The traditional pay-TV set-top box business may finally be starting to show its age.
In its latest report on the global set-top market, IHS Inc. found that pay-TV providers spent less on set-top boxes last year for the first time since 2002. Providers bought $15.3 billion worth of set-tops in 2014, down 4% from the $15.9 billion they spent the year before, as a slowdown in the more mature pay-TV markets of North America, Western Europe and parts of Asia more than offset growth in emerging markets around the world.
The revenue drop came despite a slight rise in set-top shipment volume last year. Global set-top box shipments actually edged up to 204.7 million units, an increase of nearly 1% from the 203.1 million boxes shipped in 2013. But shipment revenues still fell because of a change in the mix, with vendors shipping fewer high-end boxes and more low-end boxes.
Further, IHS predicts that the pay-TV industry's spending on set-tops will contract further over the next few years as the demand for advanced, premium boxes continues to decline in the more saturated, mature markets. The research firm projects that shipment revenues will slide to $15.1 billion this year and slip as low as $13.2 billion in 2018 before stabilizing in 2019.
"The industry is now at an inflection point," said Daniel Simmons, head of connected home research at IHS Technology. "Mature pay-TV markets are saturated with high-value advanced boxes, so shipments are set to decline there, and operators in emerging markets aren't transitioning to advanced boxes fast enough to increase overall industry value."
But, even as the overall market declines, some key segments will continue to expand at a healthy clip. IHS predicts that the satellite TV set-top market will keep growing for vendors because of customer demand and the difficulty of virtualizing set-top box functions in satellite boxes, which, unlike most new cable and IPTV set-tops, are not broadband-enabled for connections to the cloud. The firm also sees higher demand for set-tops in such emerging markets as Africa, the Middle East and Latin America.
Given these market trends, Simmons argued that Arris Group Inc. (Nasdaq: ARRS)'s proposed $2.1 billion acquisition of Pace Micro Technology "makes strong strategic sense." That deal, signed two months ago, just ran into its first regulatory hitch when the US Department of Justice (DoJ) requested further information from the two companies. (See DoJ Stalls Arris Plans to Purchase Pace .)
"As well as making Arris almost three times the size of its nearest competitor, Pace is well positioned in key growth markets," Simmons said. "It is the third-largest provider of satellite STBs globally and the second largest provider of satellite STBs in South and Central America."
Simmons also predicted that there will be further consolidation of suppliers in the set-top business "as other vendors look to secure growth through acquisition and compete with Arris' new scale." He cites such vendors as Altech Multimedia, Humax Co. Ltd. , Sagemcom SAS and Technicolor (Euronext Paris: TCH; NYSE: TCH) as "key acquisition targets."
Besides the satellite TV segment and emerging markets, another spur to set-top box growth should come from the introduction of 4K TV services. IHS sees more pay-TV operators following the lead of pioneering providers like Tata Sky and D2H+ n India, Comcast Corp. (Nasdaq: CMCSA, CMCSK), DirecTV Group Inc. (NYSE: DTV) and Dish Network LLC (Nasdaq: DISH) in the US and others in Japan and South Korea in deploying new Ultra HD (UHD) set-tops for 4K services.
IHS projects that the rollout of UHD boxes in the US alone will generate $240 million in revenues for equipment vendors this year. By 2019, the firm believes UHD box shipments will produce $5.4 billion in revenues, or about 40% of the total set-top market. "More aggressive UHD deployments by pay-TV operators could help the set-top box market return to growth," Simmons said.
More information on the study can be found here
— Alan Breznick, Cable/Video Practice Leader, Light Reading>