The Long View: 4K - The Race Is On

Transcription

1 Claudio Aspesi (Senior Analyst) Todd Juenger (Senior Analyst) Chris Lane (Senior Analyst) Alberto Moel, ScD (Senior Analyst) Mark C. Newman (Senior Analyst) Paul de Sa, D.Phil. (Senior Analyst) The Long View: 4K - The Race Is On Please see the Disclosure Appendix for the ratings and price targets of the companies covered in this report. Highlights In June 2013 we published a call (The Long View: 4K... or a Marathon?) summarizing the state of the art on the development of the next generation TV display format. In this call, we leverage the complementary perspectives of six SCB industry coverage teams across three continents and spanning 4K's entire value chain namely: Asian IT Hardware (Moel), Global Memory & Consumer Electronics (Newman), US Media (Juenger), European Media (Aspesi), US Telecommunications (de Sa) and Asian Telecommunications (Lane). We believe 4K is happening, as manufacturers ramp up production. Widespread adoption (30%+) will probably still require 3-5 years and penetration may slow once it reaches 30% because 4K appeals most to consumers buying large TV sets. Content production and distribution should follow reasonably quickly, once a critical mass of TV sets is reached, but there will likely be little effort until then by pay-tv companies to promote aggressively the new standard. In this call we size up the opportunity for the companies in our coverage. 4K, also known as 4Kx2K or UHD, is a format for the next level of video resolution. 4K resolves at 3840 x 2160 pixels, compared to 720p HD format at 1280 x 720 pixels or 1080p HD format at 1920 x 1080 pixels and SD format at 640 x 480 pixels. Physical limitations that may restrict adoption of 4K. To get the full benefit of an increase in resolution, consumers will need to either sit closer to their TV screens or purchase a larger screen. For 4K, the ideal viewing distance for a TV size of 42'' will require consumers to sit 83cm (33'') away and could be too close for comfort. For the average household viewing distance of 2.7m, consumers will need a 4K TV that is 135'' in size that is if cost were not an issue. Manufacturing Shipments are ahead of schedule in 2014 and now accelerating has seen material shipment growth well above early forecasts, which assumed around 10 million units by 2016 but 2014 should already see over 12 million units shipped. Shipment growth prospects are quite attractive, despite underperformance in 2013 where actual shipments of 1.6 million were much lower than the forecasted volume of 2-4 million units. - China is forecasted to lead the demand for 4K TVs, with over 24 million 4K TFT-LCD TV unit shipments in 2016, driven by brands willing to push pricing more aggressively and consumer benefits from 4K being able to render Chinese characters better. North America comes second with about 9 million 4K TV unit shipment in 2016, largely driven by demand skewed towards large screens. Penetration (as percentage of total TV shipments) in China is also expected to be the highest among all regions and is forecast to increase from 2.5% in 2013 to 41% in 2016, while global penetration in 2016 is expected to be half of that, at around 20%. - We believe the inflection point for 4K TV for mass adoption is near. Current 4K penetration rate of 9% lags far behind levels implied by the price premium and we expect growth to accelerate and reach double-digit levels soon, as holiday season promotions bring down TV prices to $1,000 levels. See Disclosure Appendix of this report for important disclosures and analyst certifications.

