JPMGoogle TV

Asia Pacific Equity Research
30 May 2010
Google TV Technology
Paradigm shift in TV and telecom; a new era is
+
arriving Telecom
• Why is Google TV? Internet TV has been in the market for over a Technology + Telecom
decade. However, there are significant differences between the JJ Park
AC
technology landscape of late-90s and the current one where state-of-the- (822) 758-5717
art DTV, modems and broadband services are available. As Google is jj.park@jpmorgan.com
tied up with all supply chains, connected TV for the living room should J.P. Morgan Securities (Far East) Ltd, Seoul
accelerate, in our view. We estimate connected TV to account for one- Branch
AC
third of total TV shipments within the next three years. James R. Sullivan, CFA
• Transition to MP3 players from CD in music devices is happening in (65) 6882-2374
james.r.sullivan@jpmorgan.com
the TV market: We saw music device shipments increasing by 200%+
J.P. Morgan Securities Singapore Private
in three years with the arrival of MP3 players (see Figure 9 for details). Limited
We expect Google TV-type of connected TVs to accelerate TV market Marcus Shin
AC
growth since online streaming services could result in: (1) greater (822) 758-5712
convenience for consumers; (2) better monetization for studios; and (3) marcus.j.shin@jpmorgan.com
lower cost for subscription service providers. J.P. Morgan Securities (Far East) Ltd, Seoul
Branch
• A paradigm shift in the TV market: While TV makers in recent years
have focused on features such as LED, FHD, 240Hz, and 3D, internet Liang-Chun Lin
(886-2) 2725 9863
connectivity is now emerging as new key features. Since it requires high liang.c.lin@jpmorgan.com
performance and large-size screens, demand for high-definition (FHD)
J.P. Morgan Securities (Taiwan) Limited.
picture quality with bigger screens will accelerate, in our view.
Yoshiharu Izumi
• Beneficiaries in the technology space: It would clearly benefit major (81-3) 6736-8637
panel makers (i.e. LGD) given increasing demand for high-end panels, yoshiharu.izumi@jpmorgan.com
key component makers (such as LED and LCD driver ICs), and high- JPMorgan Securities Japan Co., Ltd.
end TV makers since it would be a differentiation factor. Also, it
Cynthia Chou
requires more memory (albeit its contribution is very small), high power (886-2) 2725-9898
CPUs and the inclusion of network interface capabilities yielding cynthia.hy.chou@jpmorgan.com
strong growth potential for semiconductor. J.P. Morgan Securities (Taiwan) Limited.
• Impact on telcos: A broader adoption of video streaming onto large Rahul Chadha
screen TVs should further encourage high-speed broadband adoption. (91-22) 6157-3261
Hence, continuing proliferation of alternative platforms is potentially rahul.z.chadha@jpmorgan.com
negative for pay incumbent TV content aggregators such as Starhub J.P. Morgan India Private Limited
and Austar, while it could be positive for challengers such as SK
Broadband and China Telecom. Google TV supply chain
Logitech
Connected TV supply chain: companies with potential impact
Positive Negative
AtomChip
TV brands LED makers Semiconductor TV Brands Intel
SEC Epistar Intel White box makers Androidbased
LGE Formosa Epitaxy Driver IC makers Panel makers Google platform GoogleTV
BestBuy DishNetworkDVR WebmeetsTV
Sony SEMCO Novatek Second tier panel makers Flash10.1
Adobe
Panels makers LG Innotek Himax Telecom
LGD Everlight DRAM makers Starhub
Chimei-Innolux Telecom Austar
SK Broadband SonyInternetTV
China Telecom
Source: Company data.
Source: J.P. Morgan.
See page 19 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
JJ Park Asia Pacific Equity Research
(822) 758-5717 30 May 2010
jj.park@jpmorgan.com
Table of Contents
Connecting internet with family room ....................................3
Why connected TV? ....................................................................................................3
Growth opportunity in connected TVs.........................................................................4
Nothing new but the technology landscape has improved ...........................................5
Paradigm shift in TV.................................................................6
Connected TVs = MP3 players ....................................................................................7
Opportunity in semiconductor .....................................................................................8
Google TVs ...............................................................................9
What is Google TV? ....................................................................................................9
Possible attraction for Google....................................................................................11
Related supply chain ..................................................................................................12
Potential opportunity for SEC and LGE ....................................................................13
Growth potential for Taiwan TFT/LED supply chain................................................13
Advantages/ Barriers for Google TV .........................................................................14
Specifications.............................................................................................................15
The impact to TV industry .....................................................17
Sector thesis ...............................................................................................................17
Investment thesis........................................................................................................17
The impact on the telecom Industry .....................................18
Sector thesis ...............................................................................................................18
Investment thesis........................................................................................................18
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(822) 758-5717 30 May 2010
Connecting internet with family room

We expect incremental adoption We believe web access on the television is finally ready for prime time, with retail
in connected TVs sales of connected TV set to rise by a factor of six by 2013 after failing to live up to
its promise for more than a dozen years.
Figure 1: Connected TV market trends

Unit in thousands
120,000 35%
33%
100,000 29% 30%
80,000 26% 25%
60,000 20%
40,000 17% 15%
20,000 10%
0 7% 5%
2009 2010 2011 2012 2013
Latam China MEA
AP Japan Eastern Europe
Western Europe North America % of total TVs (RHS)
Source: DisplaySearch, company data, J.P. Morgan estimates.
Definition of connected TV (IETV/IPTV)

