television falling,” Dyson said. “It is also due to governments around Europe committing themselves to dates in which analog broadcasting will be switched off. We think you will see a lot of suppliers focusing on [high definition] and MPEG4. It is about getting content at the highest possible quality. We would expect to see a number of offerings along those lines.”

van Driel, agreed that moves toward broadcasting more high-definition content will help spur growth in the set-top box market. “Everyone is talking [high defintion],” he said. “Quite a few of the well-known broadcasters also have very concrete [high definition] introduction plans, some of whom have announced their plans already, some of whom haven’t. We are working behind the scenes with a number of those who are keeping their cards close to their chest with a view to making a surprise entry in the course of next year.”

For set-top box manufacturers, the high definition landscape, in particular, is beginning to heat up. Premiere, the German pay-TV operator, will launch high definition services in November, and others such as BSkyB are set to launch comprehensive high definition offerings in early 2006.

Thomson will supply the high-definition set-top boxes to BSkyB in a deal, and van Driel expects penetration levels to quickly increase in Europe. “It is difficult to predict the speed at which [high definition] will take off. We think it all depends on content.”

Broadcasters and suppliers are counting on soccer’s World Cup in summer 2006 to help launch wide acceptance of high-definition technology, and hope to hold onto customers who invest in the technology and service by rolling out movies in high-definition format at the same time. “I would imagine that over the next five years, we could reach HD penetration levels in those markets of around 25 percent,” van Driel said.

Dyson predicts that in 12 months, most of Pace’s customers will be doing something with high-definition TV. “We would be disappointed if the majority of our customers weren’t moving in one sense or another to at least running [high-definition] trials. From the perspective of our customers, it is not just about buying the boxes, they also have to upgrade their broadcasting equipment. So, they have some commercial decisions to make, but I would be surprised if the majority of our present customers weren’t running those sorts of experiments over the next 12 months.”

Philips will launch its high-definition set-top box offerings with Premiere before the end of 2006, said Lucas Covers, general manager of digital video set-top boxes and chief marketing officer of consumer electronics at Philips. “Next year, 95 percent of our flat screens will be [high definition] ready. We are building upon the factors which will create the success of [high definition. We are fully supporting that embrace. We think the speed of penetration will go faster than we have seen in the past with other technologies.”

Personal Video Recorder Impact

However, industry executives think the impact of high definition services will not have as much effect on set-top box growth as the demand for PVRs. The key challenge will be to bring higher capacity set-top boxes into the market place.

“We expect PVRs to reach a penetration of 80 percent of households,” Dyson said. “The product is truly an excellent user experience. If you go back to VCRs, they reached a very high rate of penetration. Those products were infinitely less good than a PVR is. I am quite surprised by the relatively low take-up rate of PVR so far, and personally we expect to see this accelerate over the next few years.”

Companies are also hoping that expanding the capacity of the PVRs will help bring more consumer interest. “We are preparing a number of products for various partners, van Driel. “Last September, we introduced PVRs with 160 gigbytes. We are now working on 250-gigbyte PVRs, which will be introduced next year. You will see more and more capacity and it is not just for the obvious reasons that people want to have more storage capacity. It is also an opportunity for broadcasters to keep some of the capacity to themselves and so enable them to push video on demand. This is clearly a trend moving forward.”

Competition

One of the key issues in digital television is can markets sustain satellite, cable and IPTV, as well as digital terrestrial television alternatives. This may be more of an issue for telcos as they look to take market share from established operators such as the satellite pay-TV operators.

“Our view of the way markets will develop has been very much influenced by the way the way the digital markets have developed in the U.K. and the U.S.,” Dyson said. “What is pretty apparent is that the consumer signs up with an operator or broadcaster because they like the service offered by that operator and broadcaster.”

van Driel added, “Telcos are looking at new sources of business and are pursuing video as an attractive potential revenue stream. They will all start one way or the other. It is difficult for us to say whether or not they will be successful. I think the main point to consider is that this will expand consumer choice and ultimately it will be up to consumers as to how they wish to access content. It is really content that will drive all of this.”

But whether IPTV or other digital terrestrial alternatives take market share away from the satellite companies, it likely won’t have a major impact on the set-top box manufacturing market.

“There is nothing generically that says we are a satellite or a cable company or an IPTV company or DTT company,” Dyson said “We are able to supply products in all of those technologies and it really depends only what our customers want at a particular point in time.”

–Mark Holmes

(Julia Ruane, Pace Micro Technology, Julia.ruane@pacemicro.com; Brenda Clery, Thomson, brenda.clery@thomson.net; Natasha Konstantinova, Philips, natasha.konstantinova@philips.com)