2 Manufacturing We see increased competition, falling ASPs and falling margins. - Samsung is a strong #1 in the global 4K TV market with 35% share, but the 2 nd -4 th players are Chinese with a collective 30% share. Samsung has done especially well with 4K TV market share jumping from only 6.5% in 4Q13 to 35% in 2Q14 as it introduced mass-market products to China for the first time in 1H14. Chinese influence is limited to China with not even one of the Chinese setmakers making it to the top 5 in the US. We worry that price competition globally may get even worse with Chinese players also increasingly looking overseas as a way to overcome sluggish demand and tough competition in domestic markets. - We expect Samsung and LGE to take charge and accelerate market growth by: 1) creating new demand in developed markets with premium products, but also 2) introducing mass-market models in China that narrow the price and quality gap with cheaper Chinese fare. The 4K TV market has been predominantly Chinese with 71% of demand from China in 2014E, but going forth we expect much of the growth to be driven by North America and West Europe where 4K adoption is still low. - The majority of 4K TVs will be sold at increasingly declining ASPs, putting pressure on margins and profitability. We see that 4K ASPs have dropped faster than our original forecast, which is likely driving the improved shipment performance. This decline has been steeper than the Full HD set ASPs, with 2014 ASP premiums below 1.5x for under 60" TVs. Furthermore, these ASP premiums are expected to rapidly converge towards 1.0x, making 4K TVs not a premium high margin offering but the basic "table stakes" offering for large TVs. Only the 60"+ segment is expected to maintain a positive (but declining) premium over the next couple of years. - In the end, it's déjà vu all over again roasting the goose of the golden eggs. It is pretty obvious that (as usual in this business) ASPs have fallen far faster than manufacturing costs. In 1Q13, a 4K panel had on average an 80 percentage point margin premium to its less-exalted Full HD equivalent, which meant that the profit margins on 4K panels were outstanding, even if shipments were small. However, by 4Q14, that premium had on average fallen to zero, and for some of the more widely available panel sizes (40" and 42", and 55") the pricing premium was actually below the manufacturing premium, indicating that for these sizes, selling 4K panels was less profitable now than traditional Full HD panels. Only the very largest 4K panel sizes, over 60", have any incremental margin contribution. Content production and broadcasting A "wait and see" attitude prevails on both sides of the Atlantic though "future proofing" is a little further along. - US Media: Other than a few proof-of-concept experiments with sports programming 1, nobody is making any serious investment behind 4K across content owners and networks. We expect it will be a long time before any of the US media companies invest substantially behind 4K, especially since 4K TV's can up-convert standard HD content to some degree. We believe there is a palpable sense of "upgrade fatigue" in the US consumer market, after the fizzled 3D experiment. Comments like this from Fox Sports SVP Jerry Steinberg confirm our conviction on this point: We spent millions going to HD and never got an extra dime from advertisers. It seems today [that 4K] is a monumental task with not a lot of return. With no meaningful content available (yet), we believe by far the most common reason for US consumers to purchase a 4K set (rather than a regular HD) will be as price points continue to fall, HD sets lose distribution, and there is effectively no other choice offered for a consumer who is buying a large screen set. 1 Examples include: Comcast shot the Sochi Olympics in 4k, Fox Sports shoots NFL games in 4k (primarily for the benefit of the "zoom in" feature needed for replay reviews, Netflix shot season 2 of House of Cards in 4k and has committed to shoot all future original programming in 4k. 2

3 - European Media: Sky appear the most advanced having tested two live sports events in 4K, while other European broadcasters are "aware" and not near any phase of adoption, though there is evidence of ensuring production equipment is 4K-ready. Broadcasters do not shoot or commission anything in 4K format and have not directly "future proofed" any content, as everything could technically be "upconverted" and, even if 4K-level channels were to become prevalent, they would still be able to broadcast HD content on them (much like SD content is broadcast on HD channels at times). All cite lack of 4K TV adoption as the reason the development of 4K isn't further along. Upstream, production companies cite the lack of demand from broadcasters. Delivery In the U.S, Cable operators (not Telecoms) have the upper hand, while Asia is more likely to benefit due to aggressive deployment of FTTH - Even with advances in technology, such as the H.265 standard, the delivery of 4K content requires twice the bandwidth of regular HD programming, regardless of delivery method (satellite, cable, telco and IPTV) - US Telecommunications: For conventional pay-tv platforms: cable, satellite and Verizon's FiOS have an advantage over DSL-based IPTV providers (AT&T's U-verse TV and CenturyLinks's PrismTV), which are more capacity constrained. We see Century Link as the only major U.S. pay-tv provider facing difficulties if delivery of large volumes of 4K content becomes a competitive necessity. For IPbased content, 4K needs speeds of at least 15Mbps, which will limit most U.S. households in their choice of broadband providers to cable and Verizon FiOS. While all providers do upgrade offerings to meet secular demands, given the expected deployment trajectory for 4K, it is unlikely to have much incremental impact on Cable's or Telco's capex plans. - Asian Telecommunications: In Asia, we see rapid deployment of FTTH in Japan, Korea and more importantly China. In fact China will have over 140 million FTTH subscribers by 2020 and will likely play a key role in the ultimate success or failure of 4K. Investment Conclusion Several industries converge around new technology standards in Television: consumer goods manufacturers, technology suppliers, distribution companies (Telecom, Cable and Satellite) and media production. The last important launch was HD (High Definition), which came to most markets 8 to 10 years ago. Manufacturers and technology companies of course hope that a new adoption cycle will start soon on the back of the launch of 4K, while distribution and content production companies tend to take a less aggressive view (in part because they have shorter lead times to be ready to exploit the new opportunity). We believe 4K is happening, as manufacturers ramp up production. Adoption has been higher in Asia than in the Western markets and widespread adoption (30%+) will probably still require 3-5 years and penetration may slow penetration may slow once it reaches 30% because 4K appeals only to consumers buying large TV sets. Content production and distribution should follow reasonably quickly, once a critical mass of TV sets is reached, but there will likely be little effort until then by pay-tv companies to promote aggressively the new standard. Manufacturers 2014 has seen material shipment growth well above early forecasts, which assumed around 10 million units by In reality, 2014 should already see over 12 million units shipped, and shipment growth prospects are quite attractive. We believe the inflection point for 4K TV for mass adoption is near. Current 4K penetration rate of 9% lags far behind levels implied by the price premium and we expect growth to 3

