Smart TVs are failing to connect

September 6, 2012: 10:45 AM ET

Consoles and set top boxes are proving much easier for consumers to use than even the most advanced new TVs.

By Peter Suciu

FORTUNE -- In an effort to drive television sales, manufacturers have supercharged the number of features and types of connectivity they offer. By virtue of high-speed processors, built-in cameras and Internet connections, the stupid box is quickly turning into anything but. Unfortunately that hasn't had much of an impact on revenues or stemmed a devastating slide in sales.

It's not that people aren't making use of such features. A recent NPD Group DisplaySearch report, for instance, showed that 18% of consumers in 14 countries are already accessing online video -- as opposed to traditional broadcast TV -- from TV sets. The hang up, it seems, is a lack of a single unifying standard to deliver online content to televisions.

While many TVs now offer the same functionality and connectivity that previously only existed in such set top boxes as Apple (AAPL) TV or Roku, most consumers simply aren't connecting this way. Jupiter Research predicts that by 2017 some 650 million users worldwide could be connected online via a TV, including through set top boxes. So where's the disconnect?

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The blame, according to analysts, falls on TV makers. "The user experience is not good because the interfaces are not easy to navigate on the sets," says Riddah Patel, NPD DisplaySearch research director of Consumer Insights. This is made worse because each TV manufacturer has its own user interface conventions. Imagine if each computer you used had an entirely different operating system, one of eight or 10 types, rather than simply Mac or Windows.

The result is that many consumers, even those with smart TVs, are more comfortable using an external device to navigate online video on TV. "We're seeing that many people are already connecting online through a set top box including a game console like the Xbox 360 or a Blu-ray player," says Tom Adams, director and principal analyst at IHS Screen Digest. "There is a misconception in the industry that people have set top box burnout."

Set top boxes have other benefits over smart TVs. For one, most larger screen HDTV sets can cost upwards to $2,000 and have an eight to 10 year life cycle, while a set top box costs far less to replace. "The TV stays in the house for eight years or more, and it can't keep pace with the changing technology of the Internet," says Colin Dixon, senior partner of The Diffusion Group, who noted in a recent study that this fragmentation could result in $1 billion in lost ad revenue alone. Advertisers are struggling to decide which smart TV platforms to support.

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Taking a page from Google's (GOOG) Android marketplace and Apple's iTunes, TV makers have started offering apps that run on televisions. But this has caused problems as well. "Every manufacturer has a different application platform, and this makes it extremely challenging for anyone who is writing the apps, which means they have to write for six or seven different platforms," says Dixon. As a result, new apps simply haven't been forthcoming.

Yet another factor is that the same companies that are including connectivity to make the TVs "smart" are adding the functionality in other devices. "There is such a great opportunity for those who want to connect their TV to a box," adds Adams. "There is just less resistance to the idea of having lots of boxes connected to a TV, and we're seeing that the boxes are measured in the millions now after being microscopic for years."

That has lead some to ask if smart TVs actually are. Rob Enderle, principal analyst for the Enderle Group, argues that manufacturers are still too limited in what they offer. Consumers, he says, are better served by low-cost set top boxes that can be replaced every few years. "This is a vastly better way to address this problem, because it is typically far easier and cheaper to replace the box when it is obsolete than the TV," he says. "The problem with Smart TVs is they aren't smart, not by a long shot. They are more of an oxymoron."

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