In-depth research report on smart TV: TV Internet has entered an explosive inflection point

1. The Internet is rapidly penetrating into the living room, and the explosion of TV Internet is imminent

1. PC and mobile traffic growth slowed down

The number of PC and mobile Internet users has encountered bottlenecks, and traffic growth has gradually slowed down. The development of China's Internet has gone through two eras: PC Internet and mobile Internet. 20 years ago, China joined the global Internet family for the first time, and the PC Internet era officially started. Today, China has become the country with the largest number of Internet users in the world, and has cultivated a number of Internet companies with global influence. In 2007, the launch of Apple's iPhone detonated the development of the mobile Internet market. After several years of rapid popularization, China has more than 550 million mobile Internet users and a market size of 210 billion yuan. However, as the number of users has gradually reached a bottleneck, the growth rate of traffic and market size has gradually slowed down.

2. TV Internet is entering a period of explosive growth

Smart TVs are increasing rapidly in volume, and the penetration rate of Internet TV users is about to cross the 10% key point. 2014 was the first year for China's smart TVs to increase in volume sales, with a sales penetration rate of over 50% for the whole year. The industry's cumulative stock was close to 30 million units, and the stock user penetration rate reached 5%. In 2015, the penetration rate of smart TVs is expected to reach over 70-80%, and the penetration rate of Internet TV users is about to cross the 10% key point. The number of terminals activated by leading companies will exceed 10 million, and the average daily active users will exceed 5 million, reaching the starting point of large-scale operations. (Note: Definition of user penetration rate: the proportion of smart TV stock to the total TV stock)

With the popularization of users and the surge in traffic, the TV Internet economy is entering a period of great explosion. Let us recall what happened when the penetration rate of mobile Internet users in China moved from 10% to 30%? The application market exploded, various profitable business models were formed rapidly, and the mature ecology of the PC Internet gradually shifted. In addition, giants accelerated their efforts to seize the entrance to the mobile Internet. All of this will appear in the TV Internet economy without exception.

The TV Internet economy has been created from scratch, with a long-term market size of hundreds of billions and a huge potential.

(1) The market size of video services will reach 100 billion yuan (including TV video advertising and content payment services). The market value of China's traditional TV ecosystem is about 200 billion yuan, including 130 billion yuan of traditional TV advertising and 70 billion yuan of cable TV viewing service fees. As users' viewing time and traffic gradually shift to smart TVs, the market value will also shift. At the same time, various Internet innovations are expected to increase users' willingness to pay for high-quality content. The market size related to TV Internet video will develop rapidly and is expected to reach 100 billion yuan in the long run.

(2) The combined market size of TV games and application businesses is expected to reach 50 billion yuan in the long term. TV games: The current global TV game market size is 30 billion US dollars, of which, excluding hardware sales, the game payment market size is around 20 billion US dollars, accounting for a stable 20% of the global game industry size. According to iResearch Consulting, in the long run, the scale of China's game industry will exceed 200 billion yuan (110.8 billion yuan in 2014). Assuming that TV games grow from nothing to 10-15%, the market size will reach 20-30 billion yuan. Other types of applications and derivative advertising businesses: such as online education, music, social networking, etc., are estimated to have a market size of more than 10 billion yuan.

(3) The TV shopping market is conservatively estimated to reach RMB 300 billion to RMB 500 billion. In 2014, the size of China's online shopping market reached RMB 2.8 trillion, with a growth rate of 50%. According to iResearch Consulting, the size of China's online shopping market is expected to exceed RMB 7 trillion in the long term. As the TV payment system matures and user habits shift, assuming that the proportion of TV shopping reaches about 5% in the future, the market size is expected to reach RMB 300 billion to RMB 500 billion.

2. Terminal + operating system is the core entrance to TV Internet

1. Compared with the decentralized entrances to the mobile Internet, the entrances to the TV Internet are centralized.

The entrances to the mobile Internet are diversified and fragmented. The bottom layer is hardware + operating system, which creates a closed or semi-closed model to form a strong user stickiness and traffic import function, such as Apple + iOS, Xiaomi + MIUI. The second is the pure operating system level, such as customized operating systems such as MIUI. At the application store level, there are application distribution platforms such as 91 Assistant and 360 Mobile Assistant. At the APP level, there are super APPs such as WeChat, Baidu Maps, and Dianping.com.

(II) TV Internet: Terminal + operating system is the most important traffic entrance

Due to the closed nature of the TV system, the fragmentation of hardware technology standards and user operating habits, the entrance to the TV Internet will be concentrated at the terminal + operating system level, among which the operating system is the core of the operation.

