Why Fanhattan’s Snazzy Set-Top Will Be DOA

Startup has virtually no chance of winning business with pay TV providers

It may make for a wicked-cool demo, but Fanhattan’s Fan TV set-top box stands approximately zero chance of gaining traction among its intended customer base: cable, satellite and telco TV operators.

Fanhattan founder and CEO Gilles BianRosa, who said the startup has been working on the box for two years, unveiled the device this week at AllThingsD’s D11 conference. He describes the vision for the product in Apple-like terms.

“It is our answer to the future of TV and our vision — to make engaging with your favorite movies and shows simpler and more magical — realized,” he wrote in a blog post. “Fan TV brings your entertainment life together in one place: Live TV, cloud DVR, and streaming.”

But it’s nearly impossible to imagine pay TV providers willing to play ball with the startup, no matter how cool and iPad-like the glinting interface and swipe-enabled touchscreen remote control are. Numerous other players — from Google TV to Boxee — have already tried and failed to break into this space, touting their better mousetraps for advanced TV.

For the Fan TV concept to work, it will require the cooperation of the big multichannel video providers.

However, the biggest cable and satellite TV operators like Comcast, DirecTV, Dish Network and Time Warner Cable have invested billions in their own set-tops, gateways and video-delivery infrastructure — and have demonstrated repeatedly that their strategy is to control their own guide, which they view as a competitive differentiator.

Meanwhile, pay TV providers both large and small would be averse to the prospect of investing capital necessary to retrofit their networks to accommodate the Fan TV box. Fanhattan has not released technical details of the device, but there would inevitably be expensive and time-consuming integration work to make it compatible with pay TV providers’ video formats, conditional access systems, DVRs and guide infrastructure.

In addition, Fanhattan says its set-top will provide easy access to over-the-top video services like Netflix and Amazon — another nonstarter for cable and satellite companies. That’s because in some cases pay TV providers are contractually prohibited by studios from offering such third-party subscription services through an operator-supplied device. And anyway, big cable and satellite providers would be disinclined to promote Internet video services unless they were getting a cut.

Still, some industry observers gushed over the Fan TV demo, pronouncing it a game-changer. “We have had the opportunity to experience Fan TV first-hand and can honestly say it is a transformative experience,” BTIG analyst Rich Greenfield wrote in blog post.

An innovative new approach, though, is not a guarantee of commercial success in the TV set-top business.

TiVo’s history provides a useful case study. Early in its life, TiVo won a significant distribution deal with DirecTV, while cable operators shunned it and eventually developed their own DVRs. DirecTV subsequently did, too, and TiVo began a years-long slide of losing customers.

Now TiVo has reversed its subscriber losses, winning as a marquee customer Virgin Media in the U.K. along with several smaller operators. But it took a decade of R&D and false starts before cable operators embraced the TiVo, and only because the company made its DVRs plug-and-play compatible with cable TV environments.

The first product from Fanhattan, founded in 2010, was a video-discovery app for finding movies and TV shows from multiple sources. The startup is backed by investors including NEA, Redpoint Ventures, BV Capital and Greycroft Partners.

Ultimately, the Fan TV box illustrates the techno-utopian thinking of Silicon Valley: that a more elegantly designed product will win the day. In the TV biz, there are simply too many other barriers for that to become reality.

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