IETV is a TV capable to connect IETV is defined as a set that has the capability to connect to the internet either with a
to the internet either with a wired wired link or wireless, and provides sufficient system resources to support thin-client
link or wireless, while IPTV applications such as Yahoo Connected TV widgets or the Adobe Flash Platform for
refers to the use of a carrier-
based managed IP broadband
digital home.
network IPTV refers to the use of a carrier-based managed IP broadband network to deliver
television and video content services to an end user’s TV set via a set-top-box (STB),
with picture quality at least equivalent to existing pay-TV and free-to-air services.
The difference between IETV and IPTV

Not everyone considers advanced television services offered by telcos (IPTV) to be
synonymous with internet TV, even though both use internet protocol. One
possibility for this is that telcos and their vendors want to market themselves as
having a distinctly different TV service from what satellite TV, cable TV and other
network operators offer.
IETV can offer open content in Still a notable difference between “IPTV” and “IETV” is that unlike the internet,
internet but IPTVs’ contents are IPTV is internet protocol content (in the form of packets) provided by network
provided by network operators
operators (and others) over closed networks. (The internet is a gigantic open
network). Another difference between IETV and IPTV is that when viewing IETV,
such as a video on YouTube, the service provider has no control over those actual
videos, unlike a service provider who provides the IPTV service through which you
watch the Discovery and History channels.
Why connected TV?

1. Too much information to channel surf
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Content remains king, but it now goes beyond the hundreds of general linear
broadcast channels, cultural and genre-niche channels, premium channels,
voluminous library of on demand titles and HD programming. It is the ability to get
the content you want, when you want it and where you want it—i.e. TV Everywhere.
2. Ability to cross over platforms from internet to TV

There is an enormous quantity of free, internet-based video content available from
YouTube, OTT TV sites such as Hulu.com, and user-generated content from
community sites such as Facebook and Twitter that are quickly becoming an integral
incremental source of video entertainment. IPTV providers are offering the ability to
access content residing on the PC, such as photos, home video, music files, and view
and/or listen to them on the TV screen.
3. Picture-in-picture and across multiple screens

AT&T, with its 2009 Masters golf broadcast, provided three-screen coverage (TV,
PC and mobile phone). U-verse TV customers had interactive features such as an up-
to-date leader-board, player scorecards, stats and bios, news updates, tournament
photos, video archives and a course map of the Augusta National Golf Club.
4. Internet activity through the use of TV widgets

The ability to get snippets of internet information such as weather, news feeds,
horoscopes, yellow pages, remote management for DVR services and, most recently,
access to social networking sites from the TV screen.
5. Providers’ expansion of the customer service experience

Providing remote or in-house technical support for not only TV and broadband
services but also for devices within home with the goal of keeping the network up
and running, and the customer happy.
Growth opportunity in connected TVs

Since the FPTV market has been Since the flat-panel TV market has been driven by declining prices, TV makers are
driven by declining prices, TV looking at ways to differentiate their TV line-up from competition. Adding new
makers are looking at ways to
differentiate their TV line-up
features helps not only with differentiation but also increases the possibility of
charging a premium for a step-up model. While TV makers in recent years have
focused on features like LED, FHD, and 240Hz, internet connectivity now is
emerging as a new key feature.
Potential win-win for everyone

Beyond the differentiation factor, the addition of internet capabilities to TV sets by
leading TV OEMs represents a unique opportunity for these companies to finally
have direct access, and thus additional potential revenue channels, to their end
customers.
We believe IETV will emerge as On the consumer side, we believe IETV will emerge as one of the key features that
one of the key features that consumers will demand in coming years. With strong interest among both TV buyers
consumers will demand in
coming years
and sellers, IETVs are entering the market in droves. Already in 2009, more than 85
IETV models were offered at the retail level in the US alone.
China is believed to witness a Connected TV (IETV) in China

huge increase in IETV According to Ovid Consulting (AVC), China is believed to witness a significant
increase in the IETV market volume with more than 6 million unit shipments
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expected in 2010. At present domestic brands dominate the IETV market in China,
with leading six brands commanding around 95% of the segment share.
Recent May holiday sales statistics indicate internet functionality becoming a key
feature of high-end TV models with more than 73% of the new models equipped
with networking capabilities. May holiday IETV unit share increased to 13% from
9% during the January holiday, in spite of aggressive price promotions by foreign
players for LED LCD TVs. Figure 4 shows the proportion of IETVs shipped by
different brands during May holiday sales, further validating our argument.
Figure 2: IETV—Unit share and value share

20% 20%
19%
17%
16%
15% 15% 15%
14% 14%
13%
12% 12%
10%
9%
5%
Jan Holiday 10W14 10W15 10W16 10W17 May Sales
Sales Holiday
Rev enue Share Unit Share
Source: Ovid Consulting (AVC).
Figure 3: China IETV market share, by brand Figure 4: Brand wise IETV unit proportion during May Holiday sales
Others, 5%
Haier, 8% 100%
Changhong, 80%
TCL, 34% 60%
10%
40%
20% 51%
Sky w orth, 24% 21% 16% 14% 18%
0%
12% ier
e
ka
g
L
rth
n
ns
TC
Ha
n
ho
o
se
Ko
yw
g
Hi
an
Sk
Konka, 13% Hisense, 18%