4 accelerate and reach double-digit levels soon, as holiday season promotions bring down TV prices to $1,000 levels. However, the majority of 4K TVs will be sold at increasingly declining ASPs, putting pressure on margins and profitability. Content Production and Broadcasting In US Media, nobody is doing anything other than a few proof-of-concept experiments, across content owners and networks. We expect it will be a long time before any of the US media companies invest substantially behind 4K, especially since 4K TV's can up-convert standard HD content to some degree. We believe there is a palpable sense of "upgrade fatigue" in the US consumer market. In Europe, little is done, and what is done is mostly by production companies. European broadcasters' disposition towards 4K seems pretty aligned with that shown by US counterparts. Historically, Sky has been the most aggressive innovator in Europe, and we would expect them to play a similar role in this case as well. However, we have not yet seen much effort even from them. Delivery If 4K becomes a source of differentiation for traditional pay-tv providers, it will benefit DIRECTV (and hence AT&T if its proposed acquisition proceeds in 2015), cable, and Verizon who are better suited to distribute 4K content than other telcos with pay-tv offerings (primarily CenturyLink s IPTV-over-DSL PrismTV). If 4K becomes an incremental driver of demand for fixed broadband with higher speeds, that will benefit cable and Verizon over other broadband providers whose infrastructure is currently less well suited (and will require significant capex) to deliver IP streams with the necessary throughput and quality of service. In Asia operators are more likely to have the upper hand and China, given the huge investments in FTTH will play a key role in the success or failure of the standard. China Telecom is already the world's largest IPTV operator adoption of the standard by them could be a key catalyst for reaching critical mass. 4

5 Details What is 4K? 4K, also known as 4Kx2K, is a format for the next level of video resolution. 4K resolves at 3840 x 2160 pixels with a total of 8.3 megapixels. As a quick reminder, video resolution formats are characterized by their pixel densities ie, "how many horizontal pixels by how many vertical pixels" can be fit on a screen or by their resolution "how many millions of pixels are present". Also worth remembering is that resolution and screen sizes are two separate concepts: the same resolution can be viewed on different-sized screens whereas the screen size changes, it is the size of the pixel being displayed that changes, not the resolution. Today's HD format comes in two main levels of quality: 720p (1280 x 720p, resolving 0.9 MP) or 1080i and 1080p (1920 x 1080, resolving 2.1 MP). These can be contrasted with SD video (640 x 480, resolving 0.3 MP). For the same sized pixel, these formats can be visually depicted as in Exhibit 1. Please refer to the Appendix for an in-depth overview of 4K definition along with the other formats. Exhibit 1 Current HD vs. Ultra HD A Graphical Explanation SD HD HD 720p 1080p 4K 8K Source: Bernstein analysis. Physical limitations that may restrict adoption of 4K To get the full benefit of an increase in resolution, consumers will need to either sit closer to their TV screens or purchase a larger screen. For 4K, the ideal viewing distance for a popular TV size of 42'' will require consumers to sit 83cm (33'') and could be too close for comfort. Horizontal viewing angle for the human eye restricts how close one can get to the screen without moving the head up and down. Industry standards suggest 20-40º, which for a 42'' screen suggests 128cm (50'') viewing distance. Consumers could alternatively choose an ideal size of TV for their home. For the average household viewing distance of 2.7 metres, it would require a 4K TV that is 135'' in size that is if cost were not an issue (Exhibit 2). Please refer to the Appendix for an in-depth overview of the trade-off between resolution, visual distance and screen size. 5

