A research study focusing on demand factors driving consumers to adopt connected tv devices in their living rooms. Research methods include interviews, primary and secondary research.

1. Connected Living Rooms: Analysis of User Preferences and Market Trends Melody Akhtari Vincent Huang Matt Salazar May 19, 2010 Faculty Advisor: Pablo Spiller UC Berkeley, Haas School of Business

3. Context, Definitions, and Objectives 4

4. Industry and User Trends 5

5. Industry Highlights 6

6. User Demographics & Trends 9

7. Analysis 13

8. Research Methodology 14

9. Competitive Landscape 15

10. SWOT Analysis 17

11. Primary Research 21

12. Industry Professionals 22

13. Connected Living Room User Interviews 23

14. Quantitative User Survey Analysis 24

15. Findings & Implications 29

16. Hypothesis Inventory 30

17. Hypothesis & Implications 31

18. Market and Users: Implications 44

19. Suggested Further Research/Steps 47

20. Inquiries, Contact Info 48

21. Appendix 49

22. A: Sample Survey 50

23. B: Regression Analysis 52

24. C: User Interview Guide 54UC Berkeley, Haas School of Business

25. Executive Summary Objectives: Map both demand and supply side of the connected living room landscape Identify the user preferences of lead users and predict trends in the mass market landscape Primary & Secondary Research: Mapping demand and supply-side: Qualitative interviews of industry leaders throughout the value chain: content producers, chip manufacturers, software, and hardware providers Identifying lead user preferences: Qualitative interviews of connected living room users Quantitative surveys of US lead users 3 UC Berkeley, Haas School of Business

26. Context, Definitions, and Objectives Context: Users are beginning to use devices and services to consume content from the Internet. There has been an explosion of companies vying for adoption of their device/service. Definitions: ACS Living Room: Content connected via Antenna, Cable, Satellite. Content is viewed in the living room. Connected Living Room: Content sourced from the Internet. Content is viewed in the living room. Content: Videos Production Value: User generated content (UGC), Independent, Mainstream (e.g. movies, TV shows) Length: Short-Form (<10 min), Episodic (10-60 min), Feature-length (60+ min) Content Acquisition: Recording, downloading, and streaming of content Content Platform: Content providers or content aggregators Devices: Companies whose core competencies are to create and sell physical products Devices include: Connected Blu-Ray players, connected TVs, game consoles, OTTB Services: Companies whose core competencies are to provide content from the Internet Services include: Content aggregators, content broadcasters, content platforms, content applications Our specific objectives include: Identify drivers and challenges for organizations within the content ecosystem Determine US lead user preferences for types of content consumed Provide predictions and recommendations for organizations in the content ecosystem 4 UC Berkeley, Haas School of Business

27. Industry and User Trends Industry Highlights User Demographics User Trends 5 UC Berkeley, Haas School of Business

28. Industry Highlights: A Complicated Value Chain UGC Indie Producer Broadcast Network Cable Network Antenna Cable Satellite Component Device STB OTTB Content Aggregator Content Platform Internet Broadcaster PC Consoles Internet Provider TV Manufacturer Product Co. Fred, Shay Carl hitRECord, Prom Queen, The Guild ABC, CBS, Fox, NBC Discovery, TBS, ESPN Comcast, CableVision, TimeWarner DirecTV, DISH DVD, Blu-Ray Player Scientific America, Motorola (Over The Top Box) AppleTV, Roku, TiVO Clickr.com, Boxee Hulu, Justin.TV, Netflix, Vudu Koldcast TV AT&T, Comcast, Verizon, CableVision, TimeWarner Samsung, LG, Vizio, SONY PS3, Wii, Xbox 360 Roof, Rabbit Ears New Content and delivery channels have created multiple paths for consumption. 20th Century Fox, ABC, Disney, Endemol Desktop, Laptop Traditional to Traditional Tradition to New New to Trad/New UC Berkeley, Haas School of Business 6