Ch
iTV Non-iTV
Source: Ovid Consulting (AVC). Source: Ovid Consulting (AVC).
Nothing new but the technology landscape has improved

Even though IETV has been in The start of the likely IETV boom comes 12 years after Microsoft making a major
the market over the decade, impact on the technology world with its purchase of WebTV Networks. WebTV,
internet infrastructure has now called MSN TV, promised to bring internet access to the very big installed base
improved significantly
of TVs. Some people might be wondering if IETV is simply a case of déjà vu all over
again. However, there are significant differences between the technology landscape
of the late-90s and the state-of-the-art digital TVs (DTV), modems and broadband
services of 2009.
One major difference is the fact that VDSL and fiber-to-the-home are increasingly
being adopted by consumers, offering download speeds of 30Mbit/sec and faster—
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three orders of magnitude faster than the V.34 modem speeds supported by the first-
generation WebTV unit.
Hardware has evolved

Change from CRT to FPTV has Another change involves the increasing prevalence of FPTVs, in contrast to CRT sets
positively impacted IETV that were universal during late-1990s. A whole new world has opened up for
development consumers with the arrival of FPTVs, their digital capabilities and increasing
amounts of digital content served from non-traditional sources such as Vudu, Roku
and TiVo, as well as video-on-demand (VOD) services. This is a dramatic
significance from 10 years ago, when television was a mode of entertainment that
was primarily available through either broadcast cable or a satellite service provider
or from rented videos.
Paradigm shift in TV
Consumers’ willingness to move beyond traditional mode of content distribution
Increasing momentum of new As mentioned earlier, recent roll-out of services such as Vodu, Roku and Netflix
services such as Netflix has have showed consumers’ willingness to experiment with non-traditional modes of
showed consumers’ willingness content distribution. Netflix Inc (covered by J.P Morgan’s US internet analyst Imran
to experiment with non-
traditional mode of content
Khan), which was started as a predominantly DVD-by-mail service, has emerged as
distribution the world’s largest subscription service streaming movies and TV episodes over the
internet and delivering DVDs by mail.
With a present subscriber base of 14.0 million, the company is believed to end FY10
with a subscriber count of 17.1 million. The company’s aggressive growth over the
past few quarters can be credited to its unique monthly rental plans such as
$8.99/month plan which allows subscribers to unlimited instant online-streaming of
TV episodes and movies directly on their TVs and computers, in addition to DVDs
by mail service.
Figure 5: Netflix' subscriber growth

Subs in millions
20 50%
41% 42%
15 40%40%
35%
28% 31% 30%
10 25% 26% 25% 26%
21% 23%
20%
5 10%
0 0%
Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10E Q3-10E Q4-10E
End-of-Quarter Subscribers Y/Y Subscriber Grow th
Source: Company reports, J.P. Morgan estimates.
Netflix saw the percentage of subscribers who actively stream increasing from 48%
in 4Q09 to 55% in 1Q10. The company reported a churn rate of 3.8% in 1Q10, down
from 3.9% in 4Q09, which can be attributed to increased subscriber engagement with
online streaming and blue-ray content.
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Figure 6: Average monthly churn declines for the third consecutive quarter
4.6% 4.5%
4.4%
4.4% 4.2% 4.2% 4.2% 4.2%
4.2% 3.9%
3.9%
4.0%
3.8%
3.8%
3.6%
3.4%
Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09E Q3-09 Q4-09 Q1-10
Av erage monthly churn
Source: Company reports, J.P. Morgan estimates.
J.P. Morgan expects online Online streaming will be the growth driver
streaming would be the growth J.P Morgan’s US-based internet analyst Imran Khan believes DVD-by-mail model
driver for Netflix in the medium-
to continue adding customers for Netflix in the near future. However, online
to long-run
streaming would be the growth driver in the medium- to long-run, mainly due to:
• Greater convenience for consumers. Online streaming allows users

immediate access to the content they wish to see, eliminating the wait for
the DVD to arrive. It also helps to reduce sampling costs with users being
granted liberty to switch choices instantly, based on their preferences.
• Better monetization for studios. A streaming offering allows studios to
monetize some content that be economical to monetize if the up-front costs
of manufacturing and packaging a DVD were involved. Additionally, a
mass-market streaming option may leave room for studios to price-
discriminate by continuing to offer DVDs with more special features aimed
at hardcore fans of a movie, while monetizing a broader customer base
through a rental approach.
• Lower cost for Netflix. Shipping and warehouse costs are a substantial
portion of Netflix’ expense structure, and each DVD shipped costs in excess
of 80c, a number likely to go up with further postage price hikes. On the
other hand, bandwidth costs are likely to continue declining from what is
already a much lower number (~5c for a standard-definition movie). Hence,
the company might like to provide incentives to users to opt for the
streaming solution over getting DVDs by mail.
With the present content distribution tie-ups with NBC Universal, MGM, 20th
Century Fox, CBS/Paramount, ABC-Disney, Warner Brothers, Lions Gate
Entertainment and New Line Cinemaz and a vast group of devices supporting
Netflix (currently includes Xbox 360, Sony’s PS3, Roku’s digital player, Nintendo
Wii, blue-ray players from Samsung, LGE and Insignia, Vizio TVs and Apple iPad
tablet), Netflix has already taken a remarkable lead from other peers in the category.
Connected TVs = MP3 players