6 Exhibit 2 We calculate the both "Optimal" viewing distance and "Ideal" viewing distance for typical TV screen sizes and find 4K will require consumers to sit 83cm (33'') from a 42'' TV or buy a much larger TV, ideally 135'' in size Screen size 22'' 32'' 42'' 55'' 65'' 85'' 98'' 135'' Optimal 67cm 98cm 128cm 168cm 198cm 259cm 299cm 411cm SD 240cm 349cm 458cm 600cm 709cm 928cm 1070cm 1474cm 720p HD 131cm 190cm 250cm 327cm 386cm 505cm 583cm 803cm 1080p HD 87cm 127cm 166cm 218cm 258cm 337cm 388cm 535cm 4K 44cm 63cm 83cm 109cm 129cm 168cm 194cm 268cm 8K 22cm 32cm 42cm 55cm 64cm 84cm 97cm 134cm Screen size 22'' 32'' 42'' 55'' 65'' 85'' 98'' 135'' Optimal 26.4'' 38.4'' 50.4'' 66.0'' 78.0'' 102.0'' 117.6'' 162.0'' SD 94.5'' 137.5'' 180.5'' 236.3'' 279.3'' 365.3'' 421.1'' 580.1'' 720p HD 51.5'' 74.9'' 98.3'' 128.7'' 152.2'' 199.0'' 229.4'' 316.0'' 1080p HD 34.3'' 49.9'' 65.5'' 85.8'' 101.4'' 132.6'' 152.9'' 210.7'' 4K 17.2'' 25.0'' 32.8'' 42.9'' 50.7'' 66.3'' 76.5'' 105.3'' 8K 8.6'' 12.5'' 16.4'' 21.5'' 25.4'' 33.2'' 38.2'' 52.7'' Source: Bernstein analysis. 4k TV penetration and shipments Ahead of schedule and now accelerating Early estimates of 4K TFT-LCD shipments and penetration were rather optimistic. For example forecasted volume of 4K TFT-LCD TV panels from panel makers in early 2013 was 2-4 million units in 2013, but actual shipments were only 1.6 million, below the low-end of the forecasted range. However, 2014 has seen material shipment growth well above early forecasts, which assumed around 10 million units by In reality, 2014 should already see over 12 million units shipped, and shipment growth prospects are quite attractive (Exhibit 3). The majority of this volume will ship in China where brands are willing to push pricing more aggressively and 4K is widely used as a marketing ploy to get consumers to upgrade. On the other hand, there are real advantages with 4K displays for rendering Chinese characters on screen, so some of this hype could be justified. China is forecast to lead in demand for 4K TVs, with over 24 million 4K TFT-LCD TV unit shipments in North America comes second with about 9 million 4K TV unit shipment in 2016, largely driven by demand skewed towards large screens. 6

7 Exhibit should already see over 12 million units shipped, and shipment growth prospects are quite attractive Units (000s) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, K TV Shipment by Region E 2015E 2016E 2017E 2018E JP NA WE EE China APAC LA MEA 4K Penetration 35% 30% 25% 20% 15% 10% 5% 0% Source: DisplaySearch and Bernstein analysis. Note: Total TV shipment when calculating 4K penetration includes TFT-LCD, PDP and OLED but excludes CRT and RP DLP 4K TV set shipment penetration (as percentage of total TV shipments) in China is also expected to be the highest among all regions and is forecast to increase from 2.5% in 2013 to 41% in 2016, while global penetration in 2016 is expected to be half of that, at around 20% (Exhibit 4). The penetration in North America, Western Europe, and Japan should be in line with global averages, and below that in other regions. Size-wise, it's very clear that the 4K resolution will prevail mainly in large size TV sets because of both the premium positioning and the fact that human eyes won't be able to extract the benefits of 4K resolution from smaller screens. While overall, 4K TV sets are forecast to account for 20% of total TFT-LCD TV sales in 2016, we expect that more than 80% of 50"+ TVs shipped will be 4K TVs (Exhibit 5). In other words, for large TVs the 4K designation becomes the "table stakes" standard as the shift to 4K is well underway. Exhibit 4 4K TV penetration is expected to be highest in China forecasted for 41% in 2016, while globally, it is forecasted to be around 20% Exhibit 5 While overall, 4K TV sets are forecast to account for 20% of total TFT-LCD TV sales in 2016, we expect that more than 80% of 50"+ TVs shipped will be 4K TVs 60% 50% 40% 30% 20% 10% 0% 4K TV Penetration Forecast by Region E 2015E 2016E 2017E 2018E JP NA WE China WW EE Source: DisplaySearch and Bernstein analysis. Note: Penetration of Asia Pacific, Latin America, and Middle East & Africa are below the global average and not plotted in the exhibit 120% 100% 80% 60% 40% 20% 0% 4K TV Penetration Forecast by Screen Size E 2015E 2016E 2017E 2018E 50"-54" 55"-59" 60"+ All Size Source: DisplaySearch and Bernstein analysis. Note: Penetration of Asia Pacific, Latin America, and Middle East & Africa are below the global average and not plotted in the exhibit 7

