3 Jan 2009

Local manufacturers have done well with exports, but digitization is opening opportunities in the home market as well.

BY CINDY SUI

One of the fastest growing industries in Taiwan is the manufacture of set-top boxes (STBs), which are becoming increasingly popular worldwide aspart of the effort to bridge the gap between TV and the internet. The device, which as the name implies is placed on top of the TV set, allows people to watch videos from the internet on their television, enjoy the ease of surfing the Web from their flat screens, or use the internet to receive higher definition, digitized programs.

The networking devices may use IP connections such as ADSL, cable TV connections, terrestrial connections, or satellite reception. While Taiwanese homes, unlike those in the United States and Europe, have still not embraced the devices, Taiwanese manufacturers are becoming some of the most important makers of the products. In 2007, Taiwanese companies produced 19.5 million STBs, a 51% increase from the previous year. Production value increased 83% year-on-year, reaching US$1.3 billion. That gave Taiwan a 15.6% share of the worldwide market for STBs. Taiwan's rate of growth in the industry is much faster than the worldwide growth rate. Global production value in STBs grew 57% percent in 2007 over the previous year's level. This year, Taiwan's production volume is expected to increase 33% to reach 26 million units, while the production value will likely rise 23% to US$1.6 billion, raising Taiwan's share of the global market to 16.5%.

The figures were released by the Taipei-based Institute for Information Industry's Market Intelligence Center (MIC), which tracks growth in the industry in a project initiated by Taiwan's Ministry of Economic Affairs. "In the past few years, the worldwide demand for STBs has been very high, especially as the United States is promoting them," says Lee Chien-hsun, an industry analyst at MIC. "That's why the growth rate in this industry has been very fast, especially in the last two years."

Most of the STBs Taiwan makes are cable and IP set-top boxes. Taiwan-made cable STBs comprise 23% of the world's total, while its IP set-top boxes account for about half of the world's market. Its terrestrial STBs are not far behind, making up about 17% of global supply, but its satellite STBs take up only 7% of the global total.

Thomas Ho, senior director for Askey Computer Corp., whose parent company is Pegatron (a spinoff company from Asustek), notes that STB production currently contributes a significant proportion of his company's revenues. "We hope to raise it even higher in three to five years," says Ho, citing the great potential for growth in the industry. Worldwide, the industry's production value is expected to grow 13% percent this year. "This industry will definitely grow because digital homes are the trend and to have a digital home, you must have video and audio access from the internet," says Ho. "In the future home, there might be a screen in every room, including the bathroom and kitchen, and there will be set-top boxes also. It could be your home's biggest gateway." Although Taiwan has been making STBs for 30 to 40 years, and digital ones for the past 20, many more companies began entering the market since 2000 due to the hike in worldwide demand. Industry sources estimate that there are currently 10 to 20 companies in Taiwan manufacturing these devices. But the country faces a variety of challenges trying to maintain and build up its position in this field. While the volume of set-top boxes being sold is increasing, profit margins for the Taiwanese manufacturers have never been high. And now prices are dropping sharply, especially as companies in China, with cheaper labor and production cost, enter the market. "We can see that Taiwan's market share risks being taken by China," says Chris Hung, a senior industry analyst for MIC. "China is doing more and more. We've heard Taiwanese companies say they are meeting a lot of competition from China."

Some STB software makers, especially those in the United States, are also increasingly turning to factories across-the-border in Mexico to make the boxes.

In response to the competitive pressure, Taiwanese makers are seeking to do more high-end STBs, such as those for pay TV, says Huang. These tend to include value-added features, such as video recording functions or multi-room viewing capability.

Besides making the hardware, Taiwanese companies are also trying to develop the necessary software, for which they currently rely on supply from overseas. Without that capability, says Batter Lin, product planning manager for Alpha Networks Inc., "the software is in other people's hands and our box must match other people's work." Alpha Networks has been making STBs for the past five years.

OEM relationships

Taiwan mostly manufactures on a contract basis for customers abroad. In the past the technology has been mainly provided by the customer, but for the Taiwan manufacturers to add value to their products, they need to do their own R&D and come up with innovations, industry sources say. Companies like Askey have already started working with clients on the design of the hardware, moving up from an OEM to an ODM relationship. "Since the more you do, the higher your profits, we'll do more and more innovation," says Ho, whose company has 9,000 employees, mostly in China, and also makes other internet-related products. "We hope to eventually design the software."

The fact that STBs have not taken off yet with Taiwanese consumers is also a hindrance to Taiwanese companies' growth. Cost is the main consideration for Taiwanese consumers, Ho says, adding that "it's only a matter of time" before the market develops. Being able to sell in the domestic market would help the manufacturers increase their revenues, he notes. Lin agrees that the industry, both international and domestic, has a lot of potential. "Many telecommunications company have already upgraded their connections to fiber, which enables them to have greater bandwidth, so they are better equipped to use STBs, but the only problem is there's not enough STB usage in homes," Lin said.

He notes that Chunghwa Telecom, which provides IP TV services, already has 600,000 subscribers, and expects to have 200,000 new subscribers next year. Many of the subscribers, however, are currently using TVs with built-in STB functions, Lin notes, eliminating the need for a separate box.

But the government is requiring the domestic cable operators to upgrade from analog to digital systems, which will enable them to offer consumers a much broader choice of programming with higher quality. That means the subscribers will need STBs for their TV sets. The switch began this year, and as part of the process, the operators are being required by the government to provide one free STB to each household.

Consumers will have to buy additional boxes, however, if they have more than one TV set at home and want to access the full range of programming on each set. As a result, domestic demand should increase sharply next year.

Taiwan has several major cable TV operators, who together have 4 to 5 million households as subscribers (one of the highest cable TV penetrations in the world), with an average of 2.5 TV per household. The leading cable operators have been investing heavily over the past few years to upgrade their digital platforms so as to offer a wider range of services. Their industry association, the Cable Broadband Institute in Taiwan (CBIT), has been facilitating the process by defining a set of common standards for the new digital platform.

One of the standards adopted is the latest digital video compression technology, known as Moving Picture Experts Group 4 (MPEG4). Its use will enable Taiwan to leapfrog most of the other markets in the region, which are still deploying the older MPEG2 technology. In order for the public to buy into the concept of digitization, however, the cable operators and digital content providers will have to make sure that the service they provide meets customers' needs and expectations, says Lin. "This is subscriber-based, so it all depends on the programs," he notes.