29. Connected Living Rooms: On the Brink of Growth 2004Content Connects to PCs Windows Media Center 2005 2008Ease of Installation Netflix on Xbox 2006PCs Connect to TVs XBMC 2.0 Revenue 2009Jump in Device Processing Yahoo! Connected TVs Blu-Ray Plays drops below $100 2007New Content Platforms Hulu.com founded Netflix launches Watch Instantly 2010Growth in Devices/Services Walmart.com buys Vudu Boxee gains 1M users Time Stage: Strategy: Growth: Gain Market Share Mature: Incremental Innovation Decline: Harvest Profits Emerging: Innovate and Disrupt 7 Source: Henry Chesbrough. Open Innovation Business Models UC Berkeley, Haas School of Business

30. Customer Demand and Implementation: Key Challenges and Obstacles There are many challenges and obstacles in creating the perfect connected experience. UC Berkeley, Haas School of Business 8 Challenges in Consumer Demand Industry Challenges

31. Online Video Has Arrived For All Online Video has become mainstream; 62% of online adults have used the Internet to watch or download video, nearly double since 2006. On a typical day, 36% of adult Internet users watched videos online,up from 30% in 2008. Source: RBC Capital Markets (September 2009) 9 UC Berkeley, Haas School of Business 80% 68% 50%

32. User Trends: Increasing Demand forInternet Delivered Content on the Television Over a third of Netflix subscribers consume “Watch Instantly” content on something other than a computer monitor The increasing demand for Internet connectivity on the television is bolstered by consumers under 44. 10 UC Berkeley, Haas School of Business

33. User Trends: Internet Delivered Content is Both a Compliment and Substitute to Current Video Consumption Substitute: Upward trend of cord cutters (1.6M over 3 years)but still small to total market size (101M subscribers) Compliment: Upward trend in total video consumption 11 UC Berkeley, Haas School of Business

34. User Trends: Significant Questions Remain to Video Content Business Models and Economics 44.2% of Baby Boomers say they’re most likely to give up paying a subscription fee for TV service over any other subscription-based service (RBC, September 2009) Advertising:Support amongst users but revenue has not materialized Payment: Only moderate support for online content purchases Source: eMarketer (February 2010) Source: eMarketer (April 2009) 12 UC Berkeley, Haas School of Business

35. Analysis Research Methodology Competitive Landscape SWOT Analysis 13 Haas School of Business

36. Research Methodology 14 UC Berkeley, Haas School of Business

37. Scoping: Identifying Key Players Competitive landscape analysis of all companies offering a “10-Foot” living room experience Narrowed list by focusing on: Recognizable and identifiable firms Firms recognized as industry leaders by users and industry experts Significant install base 15 UC Berkeley, Haas School of Business

38. Competitive Landscape: It’s Crowded at the Top 16 UC Berkeley, Haas School of Business

39. Analysis of Key Players: AppleTV 17 UC Berkeley, Haas School of Business

40. Analysis of Key Players: Boxee 18 UC Berkeley, Haas School of Business

41. Analysis of Key Players: Roku 19 UC Berkeley, Haas School of Business

42. Analysis of Key Players: WMC 20 UC Berkeley, Haas School of Business

43. Primary Research Industry Professionals Interview List Connected Living Room User Interviews Quantitative User Survey Analysis 21 UC Berkeley, Haas School of Business

44. Roku Brian Jacquet Director, Corporate Communications D-Link Dan Wong Director, Product Management Trident Microsystems Jackson Huang Sr. Director Marketing Industry Professional: Interview List Devices Netflix Richard Ezekiel Director, Partnerships Vudu Edward Licthy EVP, Strategy and Content Boxee Andrew Kippen VP, Marketing Services Endemol Jerry Kowal SVP Digital Media Koldcast TV Daniel Samuels CEO, Koldcast TV App Content Developer Rob Spectre Boxee A Content Providers 22 UC Berkeley, Haas School of Business