8 The LED Example: Inflection point for mass 4K adoption lies ahead Historically speaking, mass adoption of a new TV technology takes places when price premium to the incumbent technology falls below 30%. As we see in Exhibit 6 and Exhibit 7, LED TV penetration in 4Q10 reached 30% when price premium to CCFL TFT-LCD TVs was 30%. Adoption surged thereafter, crossing 50% less than a year later, only to stand close to 100% at the current moment. Exhibit 6 Price premium of LED TVs has quickly faded away, boosting transition, while 3D premium is still high for a large portion of the market 160% 140% 120% 100% 80% 60% 40% 20% 0% 147% 4Q09 Price Premium Trend (32" LCD) 1Q10 105% 2Q10 68% 100% 104% 109% 98% 95% 88% 66% 40% 44% 55% 29% 21% 20% 28% 11% 20% 17% 5% 3% 1% 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 30% 25% 20% 15% 10% 5% 0% 22% 20% 19% 18% 4Q09 Price Premium Trend (55" LCD) 1Q10 2Q10 3Q10 25% 24% 26% 22% 14% 12% 13% 11% 4Q10 1Q11 2Q11 3Q11 18% 15% 12% 11%11% 9% 6% 7% 5% 3% 1% 1% 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 LED Premium 3D Premium LED Premium 3D Premium Source: DisplaySearch and Bernstein analysis. Exhibit 7 LED penetration has reached c.90%, almost completely replacing the previous CCFL LCD TVs. In contrast, penetration of 3D TVs has been very sluggish and remains under 20% of total LCD shipment currently Shipment Penetration Trend 100% 87.9% 81.0% 80% 72.3% 64.6% 60% 55.7% 51.4% 47.8% 43.3% 40% 30.1% 35.6% 20% 17.9% 22.6% 17.5% 13.9% 14.1% 19.9% 19.0% 4.0% 7.6% 8.8% 11.0% 3.0% 3.8% 0% 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 LED 3D Source: DisplaySearch and Bernstein analysis. 8

9 As Exhibit 9 shows, 4K price premium in 3Q14 was 39% for 55 TVs, and should fall below 27% by yearend. Based on this, we believe the inflection point for 4K TV mass adoption is near. The current 4K penetration rate of 9% lags far behind levels implied by the price premium (see Exhibit 11), and we expect growth to accelerate and reach double-digit levels soon, as holiday season promotions bring down TV prices to $1,000 levels (Exhibit 10). Exhibit 8 We expect 4K TV penetration to cross 10% this year Exhibit 9 as price premium to HD TV falls below 30% 30% 4K TV Penetration 26% 29% 250% 229% 4K Price Premium 25% 200% 20% 20% 150% 121% 15% 13% 100% 90% 84% 78% 87% 10% 5% 0% 6% 0% 1% E 2015E 2016E 2017E 2018E 50% 0% 39% 26% 24% 27% 17%9% 9% 8% 4% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E Source: DisplaySearch and Bernstein Analysis Source: DisplaySearch and Bernstein Analysis Exhibit 10 Price premium for a 55 4K TV is rapidly coming down and should almost be non-existent by 2016 $9,000 8,336 8,955 8,899 55" 4K TV Premium 800% $8, % $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 457% 455% 479% 1Q12 2Q12 3Q12 296% 4Q12 5,146 3, % 1Q13 Source: DisplaySearch and Bernstein Analysis 2,628 2,187 2,0571,8751,7391, % 84% 90% 78% 87% 2Q13 3Q13 4Q13 1Q14 2Q14 1,032 1,0901, % 27% 26% 24% 17% 9% 9% 8% 4% 3Q14 4Q14E 1Q15E 2Q15E 3Q15E % premium (RHS) 4K TV px HD TV px 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 600% 500% 400% 300% 200% 100% 0% 9