Online streaming service should Netflix stated that the music CD market peaked in 2000 and down by 60% since then
rapidly replace the DVD market and expects the DVD market to be down by more than 50%. This implies that online
streaming services will rapidly replace the DVD market which requires new devices
(i.e. connected TVs) such as MP3 players in the music industry.
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According to a recent study by “The Diffusion Group (TDG)”, nearly half of the
users using the “Watch Instantly” feature view streaming videos on their TVs. The
study further revealed that nearly one-third of broad-band enabled Netflix users
streamed videos exclusively on their PCs, 8% streamed exclusively on TVs while
24% of the users used both TVs and PCs as a medium for online streaming.
Figure 7: Viewing medium wise proportion of Netflix' "Watch Instantly" service
Familiar but do not Use on both TVs

use, 24% and PCs, 24%
Heard of but not Use serv ice on

familiar, 10% TVs, 8%
Use serv ice on
PCs, 31%
Nev er heard of it,
3%
Source: TDG.com.
With TV being a popular online- With TV being a popular online-streaming medium among present subscribers and
streaming medium and sound sound projected subscriber growth, there may be possibilities for Netflix to partner
projected subscriber growth,
Netflix may partner with telcos in
with telcos in providing streaming services. Historically, telcos have suffered in
providing streaming service delivering high quality content offering to woo consumers. With Netflix providing
the streaming content and UI and telcos providing the pipe, it could be a win-win
situation for both of them. We believe percentage of subscribers opting for online-
streaming mode to rise further, given Netflix’s drive for licensing more content
online and expanding the base of devices having internet capabilities.
For semiconductor, connected Opportunity in semiconductor

TV offers a new growth area in
the midst of still-positive but
From a semiconductor perspective, connected TV offers a new growth area in the
slowing revenue expansion midst of still positive but slowing revenue expansion opportunities in the TV space.
opportunities in the TV space From 2001 to 2006, the DTV semiconductor market was an area of key investor
interest due to the increasing share of TVs enabled with a digital tuner/decoder.
Interest intensified as the display industry shifted rapidly away from CRT and toward
FP TV and away from standard definition (SD) to high definition (HD) models.
However, during the past three years, as retail and panel prices have eroded due to a
combination resulting from the breakneck pace of technology development and the
cutthroat OEM price wars in the TV retail arena, the growth potential for
semiconductor revenue has dwindled to the sub-10% five-year compound annual
growth rate (CAGR) range.
The only television Connected TV requires more system memory, the use of advanced decoder ICs with
semiconductor segment with higher power CPUs—or multiple CPUs—and the inclusion of network interface
stronger growth potential will be
LED backlights, in our view
capabilities, yielding strong growth potential for semiconductor suppliers. The only
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(822) 758-5717 30 May 2010
television semiconductor segment with stronger growth potential will be LED

backlights, in our view.
Connected TV usually adopts higher-density DRAM compared with conventional

TV as it requires large amount of buffer memory. As such, we estimate that IETV
will equip approximately 512MB~1GB per box.
DRAM demand relative to connected TV penetration rate

Despite higher DRAM density Despite higher DRAM density requirement, however, connected TVs’ contribution
requirement, connected TVs’ to DRAM demand will likely remain marginal given limited DRAM density per box.
contribution to DRAM demand
will likely remain marginal given
As per our scenario analysis, DRAM demand from connected TV will represent
limited DRAM density per box around 1% of total, assuming: (1) 15% penetration rate for connected TV in 2011;
and (2) average DRAM density per box of 768MB in 2011.
Figure 8: DRAM demand from IETV based on 2011 estimates

2.0%
As % of DRAM demand
1.8%
1.5% 1.5%
1.2%
1.0% 0.9%
0.5% 0.6%
0.3%
0.0%
5% 10% 15% 20% 25% 30%
Internet TV penentration rate
Source: Company data, J.P. Morgan estimates.
Google TVs
In this report, we try to identify key beneficiaries in supply chains and implications
for the TV market as we believe Google-TV type of connected TV will accelerate the
TV replacement cycle since it requires high picture quality (full HD TV) and large-
size screens to search program based on text on the screen.
What is Google TV?

At the recent developer conference, Google I/O, in San Francisco, Google announced
teaming up with Intel and Sony to develop a possible software platform for IP
addressable set-top boxes (STBs) and HDTVs. The project, named “Google TV”,
would be using Intel’s Atom chips running on the Android operating system.
Google TV, as Intel puts it, would Google TV, as Intel puts it, would help in creating an experience called “Smart TV”,
help in creating an experience coined as an integration of internet access with advanced television guides, personal
called “Smart TV”
content libraries and search.goo
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Figure 9: Google TV
Source: www.drijournal.com
Google’s strategy for Google TV

Google, with a possible motive to penetrate into the living room, announced its plan
to roll out its products in two ways:
• Google TV via standalone STBs. Google has gone forward rolling on

Logitech International to develop a companion box and dedicated keyboard
based remote control. This “companion box” would connect to TV via a
HDMI and will be capable of connecting to the network via both wireless
and wired connections. According to Logitech officials, the STB might also
possess the functionality of connecting to a TV mounted webcam, thus
allowing users to use Google TV for making video calls.
• Google TV software directly integrated with TVs and blue-ray players.
Sony is expected to launch a line of internet enabled TVs this fall, integrated
with Google TV functionality. However, the company has declined to
comment on the pricing details or the premium it would be seeking, as
compared to traditional retail models presently available in the market.
What differentiates “Google TV” from existing peers in the market?

