Set-top Boxes, HDTV and Bandwidth: A Conundrum Coming?

Sales of satellite hardware and software services and products have for over a decade been a strong staple of U.S. consumer electronics businesses. It is so strong, in fact, that just the DirecTV side of retail U.S. set-top box (STB) sales represents an estimated $2 bil. in annual income as of the last measurement in 2004, according to the Consumer Electronics Assn.

Nonetheless, the sale of STBs is about to encounter a major snag, one that could greatly affect the future of those sales, for good or for bad (or both). When the U.S. satellite industry switches from existing STBs that employ the Motion Picture Experts Group (MPEG)-2 digital video compression standard to the more robust MPEG-4 version, two opposing reactions will set in, while the outcome for CE retailers may go either way.

Analog to Digital, MPEG-2 to MPEG-4

As more and more over-the-air broadcast signals convert from analog to digital, coupled with the corresponding increase in bandwidth needed to carry consumers more and more local and national HDTV signals, DirecTV and EchoStar will be faced with a difficult set of decisions. In fact, estimates by The Carmel Group indicate the mere financial cost to DirecTV to upgrade its satellites and infrastructure for this purpose will come in at roughly $2.5 bil. during the next 3-5 years, while the same charge for EchoStar will amount to $3 bil. Yet that is not the real dilemma, because both DirecTV and EchoStar realize they have to make the infrastructure switches to carry more local-into-local signals by satellite, in more and more of the 210 U.S. Designated Market Areas (DMAs), and they both realize that they have to move their DVC technology from MPEG-2 to MPEG-4, in order to get more ones and zeros down the same pipe to the consumer.

Where the real dilemma lies is in determining the best way to replace millions and millions of existing STBs, when the analog-to-digital and the MPEG-2-to-MPEG-4 switch-outs begin. For the future, almost all of the new HDTV content will be delivered in the superior MPEG-4 format, which will require that viewers obtain a new STB with MPEG-4 compatibility. In addition, this new MPEG-4 delivered content can only be recorded on a new MPEG-4 compatible Digital Video Recorder (DVR). Thus, whether it involves a standalone or integrated STB, future DVRs will need to be MPEG-4 compatible, if they are going to be able to receive and record MPEG-4-delivered HDTV content.

EchoStar and DirecTV Squeezed

For the existing generations of satellite STB users, all the HDTV content that they receive today will continue to be available to them on their existing set-tops and DVRs. That is a commitment from both DirecTV and EchoStar. Yet forthcoming HDTV channels, like those EchoStar recently announced it might purchase from the now-defunct Voom service, will likely not be accessible to today’s existing STB and DVR users. Nor will the almost 1800 new HDTV local-into-local digital network and independent channels be accessible. Rather, DirecTV and EchoStar will likely require subscribers to upgrade their STBs if they wish to acquire and view or record the newly-introduced HDTV channels that are just around the corner.

What this means for EchoStar and DirecTV is that they have a lot of STB subsidies to contend with. It will be costly, both on the ground and in the sky. They also have a lot of related charges, such as those for truck rolls and installer fees. This represents billions of dollars that eventually will get passed along to consumers (and that will not go into their shareholders’ hands).

Retailers’ and Consumers’ Options

For their part, DirecTV and EchoStar note that they have done things like this before, that technology changes are a regular part of doing business in the multichannel world, and that “customers will not be particularly inconvenienced,” according to a spokesman for one. He goes on to emphasize, “We will do whatever it takes to make our subscribers happy. We always have. There will be good upgrade offers. We don’t expect to lose customers because of this.”

For subscribers themselves, it will be a hassle to upgrade their boxes, and there may also be additional fees that accompany the changes. But in return there will be very robust access to HDTV, and most new STBs will include very robust DVRs. As for CE retailers, the entire shift may mean some viewers leave or stay away from satellite-delivered multichannel audio and video products altogether. More likely, the tech shift will mean that many more subscribers obtain much more access to HDTV, and also buy many more HDTV-related hardware and software services and products. Which means there may be more CE revenues that come into the sector because of this STB-HDTV-Bandwidth Conundrum.

In fact, because of a lot of spending, hard work and concentration on the part of satellite operators and the CE industry, coupled with a bit more spending and inconvenience on the consumer’s part, everyone will end up that much more satisfied with the transition satellite must make in order to deliver a huge sum of additional HDTV services during the next two to three years.
In the end, will it all be worth it? Undoubtedly, the answer is yes, because even conservative projections done by The Carmel Group (see chart), indicate that HDTV will penetrate as many as 20 mil.–25 mil. of 110+ mil. U.S. TV Households within the next four years, pointing to almost a quarter of all viewers using HDTV in 2008, just four years down the road.