10 Exhibit 11 4K TV penetration to cross 10% level in 1Q15 as 4K TV prices near $1,000 level and cross In 2H15 30% 25% Global 4K TV Penetration 20.8% 28.8% 27.0% 24.3% 23.5% 23.9% 20% 15% 10% 5% 0% 1.0% 1.4% 2.0% 0.0% 0.3% 4.3% 6.4% 10.6% 11.1% 9.0% 17.0% 17.6% 15.6% 13.8% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 Source: DisplaySearch and Bernstein Analysis The Full HD Example It is instructive to compare our forecasts to the last meaningful display quality-enhancing supply-side innovation, which was the transition from Standard Definition (SD) to Full HD, also known as 1080p (Exhibit 12). When Full HD (1920x1080) resolution TVs were introduced in 2004 (T=0), the shipment penetration (as the percentage of total TV shipment) was 0.2% in T=1 (2005) and 1.7% in T=2 (2006). Current Full HD penetration is already over 50%, but there the ASP premium has been eroded away to the extent that Full HD has become a "table stakes" must-have everybody offers it, and consumers won't pay anything extra for it. In the case of 4K TV, penetration rates are currently much faster than those of Full HD at the equivalent point in time. For T=1 (2013), penetration was 0.7%, expected to rise to 5.7% in T=2 (2014). We expect these rates to be above the Full HD trend for a couple of years before tapering off as we do not believe 4K will be (unlike Full HD) economically or commercially viable at smaller display sizes, limiting their penetration upside. In reality, what we are seeing is the classic product innovation curve. As 4K becomes prevalent at larger sizes, Full HD gets supplanted by 4K at 50"+ TV sizes and its contribution to shipment share begins to decline (Exhibit 13). Our June 2013 Long View on 4K displays (The Long View: 4K... or a Marathon?) was rather conservative on the shipment prospects of 4K TVs relative to the realized actuals. This is turn drives a much more optimistic forecast (Exhibit 14). But as we discuss below, this is not necessarily good news this stronger shipment performance was driven by the usual aggressive ASP declines, which have important implications for the profitability of 4K TVs to the supply chain. 10

11 Exhibit 12 4K TV penetration rates are currently much faster than those of Full HD at the equivalent point in time Unit Shipments (Millions) Full HD (1080p) TV and 4K TV Shipment and Penetration T=0 T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 Full HD Shipments 4K Shipments (3Q14E) Full HD Penetration 4K Penetration (3Q14E) 60% 50% 40% 30% 20% 10% 0% Source: DisplaySearch and Bernstein analysis. Exhibit 13 and as 4K becomes prevalent at larger sizes, Full HD gets supplanted by 4K at 50"+ TV sizes and its contribution to shipment share begins to decline Unit Shipments (Millions) Full HD (1080p) TV and 4K TV Shipment and Penetration E 2015E 2016E 2017E 2018E Full HD Shipments 4K Shipments Full HD Penetration 4K Penetration (3Q14E) 60% 50% 40% 30% 20% 10% 0% Source: DisplaySearch and Bernstein analysis. Exhibit 14 Our forecasts for 4K displays were rather conservative on the shipment prospects of 4K TVs compared to actuals where stronger shipment performance was driven by the usual aggressive ASP declines Unit Shipments (millions) % % 2.8% 3.8% 0 0.0% % 2 1.7% Source: DisplaySearch and Bernstein analysis. 4K TV Shipment and Penetration Forecast Comparison Between July 2013 and October % 20.1% % % E 2015E 2016E 2017E 2018E 4K Shipments (2Q13E) 4K Shipments (3Q14E) 4K Penetration (2Q13E) 4K Penetration (3Q14E) 74 35% 30% 25% 20% 15% 10% 5% 0% 11

12 Long Term TV prices always fall, 4K is no exception As TV shifts from being an innovation to a necessity, ASP has gradually fallen over time to reflect this. In Exhibit 15, we analyze the historical price trend of TVs in the US market since the very first models in the 1940s and found a long term trend of falling ASPs when adjusting for inflation. There were three exceptions during the history where we saw deviations in ASP: 1) the early invention of Black & White TV; 2) adoption of Color TV; and 3) adoption of Flat Panel TV. Due to the massive price premium of new technology products in the early years of adoption, ASP surged and deviated from the trend line for years. Exhibit 15 Historically, TV ASPs have fallen constantly over time, except for three periods of massive technology-backed replacements Early B&W TV adopters Color TV adoption Flat Panel adoption LT trend line ASP Inflation Adjusted ASP Source: CEA FastFacts, US Bureau of Labour Statistics, Bernstein estimates and analysis. New technologies are introduced to keep TV prices afloat such as LED and 3D. Looking closely at TFT- LCD TV price trends in the recent few years, however, we continue to observe a rapid fall in its ASP. The introduction and adoption of LED TFT-LCD TV in the early 2010's delayed the trend due to price premium it initially carried, but the premium quickly faded away and the overall ASP began to fall again recently, deteriorating TV OEM's profitability (Exhibit 16, Exhibit 17). First introduced by Japanese companies, 4K TVs is seen as a high-end product that demanded a price premium for its higher resolution. Hope is that 4K TV can create a premium for TV and panels makers, but we think this is unlikely to happen given: 1) the limited leap in technological innovation in comparison with color TVs or flat panel TVs; and 2) rapidly dropping prices. As seen in Exhibit 9, the premium for 4K TV is falling quickly, which should help spur 4K TV adoption, but we wonder if price is falling too fast for setmakers to enjoy any significant benefit once the market does indeed open up. 12