The present consumer electronics market has been over-flooded with devices capable
of accessing web content on television sets. Intel, in 2008, announced working on the
development of a new system on chip (SoC) which aimed at bringing internet right
inside the living room. Yahoo went a step forward, rolling out Yahoo Widgets, based
on Intel’s SoC, which provided weather forecasts and sports scores at the bottom of
TV screens. At present most major TV brands allow limited access to web content on
TVs (see Table 1). This includes playing streaming videos, viewing photos and
playing online games.
Other players such as Netflix have been on a constant look-out for possible
collaboration with STB makers and game console manufactures to provide access to
their online movie rental database. The synergy between Roku and Netflix has
resulted in the launch of a Netflix player, Roku HD-XR. D-Link also plans to make a
mark in internet TV industry with the launch of its Boxee Box.
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Table 1: Present IETV offerings by various brands

Features Samsung LGE Sony Panasonic
Yahoo Widgets √ √ Select Yahoo Widgets Available Standard news and weather
services (Based on Vierra Cast)
YouTube √ √ √ √
Amazon-on-demand √ - √ √
Netflix - √ √ -
Internet-enabled models LNB650 series LH50 series KDL-W5100 series TC-PG10 series
LNB750 series PS80 series KDL-Z5100 series TC-PV10 series
UNB7000 series KDL-XBR9 series TC-P54Z1
UNB8000 series KDL-XBR10 series
UNB8500 series
PNB650 series
PNB850 series
PNB860 series
Source: Company data, cnet.com and netflix.com.
Google aims at luring users with Possible attraction for Google

a new GUI on their TV screens
Google, which aims at luring users with a new GUI on their TV screens, would not
only allow them to perform basic web functions like search and playing streaming
videos for YouTube, Netflix, Amazon-on-demand and Hulu.com, but also additional
functionalities like running search across TV guides, downloadable web applications,
games and access to social networking sites. Google, impressed by the success of its
open source model for handset industry, will follow the same for its TV business and
hopes to release Google TV SDK and web APIs for TV soon after the product’s
launch. As per industry experts and analysts, it is expected to offer a standardized
platform, which would be more open to developers round the world.
At this year’s Google I/O, Google At this year’s Google I/O, Google has gone forwarded challenging web developers to
has gone forwarded challenging start developing applications designed specifically for the TV experience. Google TV
web developers to start will also witness the integration of the Chrome browser with its Android OS and
developing applications
designed specifically for the TV
would offer fewer restrictions than the current peers. The company has already
experience formed strategic alliances with partners such as Jinnni.com and Rovi to develop
applications for its product. Jinni.com app would provide for semantic search,
personalized recommendation and social features across all sources of premium
content available to user. Rovi, on the other hand, specializes in guide applications.
Google TV: A potential threat to Apple TV

Two major differences between There have been two major differences between Google’s approach and Apple’s
Google’s approach and Apple’s existing product:
existing product: Android OS
• Android’s open nature: The sole idea behind rolling a software platform
and Apple’s unwillingness to
adapt to various resolutions based on Android OS is to woo developers around the world and help them
create widgets for TV sets. This approach has been a success in the past and
might deliver interesting results yet again. Apple, in contrast, follows a
closed strategy for its Apple TV, with only the company’s developers
enjoying the liberty to modify its software. This approach might affect
Apple, with Google expected to roll out more number of widgets, based on
support from developers worldwide.
• Apple’s unwillingness to adapt to various resolutions: Apple has been
struggling long in scaling up applications for various sizes. Apple’s strategy
is based on delivering great looking applications, aimed at providing a
handsome experience to the end-user. With TV sets showing a vast variation
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in screen sizes, scaling up Apple’s apps would pose issues for its
developers, distorting the aesthetic value of its products. Google’s Android
OS, with already a marked presence in handset space, has been successful in
coping up with different screen sizes. Developers shouldn’t face many
problems in scaling up applications for “Google TV”.
Related supply chain

