TV Distribution - The Next Frontier or Another Walled Garden?

Earlier this year, we discussed game distribution via “over-the-top” (OTT) as gaming’s next potential unlock. As a reminder, OTT is a term used to describe the process of media being delivered over the internet (vs hardlined broadband). This includes services like Netflix, Hulu, HBO GO, ESPN+, and more. These companies are distributors of content directly to end users.

Smart TVs are already widely adopted today despite not becoming manufactured at scale until 2015. Here are a few stats on the Smart TV space:

• 87% of US households have at least one Internet-connected TV device, including connected Smart TVs, stand-alone streaming devices (e.g., Roku, Amazon Fire TV sticks or boxes, Chromecast, or Apple TV), video game systems, and/or connected Blu-ray players

• 46% of adults in US households watch video on a TV via a connected device daily – compared to 40% in 2020, 25% in 2017, and 4% in 2012. This trend is likely to continue as younger people are most likely to use connected TV devices. 62% of adults aged 18-34 watch video on a TV via a connected device daily – compared to 54% of ages 35-54 and 24% of ages 55+

While players such as Netflix, Apple, and Google have all made movements in this space, we believe that the Smart TV is still an underutilized channel for gaming. This week, we will be diving deeper into the Smart TV ecosystem and assessing the role of each player, taking a look at well-positioned incumbents in the space, and highlighting areas where we believe that new entrants can compete.

The Layers of a Smart TV

Generally, one can think of Smart TVs being comparable to mobile devices. You have the hardware manufacturer, the operating system (OS), then a set of individual apps.

Landing and expanding with hardware: The role of hardware in the Smart TV ecosystem is the wedge for the operating system and applications. Today, consumers are replacing TVs every 5-10 years (for reference, a majority of Americans replace their phones every 2-3 years), meaning that they are much more difficult to substitute compared to changing subscriptions between streaming services. The primary differentiation between devices today comes down to resolution, refresh rate, TV Technology used (LED, OLED, QLED, Mini-LED), and port compatibility.

Larger differences between Smart TVs lie in the operating system: The role of the OS is to manage the functionality, user experience, and apps and content available to users. The OS controls compatibility with other hardware, ease of development and publishing of apps (including games), and the organization and distribution of apps. For the purpose of this newsletter, we will focus on content management. An open OS like GoogleTV has a fairly open and compatible ecosystem that makes developing and publishing apps to its store accessible, while closed OSs like Apple’s tvOS or Amazon’s Fire TV have strict guidelines on what can be approved to be published and therefore limited app stores. While relatively underutilized to date, for all interactions outside of individual apps, the OS also controls how advertisements are shown to end users.

Note: A cheaper way for a consumer to access OTT media is through non-Smart TVs with standalone streaming devices or video game systems ($25-150). All players that offer these types of devices (Roku, Chromecast with Google TV,  Amazon Fire Stick with Amazon Fire OS, Apple TV with tvOS) also have their own OSs and deliver the same (if not, slightly slower) smart TV experience as the dual OS-SmartTV package. According to S&P global, Smart TVs and Streaming Sticks will both continue to grow at a 7-8% CAGR through 2026.

Applications are the content library owners: Streaming services are the content aggregators (and generally the major IP owners) and are responsible for the last leg of media distribution to the end user. These are not mutually exclusive like the hardware or OS, the average US household has 4 subscription video on demand (SVOD) services. They are accessed on Smart TVs as standalone apps and are subject to the UI of the OS to be discovered and selected.

Some players work across the smart TV ecosystem. For example, Roku both manufactures their own TVs and partners with other TV manufacturers to offer their proprietary Roku OS. They also sell their standalone streaming device (the Roku stick) for users to run a version of Roku OS on non-smart TVs. Other operating systems focus on being TV-exclusives (e.g.,Samsung and Tizen OS, LG and webOS, Apple and tvOS).
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Note that we exclude cable as it is a 1-way network distribution and there is no potential for gaming distribution. However, cable companies such as Viacom and AT&T have established a presence in the TV ecosystem by acquiring streaming services at the application level (Pluto TV and Max, respectively). From our perspective, cable service providers have largely lost the smart TV “race”. While they commanded at-home TV screen time for decades, these companies were edged out in the tech-heavy layers (hardware, OS) and scrambled to acquire and fight at the layer with the highest competition: applications.

Making a Move in Gaming

Of the existing players in the Smart TV space, there are four we feel are best positioned to expand their footprint in gaming:

• Netflix: Netflix is the only player on this list with a clear, public game strategy (The Verge). Through their OTT application, they are currently offering a library of games that includes those developed by external studios as well as their own first-party content. This intentional strategy to have gaming not just as an “add-on” but as its own standalone experience at home and on TV (using one's phone as a controller) is indicative of how Netflix sees high quality, interactive content as a key differentiator in capturing screen time. This gaming strategy expands Netflix’s offering to consumers beyond just competing on expensive content exclusivity alone. We anticipate that Netflix will expand their footprint in high quality, interactive content and leverage its strong IP library to establish its own library of “forever”, evergreen IP (see the success of Pokemon, Spiderman, Mortal Kombat, GI Joe).
• Apple (Apple TV, tvOS, Apple Arcade): Today, Apple does not manufacture a Smart TV, however, it does sell the Apple TV streaming device (~10% share of the streaming device market), which runs their proprietary tvOS, and Apple TV+ subscription, which gives users access to their content library. With the tvOS SDK, developers can utilize frameworks such as TVUIKit, Swift UI, UIKit, TVMLKit, AVKit, and Metal to develop games and apps for Apple TV. This mimics a very similar (and successful) developer experience to developing apps for the iPhone and iPad. Apple also aggregates a vetted library of games via an in-house, subscription-based gaming platform that is compatible across Apple TV, iPhone, iPad and Mac: Apple Arcade. This platform already has 200+ vetted games and typically adds 2-4 games per month. Gaming on the TV for Apple is likely going to continue to be focused on a limited number of high quality, cross-compatible games instead of TV-exclusive experiences.
• Google (Google TV, Chromecast, Google Play Store): Google also does not manufacture their own Smart TVs, but they do have a TV-specific OS that is compatible with all Android OS devices and a streaming device, the Chromecast (<10% share of the streaming device market). The Chromecast and TVs running Google TV OS share the same Google Play Store as smartphones running Android OS, however, since games have to be “optimized” for the TV, there are only ~120 games that are listed as available to play on Google TV. While Google has the same phone cross-compatibility advantage as Apple, and they should hypothetically benefit from having looser restrictions versus Apple’s App Store, it is clear they have not invested as much into building a strong gaming ecosystem on TV.
• Amazon (Fire TV, Fire TV OS, Fire Stick, Appstore): Amazon is the only player we call out that manufactures their own TVs. They also partner with select third-party manufacturers to run their proprietary Fire TV OS. Of the three players, Amazon has the strongest foothold in the streaming device market through the Fire Stick (~40% share of the streaming device market). While they have an app store that has >2,000 games listed as compatible with the TV, this app store is messy and filled with lower quality games. Additionally, there is little cross compatibility with other devices (Fire Phone, Fire Tablet) which alone have lower adoption rates versus devices running with iOS or Android OS.

While it may seem self explanatory that four of the top tech companies in the world are well positioned in this market, only one of these has an intentional gaming strategy: Netflix. The other three are competitive in the OTT Gaming market through the strong baseline infrastructure they have in place across the ecosystem.

However, it is not impossible for an early stage company or startup to compete in this market. Roku, for example, is a venture-backed startup that is one of the strongest independent players in the Smart TV ecosystem with 40% market share of the streaming device market and LTM revenue of $3.2b as of June 30, 2023. On the gaming side, Jackbox is a younger startup that has established itself in the ecosystem with ~100m players before the pandemic and was anticipated to have broken 200m players by the end of 2020 (DualSHOCKERS).

While this list is not exhaustive, there are two areas where we believe gaming startups can compete:

1) Streaming device + OS: We do not believe that it is possible for a startup to compete as a Smart TV manufacturer where they would deal with long device replacement timelines, high costs, and strong incumbents. Yet we do believe there may be an opportunity in offering a streaming device that is optimized for a gaming experience as devices like the Roku and Fire Stick are both utilizing OSs that are focused on streaming video. A TV-optimized OS focused on gaming could have a differentiated wedge in the streaming device market by prioritizing the development and publishing experience of gaming applications, and optimizing for compatibility with game-specific hardware.

As you can see from looking at the Smart TV ecosystem today, an operating system alone cannot compete without strong partnerships with hardware manufacturers or building their own ancillary device as a wedge into the market. Note, we caution any startup exploring this area away from a cloud-based offering due to the high infrastructure costs - Google Stadia is a cautionary tale (The Invisible Arcade).

2) Application layer: A less capital intensive path is building a TV-based gaming distribution platform. Given the current guidelines around alternative app stores on phones (and therefore TVs), launching a competing app store is not an option today, however, an application that follows the same library format as streaming services (Netflix, Hulu, Disney+, Max) gives a startup the flexibility to launch on all Smart TVs, regardless of OS. A company could also build a companion application for mobile devices that can enable features like crossplay, crossplay remote multiplayer, using a phone as the controller, and couch co-op.

However, there are three large challenges when competing at this layer: discoverability and moat.

1. There is not a standardized user interface on TVs like there is on devices (the home screens of most mobile devices are relatively similar, and most discover apps via the App Store or the Google Play Store) and today there is not a primary user flow that optimizes for new app discovery. Startups building a gaming platform app will struggle to reach end users.
2. Like we saw (and are still seeing) with the streaming wars, “content is king” in winning the end customer. It will be very difficult for a startup to partner exclusively with developers to offer players a strong enough content library to keep them engaged.
3. Applications do not control things like hardware compatibility and optimization for game-like experiences, the operating system does. Applications will need to work within the technical parameters offered by the operating system, which vary across the many different Smart TV manufacturers out there.

Takeaway: The Smart TV ecosystem is swarming with vertically integrated players across TV manufacturers, operating systems, streaming devices, and applications. Technical incumbents such as Apple, Google, and Amazon today already have the infrastructure in place to scale and market a gaming platform offering that is cross compatible with other products in their ecosystem. One group that we believe has a cohesive strategy and strong distribution channel for success is Netflix. However, there is still opportunity for early-stage companies to compete through products such as a dual streaming device + OS offering or at the application level.

As a firm, we continue to be excited to see the OTT gaming market continue to grow and mature as investors in gaming infrastructure, technology and platforms.