13 Exhibit 16 LCD TV ASP bottoms after falling quickly Exhibit 17 and margins fall sharply as price competition ensues Weighted ASP (US$) LCD TV ASP Trend 17% CAGR ASP Down LED adoption 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 Operating Margin 6% 5% 4% 3% 2% 1% 0% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Source: DisplaySearch and Bernstein Analysis Source: Company reports and Bernstein analysis TV and panel makers have indeed done well this year, but it is important to note that the sudden jump in TV and panel ASPs was driven more by the fact that 4K TVs tend to be higher-end models with larger screens (4K looks better on large screens) rather than premium driven from technological improvement alone. We expect profits to come down as increasingly more mass-market models are introduced and price competition ensues in As of 4Q14, +40" TV price is dropping fast, even falling lower than +30" TVs in certain countries. The TV OEM Competitive Landscape: Koreans fight back In 3Q14 4K TV shipments grew to 3.4 million units (+500% YoY), amounting more than the total 3 million units sold in all of 1H14 combined (Exhibit 18). The rapid growth is impressive coming after the World Cup, and is largely due to rapidly falling prices and the arrival of Korean TVs makers on to the scene (Exhibit 19). Samsung Electronics has done especially well with 4K TV market share jumping from only 6.5% in 4Q13 to 35% in 2Q14 as it introduced mass-market products to China for the first time in 1H14 (Exhibit 20). 3Q12 Samsung CE 4Q12 1Q13 2Q13 3Q13 4Q13 LGE HE 4.9% 1.7% 1Q14 5.9% 3.0% 2.8% 2Q14 0.4% 3Q14 13

14 Exhibit 18 4K TV unit shipments to rise rapidly due to introduction of mass-market 4K TV products and price cutting (k units) 4K TV units 6,000 6,215 5,000 4,000 3,390 3,000 2,000 2,095 1, Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14E Source: DisplaySearch and Bernstein Analysis Exhibit 19 Samsung 4K TV Market share rises sharply from only 3.1% in 3Q13 to 28.3% a year later. Most recent drop is due to market loss in China 100% Global UHD TV Market Share 90% 80% 72.3% 85.3% 81.0% 79.7% 70% 60% 50% 45.9% 47.0% 40% 30% 43.5% 40.3% 20% 13.9% 9.0% 10% 2.5% 4.5% 0% 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 Koreans Chinese Source: DisplaySearch and Bernstein Analysis 14

15 Exhibit 20 Samsung is a strong #1 in global 4K TV market with 35% share, but Chinese generally dominate Exhibit 21 Opportunity lies outside of China where 4K TV penetration rate is still half of China 2Q14 4K TV Global Market Share Sony 5.6% Changhong 8.3% LGE 8.5% Konka 5.0% TCL 9.1% Others 7.9% Hisense 9.2% Skyworth 11.4% Samsung 35.0% 14% 12% 10% 8% 6% 4% 2% 0% 0.8% 0.3% 4K TV Penetration China vs Global 3.3% 1.0% 4.9% 6.8% 1.4% 2.0% 11.3% 4.3% 13.8% 6.0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 China Global Source: DisplaySearch and Bernstein Analysis Source: DisplaySearch and Bernstein Analysis The 4K TV market has been predominantly Chinese with 71% of demand from China in 2014E, but going forth we expect much of the growth to be driven by North America and West Europe where 4K adoption is still low (Exhibit 21, Exhibit 22). We expect Samsung and LGE to take charge and accelerate market growth by: 1) creating new demand in developed markets with premium products, but also 2) introducing mass-market models in China that narrow the price and quality gap with cheaper Chinese fare. Exhibit 22 Samsung and LGE are driving market demand outside of China to boost 4K market (k units) 4K TV Market Share Breakdown by Region 3,500 3,390 3,000 2,500 2,000 2,095 1, , Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 North America Western Europe Japan Eastern Europe Asia Pacific Latin America Middle East and Africa China Source: DisplaySearch and Bernstein Analysis 15