Google
Google is providing Android OS Google, in the past, has gone forward with providing advertisements on some of the
along with TV ads satellite and small cable networks, through its product named Google TV Ads.
However, it hasn’t delivered any material revenues till date. With the rolling out of
IP-addressable STBs and TVs capable of delivering a two-way feedback, Google
would be better equipped to track consumers viewing commercial advertisements.
This would help Google in providing a better per-second sampling of TV ads to
advertisers, who could, in turn, use it to target their audience better and optimize on
the costs and time-slots. Both Google and advertisers stand to benefit from this, as
Google can command higher revenue for targeted advertisements.
Sony
Sony manufactures TV set for Google TV seems to be a logical transition for Sony from its previous efforts to
Google TV provide limited web content access on its Bravia series of TVs (IP addressable STB,
DMX-NV1; Amazon video-on-demand). With the direct integration of Google’s
software with Sony’s TV models and blue-ray players, it would lend a differentiating
factor to Sony, which has suffered 18% Q/Q decline in revenue from its TV business,
while its peers (Samsung Electronics and LG Electronics) in this category have
reported a 13% and 20% Q/Q growth, respectively. Sony’s subsidiary Sony Pictures
might allow users to browse its online movie database, thus driving Sony’s top-line
even further.
Intel
Intel can diversify its business Intel has been looking on areas such as handsets and consumer electronics as
territories potential markets to enhance its chip revenues. Given Google’s aggressive plans to
penetrate into consumer’s living room, Google TV might serve the purpose for Intel.
Adobe
Adobe’s Flash Player is directly The Google I/O conference also saw the announcement of direct integration of
integrated with Google Chrome Adobe’s Flash Player 10.1 with the Google Chrome browser. This blend would the
browser
render end-users of Google TV access to more than 75% of the online videos/web
games based on Flash, rich internet applications and an array of social networking
content. Flash Player 10.1 is expected to support hardware-accelerated video
playback and would deliver smooth, HD (1080p) quality videos on Google TV
devices. According to Adobe, living room penetration would be a huge step forward
for Flash with TV representing a new screen for developers and content providers to
develop rich interactive content.
Best Buy
Google has officially announced Google has officially announced Best Buy as the first retailer for Google TV
Best Buy as the first retailer for products. The products are supposed to be available for sale in various Best Buy
Google TV products
stores nationwide this fall. This strategy is different from the one adopted for Nexus
One phone (via Nexus One web store), since the latter’s online sales momentum
failed to impress.
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Dish Network
At its launch, Google plans to At its launch, Google plans to optimize its gadgets only for HD-DVR receivers
optimize its gadgets only for HD- provided by the DISH Network. Google TV products, when connected to existing
DVR receivers provided by DISH DISH Network’s HD-DVRs via HDMI, would allow users to perform content search
Network
across DISH Network, internet as well as their DVRs. Users can also hyperlink web
content back to multi-channel TV. Though only DISH Network subscribers stand to
enjoy this handsome experience in the initial phase, we believe Google might
optimize its software platform for other TV networks also, in the near future.
Figure 10: Google TV supply chain

Logitech
Keyboard based RC
Standalone STB
Atom Chip
Intel
Android based
Google platform
Google TV Best Buy Dish Network DVR Web meets TV
Direct Integration
Flash 10.1
Adobe
Sony Internet TV
Source: Company data.
Potential opportunity for SEC and LGE

We view that SEC and LGE will Even tough SEC and LGE have not disclosed their product launch plans for Google
likely attempt to leverage their TV, they also actively open to potential growth opportunity. On top of it, we view
unique positions as top-notched
handset makers as well as
that SEC and LGE will likely attempt to leverage their unique positions as: (1) top-
leading TV brands notched handset makers, and (2) leading TV brands.
SEC/LGE will likely try to As Google TV is operated with Android OS, any content in the handsets with
produce positive synergy Android OS could be used interchangeably with Google TV. Hence, SEC/LGE will
between Android based
smatphones and Google TV
likely try to produce positive synergy between Android based smatphones and
Google TV in order to effectively expand their presence in the emerging Google TV
market.
Growth potential for Taiwan TFT/LED supply chain

Taiwan TFT/LED-related According to Display Research, AUO and Chimei Innolux together would provide
companies could also benefit around 25% of Sony’s LCD TV panel demand. Hence, we expect Taiwanese TFT
from Google TVs by
participating in the Sony panel
makers to benefit from Sony’s new opportunity in Google TVs. Meanwhile, Novatek
supply chain could subsequently participate in the Google TV theme by continuously supplying
driver ICs to its major customers—AUO and Chimei Innolux. In addition, given the
LED-backlight feature of Google TVs, we expect Taiwan LED makers such as
Epistar and Formosa Epitaxy would also benefit accordingly.
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Table 3: Sensitivity analysis—Upside potential on sales for Taiwan TFT supply chain
Upside from Upside potential on sales

shipments AUO Chimei Innolux Novatek
10% 1.4% 0.1% 0.7%
20% 2.8% 0.3% 1.3%
Sony TV
upside
30% 4.2% 0.4% 2.0%
40% 5.6% 0.6% 2.7%
50% 7.0% 0.7% 3.3%
Source: J.P. Morgan estimates.
Advantages/ Barriers for Google TV

Google TV’s key advantages Advantages
include standardizing the OS, • Standardizing the OS: As mentioned earlier, the IP-based STB market is
increased contribution from
outside developers, increasing
already overcrowded, with different companies rolling out STBs based on
interest towards Android OS different platforms. With Google Android a possible standardized OS for
the future, developers would have an advantage rolling out apps based on a
common platform, thus increasing their usability for consumers having TVs
of different brands.
• Increased contribution from outside developers: Google has announced

to open-source its Google TV SDK, like other Android-based OS in the
past. Google would heavily be banking on contributions from enthusiastic
developers around the world, to make its project successful. This move, if
successful, should provide a lead to Google as compared to other peers in
the category, which still follow closed the source-code approach.
• Increasing interest towards Android OS: Sweden-based People of Lava

recently announced world’s first interactive TV named Scandinavia. It is
based on Android v1.5 Cupcake and is supposed to hit the markets by
September later this year. Consumer Electronics Show 2010 saw Western
MediaBridge showcasing an Android-based STB, which had ThinkFree
Office viewer, web browser, 1080p video quality and a keyboard-based
remote control as peripheral. This clearly shows enhanced interest of other
companies towards IETVs and IP-STBs based on Android.
Google TV’s key barriers are its Barriers