The fragmentation of technology has led to a very close integration of terminals and operating systems, and the operating system is firmly controlled by hardware manufacturers. Since TV hardware has different technical standards and models, and needs to provide live signal support, the TV operating system needs to be integrated with different chips and hardware at the bottom layer, which makes development and maintenance difficult. Hardware manufacturers have gone through years of exploration in the research and development of operating systems before forming a unified operating platform. We believe that the operating system is a key link in realizing user operations. Mainstream manufacturers will definitely not hand over control of the operating system to a third party. In addition, it is extremely difficult to flash the TV system, and user control will be firmly controlled by hardware manufacturers.

The closed regulation of the TV system gives hardware terminals the right to choose. The content presentation on TV screens is strictly regulated by the State Administration of Radio, Film and Television. The right to choose content providers has been transferred from consumers to terminal companies. The launch of APPs currently also needs to be reviewed by terminal companies and licensees. At the same time, the State Administration of Radio, Film and Television will prohibit terminals from providing users with external ways to install APPs, such as USB flash drives and SD cards. Therefore, the power of users to choose content independently is greatly reduced. TV manufacturers actually control the right to choose content and APPs through their control of the operating system, becoming the most important traffic entrance.

User operation habits determine that the homepage EPG has a strong traffic import effect, and the survival space of third-party platforms is relatively small. Users have simple operation requirements for TVs and will not conduct multi-level self-exploration like mobile phones. Therefore, the TV homepage EPG has a strong traffic import effect. It is difficult for third-party application platforms and super APPs to become traffic and application distribution platforms in the TV field. For example, TCL and iQiyi have two cooperation models. The first is to put the iQiyi standard version APP on the application interface, and the other is to launch iQiyi TV+ and integrate iQiyi content in the homepage EPG. The difference in active user rates between the two is more than 3 times.

3. Traffic entrances are concentrated, and terminal value is highlighted

1. TV terminal distribution has outstanding value

The distribution ratio of various mobile Internet application stores is as high as 30~50%. Due to the extremely decentralized development end of the mobile Internet, major mainstream application distribution platforms have a high voice, and the share ratio is as high as 30~50%. Take Xiaomi as an example. With the semi-closed ecosystem created by Xiaomi mobile phones + MIUI system, Xiaomi's distribution capabilities are extremely strong. In July 2014, MIUI's monthly revenue exceeded 100 million for the first time, of which more than 60% came from game distribution. The recharge of "Miracle MU" launched on MIUI on the first day was as high as 26 million yuan. In 2015, MIUI's revenue may reach more than 3 billion yuan.

The entrance of TV Internet traffic is concentrated, and the distribution value is more prominent. With the continuous growth of smart TV sales of mainstream TV manufacturers, smart TV terminals will form several major distribution platforms in the future, with strong voice. We predict that some leading TV manufacturers will obtain a 10-20% share in the video content field, and obtain more than 30% of the value share in TV games, TV education, and various application terminals.

The short-term video advertising revenue sharing model will be implemented first, and the application market such as TV games is waiting to explode. Youku Tudou and iQiyi will both start to launch TV video advertising business this year, and their annual targets are both over 100 million yuan. It is expected that some leading black-and-white TV companies will be able to obtain video advertising revenue sharing of tens of millions in 2014. In terms of TV games, the industry's turnover has entered the explosive point, and large game manufacturers such as Tencent Games and Seasun have begun to enter the TV game development. The future development of the TV game market is worth looking forward to.

2. The value of traffic entrance is not just profit sharing

The value of innovative business and advertising operations is highlighted. Let me share two data first. (1) After two months of trial operation, TCL's global broadcast business (i.e. TV theaters, please refer to CITIC Home Appliances' previous report for detailed introduction of global broadcast business) has reached 300,000 users and daily revenue of more than 30,000 yuan, of which two-thirds are advertising business revenue. We expect that global broadcast will reach 5 million users by the end of 2014, and as the film content continues to improve, the operation capacity will also be greatly improved. In 2016, it is expected to contribute more than 200 million yuan in revenue and tens of millions of yuan in net profit. (2) Skyworth Digital's direct access to Hollywood business has achieved revenue of 30 million yuan in 2014, of which Skyworth's share ratio is more than 60%. We expect its direct access to Hollywood business revenue to reach 60 million yuan in 2015.

