Over-The-Top Television is coming

Netflix has revolutionized the way Americans watch TV, with 33.5 million users in the US subscribing to its monthly video streaming service. 145 million people in the US are online video watchers, and the number of hours spend watching video online has risen to a whopping 36%. It is evident that on-demand streaming of video content over the internet is a model that's here to stay. Customers love it for the ability to watch what they want when they want, and wherever they want it, so traditional pay-TV providers like Comcast and DirecTV will eventually find it challenging to continue business as usual. The popularity of watching TV on mobile devices like the iPad, through apps, as well as via gaming consoles like Xbox is expected to increase, with one survey reporting 30% of respondents being inclined towards cord-cutting (the phenomenon of replacing cable/satellite TV with a streaming media subscription). 

There are many distribution technologies and hardware platforms at play in the convergence of television and the internet, so it is important to categorize and distinguish between terms like Internet-TV, Smart TVs, OTT, on-demand, etc. One category of terms deals with streaming content over the internet, the other with the (optional) extension of this content to traditional television sets.

OTT

First, what exactly is OTT? Over-the-top pay-TV is called so because of the way content is delivered via the internet - by coming over the subscriber's existing broadband connection. There is no necessary relation between the internet provider (MSO, say Comcast) and the content provider (say Netflix). A subscriber in New York City could have a broadband internet connection from Time Warner Cable but subscribe to an OTT content package from Dish Network, simply because the content and price offered by Dish serve the subscriber's needs, allowing him or her to watch that content on his laptop or tablet and potentially extend it to the TV set.

Consequently, the major players in the technology industry are hankering to get in on the OTT action. Google, Apple, Intel (now Verizon OnCue) and Sony all have a finger in the OTT pie.

THE CONVERGENCE OF TELEVISION AND INTERNET: WHAT ARE THE PIECES IN THE PUZZLE?

Set Top Boxes / Streaming Media Players (Hardware)
The current hardware involves some external box that helps you stream content delivered over the Internet to your TV. You could connect this set-top-box directly to the TV or go through a device like laptop or phone. Amongst existing tech players looking to break into television, the Apple TV does this currently. Similarly, Google's Chromecast dongle plugs into your computer and streams content from your device to your TV. The Roku's media player box as well as its recently announced Chromecast-like USB device are also designed to integrate online content with your TV.

On the console side, the Sony PlayStation and Microsoft XBox are devices already present in millions of living rooms that connect to TVs and the internet. They have interfaces allowing users to stream content from Netflix and Hulu to TVs like any other streaming media player device.

Dish Network's Hopper and Joey boxes also have streaming capabilities, but Dish currently does not offer content delivered over-the-top.

Amongst software-based streaming media players, Aereo is a company trying to enable streaming of over-the-air television on internet-connected devices.

All these streaming media player devices connect directly to your TV and to your high-speed internet service via your home network (Wi-Fi). Using apps, you then select the shows and movies you want to watch.The point to note is that Google, Apple, Roku, etc. don't yet have licensing deals with content providers, such as the ones that traditional cable/satellite-TV providers enjoy. And this is one of the biggest bottlenecks holding up OTT. The current streaming devices mostly stream old-ish content (called catch-up service) from online content storefronts: iTunes, Google Play, Amazon Instant Video and Netflix, to your TV. The major mobile tech companies (Apple, Google, Microsoft and now Amazon) have established ecosystems comprising hardware, software (iOS, Android, Windows Phone) and online content stores, and each seeks to tie customers to its ecosystem. These companies are now seeking solutions to bring TV, the final frontier, into their ecosystems.

It is interesting, however, to realize that OTT pay-TV need not involve a "TV" - which is the center of the scenarios described above. Video from Netflix, Amazon, etc. is usually streamed using an internet-connected device like laptop, tablet or phone and then viewed on the television set. The television is just another viewing screen, albeit the most popular, the most prized, and biggest one. It has traditionally received content from the cable companies but, as described above, consumption patterns are changing, which places it at the center of a renewed fight for the living room. All these companies, from Google, Apple, Amazon and Sony to Verizon and Dish (even Wal-Mart, with Vudu), are attempting to establish OTT services delivered to the TV set  via the internet as the disruption that will revolutionize pay-TV.

Integration with TVs:

Smart TVs are TVs that provide support for apps, allowing content from the Internet or other devices (like the streaming media devices above) to be played on them.

TV manufacturers (like Sony, Samsung) collaborated with tech companies to market a line of OS-specific smart TVs. For example the Google TV initiative is a collaboration of Sony, Logitech and Google that provides support for the Android OS.

Going forward, 2 types of triumvirates will be interesting to watch for their impact on the industry:
1). Of content creators (Disney) + content distributors (Comcast, Dish Network, Amazon, Google) + methods of distribution (cable, satellite, IPTV, Over-the-top-TV / Internet pay-TV)
2). Of TV manufacturers (Samsung / Sony) + Operating System or mobile ecosystem (Android, iOS) + streaming player (Apple TV, Chromecast, Roku)

Going forward, one could also see TVs from Apple, Google, Amazon with the OS built in, the streaming-enabling box like Chromecast built in, with content licensing deals that allow access to old and live content via apps / appstores. These TVs would get content from the Internet as mobile devices currently do, through OS-based content ecosystems.

Pay-TV Providers: Why cable won't die easily
One of the most crucial issues for accessing content is price: how much the consumer pays to watch OTT streaming content. Traditional pay-TV providers enjoy low carriage rates (the amount they pay creators like Disney to carry their content and distribute to subscribers) arising out of long-term negotiations that allow them to charge low prices to subscribers. While the Amazons, Googles and Sonys of the world could build their ecosystems to include TVs and on-demand internet-based TV services, the content certainly won't come cheap because the HBOs and Disneys do not want OTT to cannibalize the large cable companies who serve millions of their existing subscribers.

Recently however, DISH Network signed a long-term content licensing deal with Disney, allowing it rights to stream video content over the internet. This is an inflection point. DISH realized that younger customers are not willing to pay $80 per month to receive channels they don't want to watch, and has secured the right to provide specific content over the internet in a Netflix-type service. Disney gains additional new subscribers who were not being targeted earlier. It is a win-win situation and signals the beginning of OTT. Subscribers certainly have a lot to cheer about!

References:
http://www.ecommercetimes.com/story/80069.html
http://www.emarketer.com/Article/Digital-TV-Movie-Streaming-Reaches-Tipping-Point/1009775
http://www.theverge.com/2014/1/22/5334934/netflix-q4-2013-earnings