business model based on TV ad • Google TV’s business model based on TV ad revenues: Google
revenues and slow replacement
cycle
conducts majority of its online advertising business through bidding
service. It is assumed to follow the suite for its TV ad business. Even if
Google agrees upon revenue sharing with major cable content distributors,
bidding service might drive TV ads revenue down allowing advertisers to
search for cheaper time-slots. Secondly, majority of cable content
distributors won’t be too optimistic about a pact with Google, as this
would result in lost control over their ads revenue.
• Slow replacement cycle: STBs have seen a rather slow replacement cycle
in the past. Google TV, demanding installation of new Logitech's
STBs/Sony IETVs, might result in a long lead time to mark a significant
presence in the installed base.
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Specifications
In this section, we try to compare the specifications of some currently
present/announced IP-based STBs and IETVs, which might pose a competition to
Google TV.
Apple TV
This 160 GB version DVR offering from Apple requires iTunes and later running on
a Mac/Window PC. Capable of connecting to the internet via both wireless and wired
mode, the device comes loaded with built-in features such as playing content from
ITunes Store, YouTube, Flickr and MobileMe directly onto HDTVs.
Roku HD-XR
This latest Netflix ready DVR from Roku allows the user to connect to some free
channels such as Facebook photos, Flickr photos and Mediafly and premium
channels such as Netflix, Amazon video on demand and MLB.com via its Roku
Channel Store. Like Apple TV, the device can access the web content both through
Wi-Fi and cable mode.
Figure 11: Apple TV Figure 12: Roku’s HD-XR
Source: www.Apple.com. Source: www.Roku.com.
Boxee Box
This newly announced device form D-Link would not only allow users to watch
personal shows and movies directly from their hard disks but also allow them to
access web services such as Pandora, Flickr, Twitter and Facebook on their TV sets.
The company hasn’t disclosed the release date for the product but it is expected to be
rolled out with a fully functional QWERTY keyboard, at the back of its remote
control.
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Figure 13: D-Link’s Boxee Box Figure 14: Boxee Box’s full QWERTY keyboard
Source: www.dlink.com. Source: www..Boxee.tv.
Scandinavia
Sweden-based People of Lava recently announced the launch of world’s first
interactive internet TV called Scandinavia. The product would be backlit LED TV
and available in 42”, 47” and 55” sizes. Capable of connecting to web via ethernet
and wireless USB dongle, the device would come loaded with Android v1.5 Cupcake
OS (upgradeable through internet) and a wireless keyboard with pointer/mouse and
supports applications such as Google Maps, YouTube, and Internet Browser. The
company also plans to launch an app store containing free downloadable apps like
Facebook, Twitter, and many more.
With such a line of exciting functionalities, Scandinavia may directly compete with
Google TV-based Sony IETVs. With such a strong presence of Android v1.5 in the
installed base (higher than 34%), developers might prioritize the development of
widgets on this version, which could be later scaled up for Lava’s TV.
Figure 15: Scandinavia TV Figure 16: Version wise Android’s presence (installed base)
Android 1.1,
0.1%
Android 1.5,
Android 2.1,
34.1%
37.2%
Android 2.0.1,
0.4%
Android 2.0, Android 1.6,
0.2% 28.0%
Source: www.peopleoflava.com. Source: Android.com. Data collected during two weeks ending May 17, 2010.
Table 4: Price of available/expected IP-addressable STBs and IETVs

Price Release date
Apple TV (STB) $229.00 Available
Roku HD-XR (STB) $129.99 Available
Boxee Box (STB) Not Announced; expected around $200 Not Announced
Scandinavia TV Not Announced Expected around September
Sony Internet TV (Google TV) Not Announced Expected in the fall of 2010
Source: Company websites, Bloomberg.
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The impact to TV industry

Sector thesis
As connected TVs become As connected TVs become popular, there should be increasing demand for high
popular, there should be definition (HD) picture quality with large-size screens to see lots of text-based
increasing demand for HD image. Internet browsing capabilities, marketed as a differentiator in the initial phase,
picture quality with large-size
screens to see lots of text-based
would soon emerge as an essential feature for premium models. However, we
image believe, sizes less than 40/42” won’t be too attractive as screen size would be too
small to support large amount of text.
As content has always been the Content has always been the critical point for the end-consumer, and with internet
critical point for the end- opening up doors to seamless plethora of online streaming and information content,
consumer, we surely see we surely see connected TVs soon making in-roads into the living room. With
connected TVs soon making in-
roads into the living room
leading brands promising new features such as 3D and picture-in-picture, bringing
web to TV would surely be a handsome experience for end-users.
Transition to MP3 players from CD is happening in the TV market

We saw music device (CD players + MP3 players) shipments increasing to 300+
million units from 138 million units within three years. We expect Google TV-type
of connected TVs to accelerate TV shipments given that they provide lots of
advantages to consumers and relevant supply chains such as content providers and
subscription service providers.
Figure 17: CD players vs. MP3 players
Unit in millions
350 316 305