45. Users Interview Methodology Individuals obtained from additional closing question requesting a phone conversation to better explore users’ habits Questions formed around hypotheses: thoughts on downloading and streaming, high definition, obtaining content, consumption patterns 20-30 minute phone conversations with eleven US-based individuals Interviewees included 44-year old female multi-solution user, a 25-year old male college student using Boxee, and a computer engineer using TivoHD with his wife and two young children, among many others. Conversations centered on in-depth insights based on users’ homeset-up, preferences and behavior, consumption patterns, and personal media libraries. 23 UC Berkeley, Haas School of Business

46. Survey Methodology Length: 10 Questions Time: Survey Ran from 4/22/10 to 5/6/10 Forums Surveyed: AVSForum.com CNET.com TheGreenButton.com Mac-Rumors.com TivoCommunity.com Boxee Forums Results: 140 Valid Responses 24 UC Berkeley, Haas School of Business

47. Survey Topline Who are they? 67% consider themselves early adopters 55% describe themselves as technology experts What is their setup? 85% have multiple computers in their household 77% have connected a computer/laptop to their television 70% have created or modified software/hardware to fit their technological needs 25 UC Berkeley, Haas School of Business

48. Demographics Chart 26 UC Berkeley, Haas School of Business

49. Time Spent Watching Chart 27 UC Berkeley Haas School of Business

50. Number of Devices Used 48% of respondents use more than two solutions to consume digital content 28 UC Berkeley, Haas School of Business

51. Findings & Implications Hypothesis Inventory Hypothesis Testing & Implications Market Trends & Implications 29 UC Berkeley, Haas School of Business

52. Hypothesis Inventory User Behavior Users do not watch short-form content on their TVs Control over experience and setup is critical to power users Users predominantly like new and current content. Where Does Content Reside? People do not care whether content is streamed or downloaded. Users would rather build a digital library for their content Influencers Towards Connected Living Rooms HD Quality (720p or better) will drive users to connected living rooms The desire to watch content on the living room screen is positively correlated with length Users use one single device in the connected living room Content Discovery Users want social recommendations for content discovery Users want a content recommendation engine 30 UC Berkeley, Haas School of Business

54. The majority of users desire mainstream content.

55. “I'd rather watch the full movie. I don't really stream clips, but if it's something I really, really, really want to watch, then I'll watch a clip. I'll watch post-game interview/highlight clips. Value-added things that are in addition to the whole show.”

57. Linkages to short-form content libraries, like YouTube, do not provide significant utility to the user. 31 UC Berkeley, Haas School of Business

58. Hypothesis 1: The (Un)importance of Short-Form 32 UC Berkeley, Haas School of Business

61. Given the fragmented preferences, a one-stop solution remains elusive and serves as a large barrier to mass-market adoption.33 UC Berkeley, Haas School of Business

63. Users followed new episodic content and appreciate cataloged movie content.

64. “I prefer new TV shows, and movies I prefer to watch what I haven't seen. If it's an old movie I haven't seen that's fine. My wife wanted to watch Soylent Green the other day; since we haven't seen it, I don't mind watching it.”

66. User profiles are complex as they carry over taste preferences from traditional media to online content. However, availability of content complicates what they can consume. Further research is recommended. 34 UC Berkeley, Haas School of Business

68. Streaming or downloading is a means to an end, and not an end unto itself. The preference for streaming/downloading is driven by other attributes such as content quality and content availability.

69. For Millenials, there is a significant preference for downloading over recording (p=.047) but not for streaming over recording (p=.187)

70. For Boomers, the preferences are reversed, where there is a significant preference for recording over downloading (p=.028)

73. “We don't add any more drives to our media library. We keep all our kids' content because they want to watch it over and over, but for our current shows/movies, we download-watch-delete.”

76. "Yes, HD is very important to me. I would say I wouldn’t sacrifice quality for variety, but I do it now since Netflix's on demand isn't as high quality as I would like, so yes we sacrifice for the ease of instant playback. But I prefer quality, which is why we rent Blu-ray discs as well."

