Slow moving U.S. pay-TV market bides time on 4K, waits for HDR to bake

By Daniel Frankel

After back-to-back product introductions at the beginning of this year by DirecTV (NYSE: T), Comcast (NASDAQ: CMCSA) and Dish Network (NASDAQ: DISH), it looked as though pay-TV was going to embrace 4K/UltraHD in a pretty significant way in 2015.

But save for a few sporadic announcements about 4K-enabling satellite launches, and 4K set-tops to be released at some undetermined future date, there has been little if any actual movement in the pay-TV industry on the UltraHD topic since January. Most of the industry's focus today in pay-TV seems to be on streaming skinny bundles and cloud virtualization.

The flaccid state of the U.S. pay-TV market's 4K push stands in direct contrast to markets like Canada, where operators including Rogers Communications and Videotron have recently made aggressive 4K/UltraHD announcements. Rogers, for example, is going to leverage its ownership of sports assets, such as Major League Baseball's Toronto Blue Jays, to launch a channel dedicated to both on-demand and live 4K programming.

Juxtapose this with DirecTV's 4K service, which is still only offering a limited number of archival Paramount films for download in the UltraHD format nearly a year after the satellite service introduced its 4K Genie set-top.

This tortoise-like pace is occurring as over-the-top operators like Netflix (NASDAQ: NFLX) and Amazon (NASDAQ: AMZN) introduce relatively robust libraries of 4K content for streaming, and device makers like Roku launch new boxes to support them.

With nearly half the TVs sold in the U.S. soon expected to support 4K, it very well could be SVOD and not pay-TV that embraces the early adopters.

Multiple factors are slowing 4K in the U.S. market

According to Joel Espelien, senior analyst for The Diffusion Group, U.S. pay-TV operators are simply responding to the demand -- or lack thereof -- they see in the marketplace. Consumers, he said, were able to upgrade their living rooms to HD relatively inexpensively. "But 4K is extremely expensive to roll out on a legacy pay-TV service," Espelien said. "If consumers are not willing to pay for it, where's the urgency?"

Adoption is further limited by a lack of competitive pressure, he said.

"Churn between operators is very low," Espelien added. "The competitive threat that your rival is going to do 4K and steal all your customers is nonexistent. As a result, operators just need to play around in trials to show they are doing something. But there is no business case for massive investment in 4K right now."

Anthony Smith-Chaigneau, senior director of product marketing for Nagra, a leading 4K vendor, agrees that the U.S. pay-TV market is moving slowly in regard to 4K. "While there is not enough data to come to any conclusions, we've seen that many operators in the U.S. are waiting to see to how 4K is going to evolve and are reticent to commit, especially after what happened with 3D," he said.

That is not to say U.S. operators won't jump in at some point

"On the other hand, we also have operators that have stated that their networks are '4K-ready' and when market conditions are right, they will launch," Smith-Chaigneau added.

John Carlucci, president and CTO of Alticast US

Carlucci

For his part, John Carlucci, president and CTO of Alticast US, another 4K vendor to the pay-TV market, believes the timing still isn't right for U.S. operators to make aggressive moves with the technology.

"From our work with Videotron, we know that the philosophy behind their 4K adoption in Canada is that it will 'spur all the players in the distribution chain to follow suit,'" he said. "In the U.S., it seems as though satellite deployments were the catalyst behind pay-TV announcements. I think what's happening now is engineering work and that actual launches will be timed to a sweet spot of content availability and 4K TV penetration."

HDR could drive 4K progress

According to Matthew Strauss, executive VP and GM of video services for Comcast Cable, that sweet spot is actually the introduction of High Dynamic Range (HDR), a complimentary technology to 4K. In focus group tests, he said consumers have been far more favorably responsive to video images that feature not just the 3,840 x 2,160 pixel resolution of 4K, but also the whiter whites and blacker blacks of HDR.

Currently, Comcast is conducting employee tests of its new 4K-capable Xi4 set-top, with deployment to Comcast's base of more than 5 million X1 users targeted to later this year. The Xi4 will expand Comcast's 4K service, which is currently confined to an app that only works with newer Samsung 4K TVs. Comcast's 4K content offering will also expand to include things like IMAX movies.

Matthew Strauss, executive VP and GM of video services for Comcast Cable

Strauss

Strauss, however, expects far more momentum to be generated in 2016 with the launch of the HDR-capable Xi6. "We think there's opportunity to offer an even more enhanced experience by combining 4K with HDR," he said.

Strauss also sits on the board of the Digital Entertainment Group, which is among a number of industry trade groups -- the UltraHD Forum and the Consumer Electronics Association also among them -- that are currently formulating standards for integrating HDR with 4K.

"HDR is going to be a tremendous quality driver that we want to embrace," Strauss said. "We feel very good about our ability to support it."

For its part, AT&T -- the owner of DirecTV -- said it's also working on the HDR standards issue through its involvement with the UltraHD Alliance, another industry trade group.

Regardless of when or if the 4K pay-TV market ever takes off, Alticast's Carlucci sees benefits to the ecosystem's legacy video infrastructure from even the current slow pace of 4K technology integration.

"No matter how the market evolves, there are a couple of benefits we'll see. First, the more efficient HEVC video codec can be applied to HD content to make more effective use of bandwidth," Carlucci said. "Second, the stronger digital rights management and Conditional Access Systems that operators will need to protect high-value 4K content can help them do a better job of protecting all of their content in the future."

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