300 280
250 228
198 192
200 158
138 120 108 122 119
150 117 114
100
50 21
0
2004 2005 2006 2007 2008
Total CD play ers shipments Total MP3 shipments Total CD+MP3 shipments
Source: Company data, J.P. Morgan estimates.
Investment thesis
Connected TV would require As mentioned earlier, connected TV would require more system memory, the use of
more system memory, yielding advanced decoder ICs with higher power CPUs—or multiple CPUs—and the
strong growth potential for
semiconductor suppliers such
inclusion of network interface capabilities, yielding strong growth potential for
as LED BLU semiconductor suppliers. With a projected robust growth in the future, we access
network-connected TVs as a differentiator in the near-term and a game changer in
the long run. The television semiconductor segment with stronger growth potential
will be LED backlights, in our view.
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The impact on the telecom Industry

Sector thesis
The broader adoption of video The atomization of content through open platforms such as internet or closed
streaming onto large screen platforms such as iTunes, hulu.com, or Google TV by definition erode the economic
televisions should further power of content aggregators. Incumbent Pay TV operators are the single largest
encourage high-speed
broadband adoption, driving
video content aggregators; hence the most exposed.
further investments into FTTx
services The key question is any new platform’s ability to either manage or organize content
in a way that enhances user experience. Google’s largest success may lie not in
obtaining direct content rights (the iTunes model) but in organizing the vast pool of
video content available on the public internet.
Ultimately, broader adoption of video streaming onto large screen televisions should
further encourage high-speed broadband adoption. This will likely drive further
investments into FTTx services. This could be an interesting driver for a step-up to
higher-speed packages in markets such as China, Singapore, Australia, and Taiwan.
Arguably, Korea and Japan have already made this transition, so this development
should provide less revenue upside in these markets.
Investment thesis
Continuing proliferation of Continuing proliferation of alternate content platforms are potentially negative for
alternate content platforms are incumbent pay TV content aggregators such as Starhub and Austar. It is also
potentially negative for incrementally negative for incumbents if it creates competition in broadband; a key
incumbent pay TV content
aggregators
example would be Chunghwa Telecom. This trend is arguably most positive for
challengers such as SK Broadband and potentially for China Telecom.
Table 5: Present and upcoming IPTV providers

North America Asia Pacific
United States China Taiwan
AT&T China Telecom (CT) ChungHwa Telecom
Verizon China Unicom Philippines
Canada Japan Liberty Tel
SaskTel NTT Plara PLDT
MTS BB Cable Corp. India
KDDI BSNL
Europe Hong Kong MTNL
Belgacom PCCW Airtel
British Telecom CTI-HKBN
Deutsche Telekom Korea
France Telecom KT
Swisscom LG-Dacom
Telecom Italia SKT
SK Broadband
Australia Singapore
TransAct SingTel
TPG Starhub
Source: IDC and J.P. Morgan.
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Connecting internet with family room

Figure 1: Connected TV market trends

Source: DisplaySearch, company data, J.P. Morgan estimates.

Definition of connected TV (IETV/IPTV)

The difference between IETV and IPTV

Why connected TV?

2. Ability to cross over platforms from internet to TV

3. Picture-in-picture and across multiple screens

4. Internet activity through the use of TV widgets

5. Providers’ expansion of the customer service experience

Growth opportunity in connected TVs

Potential win-win for everyone

China is believed to witness a Connected TV (IETV) in China

Figure 2: IETV—Unit share and value share

Rev enue Share Unit Share

Source: Ovid Consulting (AVC).

Konka, 13% Hisense, 18%

Source: Ovid Consulting (AVC). Source: Ovid Consulting (AVC).

Nothing new but the technology landscape has improved

Hardware has evolved

Figure 5: Netflix' subscriber growth

End-of-Quarter Subscribers Y/Y Subscriber Grow th

Source: Company reports, J.P. Morgan estimates.

Av erage monthly churn

Source: Company reports, J.P. Morgan estimates.

• Greater convenience for consumers. Online streaming allows users

Connected TVs = MP3 players

Figure 7: Viewing medium wise proportion of Netflix' "Watch Instantly" service

Familiar but do not Use on both TVs

Heard of but not Use serv ice on

For semiconductor, connected Opportunity in semiconductor

television semiconductor segment with stronger growth potential will be LED

Connected TV usually adopts higher-density DRAM compared with conventional

DRAM demand relative to connected TV penetration rate

Figure 8: DRAM demand from IETV based on 2011 estimates

Internet TV penentration rate

Source: Company data, J.P. Morgan estimates.

What is Google TV?

Google’s strategy for Google TV

• Google TV via standalone STBs. Google has gone forward rolling on

What differentiates “Google TV” from existing peers in the market?

Table 1: Present IETV offerings by various brands

Google aims at luring users with Possible attraction for Google

Google TV: A potential threat to Apple TV

Related supply chain

Figure 10: Google TV supply chain

Source: Company data.

Potential opportunity for SEC and LGE

Growth potential for Taiwan TFT/LED supply chain

Upside from Upside potential on sales

Advantages/ Barriers for Google TV

• Increased contribution from outside developers: Google has announced

• Increasing interest towards Android OS: Sweden-based People of Lava

Google TV’s key barriers are its Barriers

Figure 11: Apple TV Figure 12: Roku’s HD-XR

Source: www.Apple.com. Source: www.Roku.com.

Source: www.dlink.com. Source: www..Boxee.tv.

Table 4: Price of available/expected IP-addressable STBs and IETVs

The impact to TV industry

Transition to MP3 players from CD is happening in the TV market

350 316 305