Device Manufacturers Bet on Broadband Bucks

Written by Ryan Lawler

Thursday, July 16. 2009 at 05:10 PM EDT Post a comment

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When a consumer electronics (CE) manufacturer adds new broadband services to its products, it's not just adding features to entice users to buy a new big-screen TV or Blu-ray player -- it's also adding the possibility of new revenue streams.

It's still early days in the connected device market, with CE players like Sony, LG, Samsung, and Vizio all beginning to offer new ways for consumers to access Internet content through their television sets. So far, most device makers and consumers alike have looked on these content partnerships as a value-added feature for the device.

But CE manufacturers are hoping that by becoming technology enablers -- by helping the content owner reach the consumer in his living room -- they will be able to command a share of the revenue that those services produce.

Some are already generating new revenues from services like Netflix Inc. , which has gained adoption on a number of connected devices. Netflix's streaming service is available on broadband-connected CE devices from Sony, LG, Samsung, and Vizio. The service can also be viewed on Microsoft Corp. (Nasdaq: MSFT)'s Xbox 360 gaming console, the Roku Inc. Internet set-top box, and TiVo Inc. (Nasdaq: TIVO) DVRs.

One reason so many consumer electronics manufacturers may seem anxious to offer Netflix streaming on their devices is that the video rental firm pays them a per-subscriber acquisition fee to do so. (In its financials, Netflix books these deals as a marketing expense.)

For the most part, those fees have been a one-time kickback to device manufacturers. But now CE companies are looking for ways to create recurring revenue streams for content watched on their devices.

That can take shape in a few ways, with device makers either taking a cut of ad revenue enabled on their devices, or taking a small share of any transactions made on services like Amazon's Video On Demand or Best Buy's upcoming digital storefront.

While the ecosystem to enable ad insertion on Internet-enabled CE devices has yet to be fully fleshed out, some device manufacturers are already receiving a share of sales generated on their HDTVs and Blu-ray players, sources say.

"For the first time, you're seeing device manufacturers trying to take a cut of the content being shown on the TV," says Colin Dixon, research analyst at The Diffusion Group.

This shift has the potential to boost earnings for device makers, particularly as connected devices become more prevalent and customers become more comfortable with purchasing or renting content through their TVs or Blu-ray disc players. After all, one reason that CE manufacturers are so desperate to add recurring revenue streams is that their margins tend to be ridiculously low.

One source, who asked not to be named in this story for fear of angering his CE partners, says that it's not unusual for margins on a $700 flat-panel TV to be around $10. Even on high-end TVs -- those sold in the $1,500 to $2,500 range -- margins can be as low as $50 per device, our source says.

At the same time, not everyone is optimistic that this business plan will take off. The Diffusion Group's Dixon, for instance, believes that device manufacturers are probably not ready to become players in the media business, and expects that their desire to become part of the revenue stream is probably "a temporary phenomenon."