What Display Daily Thinks: There is a subscriber/ad-supported TV sales model, and while there is not enough data to handicap the opportunities, we know enough to assess strategic imperatives if a TV manufacturer wanted to create a new model for getting TVs into the hands of consumers, one that does not require them to pay a one-time upfront fee at a big box store.
Can we treat a TV purchase the same way we treat a smartphone purchase? There may be no better way for the future of the industry.
Telly TV’s Home Invasion Strategy
Telly TV is offering a 55-inch smart TV free of charge: the TV displays ads and collects extensive data on users’ viewing habits and activities. Using a second screen as an ad screen, and leveraging its data collection, Telly TV then monetizes the viewers for ad sales.
Telly TV is not alone in tracking its users as many smart TVs and streaming services track viewers using automatic content recognition technology. Telly TV’s just being upfront about its data collection and, more ominous, data sharing, and is giving the TV for free to calm the natural concerns.
| Tracking Method | Description |
|---|---|
| Audio and Video Content | Telly TV collects information about the audio and video content users watch, including the channels and duration of viewing. |
| Motion Tracking | The built-in microphone camera tracks motion and can be used for video calling, fitness tracking, and gaming. |
| Queries and Settings | Telly TV tracks user queries and settings, including preferences, applications, and purchases made on the device. |
| Viewing and Activities | The TV monitors the time, frequency, and duration of users’ viewing sessions and other activities performed on the TV. |
| Physical Presence | Telly TV collects data on the physical presence of people using the TV, potentially capturing information on multiple users. |
| Cultural and Social | Telly gathers cultural and social identifiers, such as users’ interests or affiliations, for example, sports teams or hobbies. |
| Data Sharing Opt-Out | If users choose to opt out of data sharing, Telly suspends services and may charge for the supposedly free TV. |
The Supposed ROI of Free TVs
Telly TV claims that its free TV is valued at over $1,000, but that is obviously not the case in the real world. So, we are going to assume that there is an average value to a TV manufacturer of every TV set sold. The actual number doesn’t have to be one hundred percent accurate because, once you understand the math, it’s easy to adjust to arrive at meaningful ROI figures for a free TV model.
The average life of a TV set is about 5 years, let’s take that as a number, again, assuming that it is an easily adjustable metric in our calculations. And let’s assume the average value of a TV set buyer to a TV manufacturer is about $300. That’s how much each purchaser of a TV set contributes to the manufacturers revenues, averaged out over all models, distribution channels, and regions.
So, the lifetime value of a TV purchaser is $300 if the TV is sold at retail.
Now, let’s assume that the customer doesn’t pay for the TV: the CLV of a customer is equal to the average value of the customer x lifespan of customer or the length of time the customer is contributing revenue through subscriptions or ads. In this case, we can arrive at a number that says for a customer to have a CLV of $300 over five years, the would have to be about $5 a month in subscription or ad revenues going back to the manufacturer.
But, that’s an oversimplification of what is, in essence, a SaaS (software as a service) business model because that is what happens when you give away TV sets, you become a software and services business.
To effectively assess the success of a SaaS business, you have a different measure of key metrics that reflect financial health and growth:
- Monthly Recurring Revenue (MRR): MRR is the primary metric for tracking the monthly revenue generated by a SaaS business. It represents the total recurring revenue received from all customers each month. Calculating MRR allows you to monitor revenue trends, forecast future earnings, and evaluate the impact of new customer acquisitions, upsells, churn, and contractions.
- Net New MRR: Net New MRR measures the growth of a SaaS business by considering the combined impact of new customer acquisitions and upsells, as well as the loss of revenue due to churn and contractions. It provides insights into the net revenue gained after accounting for setbacks caused by customer cancellations or downgrades.
- Net Revenue Retention (NRR): NRR focuses on customer retention efforts and their impact on monthly revenue. It considers starting MRR, expansion MRR, churn MRR, and contraction MRR. NRR indicates how much the monthly recurring revenue has grown within a specific period, independent of new customer acquisitions. The NRR rate, expressed as a percentage, provides a measure of customer retention effectiveness.
- SaaS Quick Ratio: The SaaS Quick Ratio determines a SaaS business’s ability to offset revenue losses caused by churn and contractions through new customer acquisitions and upsells. By comparing new MRR and expansion MRR to churn MRR and contraction MRR, this metric assesses the growth potential and ability to recover revenue setbacks.