78. Hypothesis 6: HD as a Driver (Cont.) 38 UC Berkeley, Haas School of Business

81. Overall consumption is the single largest driver to whether users consume via connected living room experiences.39 UC Berkeley, Haas School of Business

85. It is intriguing that in the current era of social and peer discovery, recommendation engines have a significantly higher preference ranking over other forms of discovery. Further research in this area is advised.42 UC Berkeley, Haas School of Business

86. Hypothesis 10: Recommendation Engine 43 UC Berkeley, Haas School of Business

87. Market and User Trends: Findings & Implications The concept of a digital locker in the cloud is still very foreign. Social validation will be a key driver in helping users accept a digital locker. Implication: Companies will need to create user profiles to display content in “virtual shelves” when purchased from the cloud. These shelves are public and enable the user to broadcast their taste preferences and purchases to peers. Video streaming will supersede downloading only when HD (720p or higher) content is available for streaming. Implication: Content platform companies should significantly invest in optimization their distribution systems to deliver HD quality content without any initial buffering. There is little room for new content platforms. Implication: The content platform is crowded. New entrants have extremely high barriers of entry. Unless new entrants can deliver exclusive content or unparalleled user experience, new entrants should enter through acquisition. Existing companies should focus on a market share strategy. 44 UC Berkeley, Haas School of Business

88. Market and User Trends: Findings & Implications Physical device product lifecycles, while shortened, will continue to be much longer than software service lifecycles. Implication: Companies within the connected living room space will need to be extremely agile to keep up with its competitors. Moving to the cloud will enable companies to quickly iterate and innovate. Analytics will serve as the catalyst to incentivizing digital content distribution. Implication: Create infrastructure to collect, synthesize, and act upon data. Companies that can best serve analytics to content owners will be best positioned to find new models to monetize the content. While many players will build and provide an “apps” platform, in the long run, these platforms will be undifferentiated. Implication: Exclusive content and UI will be key differentiators for companies. Applications platforms will be will be a baseline requirement for connected living room devices. 45 UC Berkeley, Haas School of Business

89. Market and User Trends: Findings & Implications In the short term, connected Blu-Ray players are best positioned to have the best connected living room experiences. Implication: Blu-Ray devices contain both the necessary processing power and price point for consumers. Device manufacturers should seek strategic partnership with content platforms to deliver an integrated device/service. The connected living room will drive increased consumption of independent content Implication: While mainstream content will remain mainstream, connected living rooms encourage the long-tailed consumption of content. Given the initial explosion of options, UI will be a critical component of organization and discovery. 46 UC Berkeley, Haas School of Business

90. Suggested Further Research/ Future Steps 47 We chose to focus on intrinsic user behavior and preferences Potential next steps and opportunities for future research: Consumer tastes on “Ownership” and how these preferences will translate with cloud based streaming services. Further understanding of discovery preferences from recommendation engine and social network. Map user preferences along specific product features. This study focused on intrinsic user behaviors and did not seek to correlate user behaviors with specific product features. Examination of developing business models and economic trends for video content. Create quantitative analysis of findings from the Market & User Trends: Findings and Implications section. Trends were were derived qualitative interviews with industry professionals. Analyze consumer preferences for new versus cataloged content. Examination of developing business models and economic trends for video content. Monetization and understanding consumers willingness to pay was not within the scope. However, interviews indicate that many players throughout the value chain are deeply interested in this area. UC Berkeley, Haas School of Business

91. For Inquiries, Contact Us Melody Aktari, BS 2011 melodyakhtari@berkeley.edu @iMelody Vincent Huang, MBA 2011 vincent_huang@mba.berkeley.edu @huangv Matt Salazar, MBA 2011 matt_salazar@mba.berkeley.edu @mattsalazar 48 UC Berkeley, Haas School of Business

92. 49 Appendix A: Sample Survey B: Regression Analysis C: Sample User Interview Guide UC Berkeley, Haas School of Business

93. Appendix A: Sample Survey 50 UC Berkeley, Haas School of Business

94. Appendix A: Sample Survey 51 UC Berkeley, Haas School of Business

95. Appendix B: Regression Analysis 52 Haas School of Business

96. Appendix B: Regression Analysis 53 UC Berkeley, Haas School of Business

97. Appendix C: User Interview Guide 54 UC Berkeley, Haas School of Business