The advertising business has a huge market potential. The product form of smart TVs allows TV manufacturers to add advertisements on the upper layer of any video and application display interface. As the hardware platform effect continues to increase, the rapid outbreak of the advertising business will bring considerable revenue to hardware manufacturers. The current market value of the simple form of boot-up advertising alone (for a single leading manufacturer) has reached tens of millions of yuan. Once a TV manufacturer has tens of millions of daily active terminals, its advertising value will be no less than that of a medium-sized TV station.

Data operation - a gold mine for precision marketing. Through the control of the operating system, TV manufacturers can obtain users' viewing information (for the sake of privacy protection, they will only obtain content played through formal channels). On the one hand, by analyzing and summarizing viewing data, accurate ratings reports can be formed to provide guidance for TV stations, advertisers, and content producers. On the other hand, with the continuous collection of user viewing data, a characteristic portrait of each user will be formed, laying the foundation for precision marketing and service provision. At present, Huanwang Technology, a joint venture between TCL, Changhong, and Broadband Capital, and Coocaa, a subsidiary of Skyworth Digital, have begun data operation business.

E-commerce shopping platform - Taobao in the TV field. The TV e-commerce market has a broad space, and it can cooperate with TV content and advertising to create a new shopping scene experience. At present, some leading companies have tried TV shopping business on their smart TVs, and get 1-3% of the sales or sales profit. We believe that as the number of terminals of leading companies increases, their platform effect will continue to improve, and they have the foundation for developing TV e-commerce platforms, with huge long-term potential.

3. Industry trends: Traffic concentration is increasing rapidly, and capital integration is the general trend

(I) Traffic concentration is increasing rapidly, and the leading black-and-white TV companies have a significant voice

In the future, the smart TV sector will see a situation where traffic concentration > smart TV concentration > TV concentration. Currently, the market share of leading black-and-white LCD TVs is around 15%, while the market share of smart TVs is close to 20%, and the share of foreign brands has shrunk significantly. As the penetration rate of smart TVs continues to increase, some low-end brands will gradually withdraw from the market, and the share of foreign brands will continue to decline due to the lack of smart TV content, and the market share of leading brands is expected to continue to increase.

In addition, leading manufacturers have been exploring the field of smart TV user operations for many years, and have an outstanding stock of actual operational terminals. They will be the first to achieve large-scale operations, and it is expected that the traffic concentration in the TV field will far exceed market expectations.

The voice of leading hardware manufacturers in the industry chain will continue to increase. Due to certain barriers to black-and-white electronics manufacturing and distribution, it is difficult for a new brand to achieve sales of more than 3 to 4 million units in a short period of time without several years of accumulation. Mainstream black-and-white electronics manufacturers will quickly reach 20 to 30 million activated terminals within 2-3 years, forming a large number of active users. Not only will it constitute a distribution barrier, but it will also greatly enhance the stickiness of content landing on the platform and further enhance the attractiveness of the platform. Therefore, it is expected that the voice of leading hardware manufacturers in the industry chain will continue to increase.

(II) Strong cooperation between content and hardware, and capital integration are the general trend

The smart TV ecosystem competes on the comprehensive operational capabilities of hardware + content. As the number of users of mainstream black-and-white electronics manufacturers continues to increase, the difference in comprehensive operational capabilities will determine the future competitive landscape of the industry. How to better tap user value and increase ARPU value is the key to maximizing the platform effect. In the new industrial environment, content and hardware will develop in an integrated manner. High-quality content will attract users, realize the value of traffic monetization, and enhance the attractiveness of hardware. Hardware directly faces users, as a channel for content and an entrance to traffic, it is a guarantee for the rapid distribution and landing of content, and can consolidate content stickiness and achieve real control over users.

The cooperation between content providers, Internet companies and hardware terminals at the business level is just the beginning. The rapid maturity of the new model of smart TVs is also inseparable from the promotion of external capital and the power of the Internet. At present, leading hardware manufacturers have established independent subsidiaries or teams to be responsible for smart TV business, and some have already started independent financing. With reference to Xiaomi's investment in iQiyi, we expect that further financing and the introduction of external partners to promote business development will become a new trend in the industry in the future.

There will still be new participants in the industry chain who will extend to hardware terminals based on their own business advantages, hoping to build their own traffic entry platform, which just reflects the core entry status of hardware terminals in TV Internet. However, the next 2-3 years will be a precious time window for the development of TV Internet. Internet giants have no time to explore TV manufacturing. It is the right choice to select leading black-and-white TV companies with scale advantages for in-depth cooperation.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.