The fast growing concentration of the connected TV OS market: Getting Ahead of Another Big Tech Duopoly, Before It’s Too Late

The European Commission recently published its final report into the Internet of Things, with Executive Vice-President Vestager stating: “The consumer Internet of Things sector is increasingly becoming part of our everyday life …  This is a market with high barriers to entry, few vertically integrated players and concerns about access to data, interoperability or exclusivity practices amongst others.”

More specifically in the context of connected TVs, in a recent submission to the UK’s Competition and Markets Authority (“CMA”), the BBC expressed concerns that “by 2023, as many as 60 to 80% of new TV sets sold may have an operating system owned by the tech giants (including Google, Apple, Facebook and Amazon).” This could in turn lead these companies to engage in the type of conduct, such as self-preferencing, in which they have already engaged in other digital markets.

As has occurred in the case of mobile ecosystems, there is a significant risk that – absent regulatory intervention – the connected TV market could end up being more concentrated than predicted by the BBC, as this market would be  controlled by just two companies, i.e., Google and Amazon. Concentration in the connected TV market would in turn create significant risks for competition in a series of adjacent markets, such as content streaming and creation, online advertising, and hardware manufacturing since companies active in these markets would have no choice but to accept the terms and conditions imposed by Google and Amazon. Reduced competition in these markets could in turn affect consumers in terms of higher prices, reduced choice and innovation. By controlling the connected TV market Google and Amazon would further increase their data collection capabilities, enhancing their data advantage over other companies and raising privacy concerns.

Background

Consumers have access to audio-visual and audio content from a variety of sources (public service broadcasters, pay-TV, video-sharing, radio stations and social media platforms, etc.) and through various categories of devices (TV sets, PCs and laptops, smartphones, tablets and smart speakers, etc.). The past decade has also seen the rise of connected TVs, i.e., televisions that are connected to the Internet and let users consume television content. Consumers can enjoy the connected TV experience by acquiring a smart TV or by attaching hardware to their screen (such as streaming sticks), which give them access to a wide range of apps and content. A centre piece of the connected TV experience is the operating system (“OS”) as it organizes the content that will be seen by users and offers a series of key functionalities, such as the ability for users to search for content.

Why Google and Amazon are well placed to control the connected TV OS market

Independently of the hardware used by consumers to access the apps, the control of the OS is important as it drives the user journey. TV manufacturers initially controlled the OS for smart TV and, while some continue to do so (e.g., Samsung and Panasonic), many have now elected to use a standard OS from a third-party (e.g., Roku or Amazon Fire) or have used Google’s Android TV.  Control of the OS can also be achieved through streaming devices, which – as discussed below – companies like Google and Amazon can largely subsidize to gain market shares.

Control of the connected TV OS is a priority for Google and Amazon has it generates significant benefits, such as the ability to collect user data, and its subsequent use to derive income in a range of adjacent markets (e.g., search and display advertising for Google, as well as ecommerce and advertising for Amazon). This also allows these platforms to control a device that is strategically placed in each home’s living room and, together with other devices they control (such, as Android smartphones, smart speakers and other devices in which the Alexa and Google digital voice-assistants are installed) could form the central post of command for all IoT devices. As observed in a report prepared for OFCOM:

“The clear aim of Amazon, Google (and to a lesser extent Apple) is to become the single point of consumer interface in the household and on the move, featuring a single operating system shared across multiple devices, easy (usually voice-assisted) controls, single billing, navigation, personalisation and data capture).”

Both Google and Amazon are extremely well-placed to rapidly grow their share of the connected TV OS market. First, as smart TVs are commoditized and margins are getting increasingly low, Google and Amazon can use their check book to convince smart TV makers to use their OS against financial compensation, a strategy that is unavailable to OS providers that do not enjoy the same resources. Second, for users that do not own a smart TV, they can heavily subsidize their streaming devices or even sell them at a loss, and in the case of Amazon it makes use of the world’s largest ecommerce platform to sell them. Third, users may be attracted to single-home around a single OS for their home devices, which gives an advantage to firms like Google and Amazon whose OS are already used in several home devices. As noted in the abovementioned report for OFCOM:

“As smart device penetration in the home rises, consumers may increasingly gravitate to a specific brand of OS, particularly where differing devices cannot otherwise easily interact This is particularly true of smart speakers and home assistants, which are increasingly integrated into smart TVs (or where voice-enablement of the TV allows the interaction).”

At the same time, Google and Amazon can engage in various anticompetitive tactics to weaken connected TV OS rivals, such as tying access to their content to unfavourable conditions or in the case of Amazon leveraging its ecommerce platform to interfere with the distribution of their streaming devices.

While some may argue that the market for connected TV OS is currently fragmented, with some TV manufacturers retaining important market shares, that was also the case in the mobile OS space where Nokia was the market leader until it was suddenly swept away by Apple and Google. It did not take long for Nokia’s Symbian, Windows mobile OS and the BlackBerry OS to disappear. Today, Apple and Google two companies share 99% of the mobile OS market are so entrenched that new market entry seems impossible.

Why a concentrated connected TV OS market would be problematic

The negative effects of the control of the mobile ecosystems by two companies are well known. Apple and Google oblige app developers that sell digital goods or services to use their in-app payment systems and charge a 30% commission on their sales. Apple and Google’s app review process has also been harshly criticized for its opacity and lack of consistency, and they have also been accused of engaging in self-preferencing. This has triggered multiple competition law investigations, lawsuits and regulatory initiatives to tame these companies’ market power.

Similar problems would arise in the connected TV space if it was to be controlled by two companies. In practice, Google and Amazon could:

• Use their bargaining power to impose terms and conditions of access to their platforms that are increasingly unfavourable to content providers. That may be particularly harmful for smaller content providers, which will be at their mercy. While some of the largest content aggregators may have countervailing buyer power, it may dissipate over time.

• Engage in self-preferencing by promoting their own content over third-party content and extract rents from other content providers. Prominence on home screens is particularly key as content proliferates.

• Collect troves of data, which they can subsequently use to strengthen their market power in adjacent markets, such as advertising, e-commerce, etc. This may in turn raises issues of user privacy.

• Harm innovation by freezing competitive device makers and platforms out of the market, hence leaving consumers with uniform solutions.

What needs to be done?

Over the past few years, governments and competition authorities have produced a host of reports identifying the competitive issues raised by the conduct of digital platforms in digital markets including search engines, social networks, ecommerce platforms, and app marketplaces.

More attention should however be paid to the connected TV market as connected TV are strategically placed in each home’s living room and, together with other devices that companies like Google and Amazon control, they could form the central post of command for all IoT devices. Moreover, as in the case of mobile devices, there is a risk that we may end up with two ecosystems on which producers of hardware, software and content will depend.

As it is easier to prevent such a scenario to take place, rather than to undo it once it has taken place, competition authorities should seek to prevent all strategies that Google and Amazon may use to reduce competition in the connected TV market, including the granting of potentially exclusionary incentives to smart TV makers to exclusively use their OS, measures designed to impede the ability of rivals to sell their streaming devices, conditioning access of rival platforms to their must-have channels on the acceptance of unfair conditions, etc.