- Average Revenue Per User (ARPU): ARPU measures the average revenue generated from each customer. By dividing the total monthly recurring revenue by the number of customers, you can evaluate the effectiveness of your pricing strategy and identify customer segments with higher revenue potential.
- Gross Income: Gross Income reveals the profitability of a SaaS business by deducting the cost of goods sold (COGS) from the total revenue. Determining COGS for a SaaS business includes expenses such as hosting fees, utility expenses, employee salaries, and license fees for SaaS products used for business operations. Those are the typical software considerations to which you have to add the actual bill of materials (BOM) data for the TV.
| Metric | Formula |
|---|---|
| Monthly Recurring Revenue (MRR) | Sum of all monthly recurring revenue (MRR) from active customers. |
| Net New MRR | (New MRR + Expansion MRR) – (Churn MRR + Contraction MRR) |
| Net Revenue Retention (NRR) | ((Starting MRR + Expansion MRR) – (Churn MRR + Contraction MRR)) / Starting MRR |
| NRR Rate | ((Starting MRR + Expansion MRR) – (Churn MRR + Contraction MRR)) / Starting MRR |
| SaaS Quick Ratio | (New MRR + Expansion MRR) / (Churn MRR + Contraction MRR) |
| Average Revenue Per User (ARPU) | Total monthly recurring revenue / Number of active customers |
| Gross Income | Total revenue – Real Cost of Goods Sold (COGS) |
So, here we have another assumption, that a monthly subscription could be equated to an average ad revenue per user per month figure. It really doesn’t matter that much how you recognize the revenue, as long as you recognize that any free TV model needs to account for these metrics. And, yes, it can get even more complicated and more involved once you start factoring in every tracking mechanism and the individual contributions of different market segments to your MRRs.
Skip the Theories of Subscription Hardware
So far we have a lot of free TV theoretical possibilities which are based on a model that is not quite the same as the smartphone model, the only model that comes close to being useful as a reference here, but which may look like a SaaS model. Well, maybe the smartphone model is a lot like the SaaS model, too.
Sure, there are people who buy their phones, but most people don’t. They get locked into multi-year contracts with a service provider and the cost of the smartphone is lost in the monthly payment for the essentials: phone and data plans. On top of that, apps, websites, Google, phone vendors, and even a squeaky clean Apple, track and target users for further monetization opportunities. So, strictly speaking, the smartphone business model is subscriptions, lease to buy payments, and behavioral tracking for advertising dollars and each is a contributing market segment to a total MRR.
The good news for the smartphone vendor and the manufacturer behind the Telly TV is that they are going to get their money no matter what. They have kind of taken themselves out of the equation by selling to the service providers. That makes total sense for smartphones which have to be locked in to a cellular network. It may not make as much sense when the TV is plugging into any WiFi signal.
Which, ultimately, leads me to the belief that somewhere in all this strategizing about free TVs is a possible blueprint for future TV sales. And, one simple reason for that is that smartphones cost a lot more than the average TV and last a lot less longer. Realistically, we endow smartphones with a lot of mystical powers because we can carry them around, but connected TVs are just as powerful, have a superior central role to play in the home, and deliver better bang for your buck.
The movement towards more under the glass technologies undoudtedly has an impact on TVs as much as smartphones. The natural feeling that tracking technology is insidious may be right but it is not being stopped to curtailed. It is a fact of our digital existence. So, putting aside the theories and philosophies, there is a real revenue and profitability model for free TVs, one that is akin to smartphones.
There’s money being left on the table by display manufacturers because the traditional big box stores and retail distribution of TVs is not the driver of future sales. Manufacturers have to look at the broader implications of a world of connected devices, and the way people view and experience content across devices, to see that they need to be a part of the solution and not just the standout component on the BOM. If, as BOE’s chairman said at the company’s recent global partner conference, there is a merging of the internet of things (IoT) and displays, then there is a need to see that a display cannot exist in isolation, that it is the application and not just the glass.
If AI fulfills a fraction of its promise, it will make the TV the face of every digital assistant in every home. That makes it very possible for TV manufacturers to extend the capabilities of their own products and to play a bigger, more direct role in the end users’ life by seeding their devices and reaping the benefits of subscriptions, services, and yes, even ads.