16 As seen in Exhibit 20, the top 2-4th largest players globally are Chinese, but Chinese influence is limited to China with not even one of the Chinese set-makers making it to the top 5 in the US. We worry price competition globally may get even worse with Chinese players also increasingly looking overseas as a way to overcome sluggish demand and tough competition in domestic markets. Despite dim prospects for global success given lack of brand power in developed markets and lower quality product, Samsung and LGE are still looking to meet the challenge nonetheless through aggressive price cuts and volume push out in 4Q14. Exhibit 23 As of 3Q14, North America and Western Europe portion has doubled since end-2013 to 21% of global 4K market 100% 4K TV Market Share Breakdown by Region 90% 80% 70% 60% 50% 80.2% 76.1% 87.5% 82.6% 81.5% 61.1% 61.9% 40% 30% 20% 12.9% 10.9% 10% 1.9% 4.4% 4.9% 3.0% 8.2% 2.7% 2.4% 3.1% 5.2% 5.3% 0% 8.8% 10.2% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 North America Western Europe Japan Eastern Europe Asia Pacific Latin America Middle East and Africa China Source: DisplaySearch and Bernstein Analysis This could be seen on Black Friday when Samsung and LGE cut 4K TV prices by as much as 50% for 40" models to $ , and low-$1,000 levels for the most popular 55" size. Amazon specifically quotes 40" and 55" TVs at $600 and $1,200 each which are exactly half of original prices. Meanwhile LGE is selling for 40" $799 and 55" $1,300, which compares to the original $1,200 and $2,200 prices for each of these models when released earlier this year. We note this is not that much off from TCL's 50" and Hisense's 55" models, which are both priced at $800. Lower prices are never good for anybody, which could lead to margin concern in Still, Samsung Electronics should remain better off with its premium strategy (40% of 4K TV shipments are curved 4K TVs) and strong brand equity (US market share actually grew QoQ from 51% to 65% in 3Q14). Assuming content will be the main driver, Samsung looks best positioned for now as the designated 4K TV maker for 4K services at Netflix and Amazon, though we note overall content availability should rise with 4K disc players next year and 4K TV channels already available. While 4K TVs are mainly LCD-based, 4K resolution is available on OLED TV as well. Despite initial interest from Sony and Samsung, LG is the one who remains in OLED. LG plans to differentiate itself with 4K OLED, and will release the world's first 4K OLED TV this year. Demand looks to remain limited, however, with prices still much higher than LCD-based 4K TVs at $99,999 for 105" and $39,999 for 98" TVs. We expect LCD to be the main 4K TV format for now, and forecast demand to rise further next year as QD TV models enhance the viewing experience with OLED color quality offerings at a third of the price. 16

17 Implications to Panel Makers: TV OEMs and panel makers as usual are getting too optimistic So far, Taiwan panel makers Innolux and AUO remain the front runners for 4K, with the vast majority of shipments to Chinese TV makers. However, as the 4K TV market continues to grow rapidly, other panel makers, namely Samsung and LG Display, are aggressively making inroads into the segment. In addition, we are starting to see Chinese panel makers begin to ship 4K display, which is never a good sign. According to DisplaySearch, the two Taiwan panel makers accounted for ~77% of 4K TV panel shipments during 2013, but that rapidly dropped to 48% in 1H14, due to the increased competition from Korean makers, especially as they aggressively push for RGBW 4K TVs in China. We believe that the intensified competition from the Korean makers will accelerate 4K panel commoditization and it will be a challenge for Taiwanese panel makers, who enjoyed the first mover advantage last year. 4K TV panel shipments in 1H14 reached 6.4 million units, representing ~5% of TFT-LCD market share globally, according to DisplaySearch. In particular, we have seen the two Korean makers LG Display and Samsung Electronics boost their market shares as they introduce low-cost new RGBW panels targeting price-sensitive Chinese TV makers, both reaching 1.3 million unit shipment in 1H14. Specifically for our coverage companies (Exhibit 24): AUO targeted 4.4 million units of 4K panel shipment for 2014, but actual shipments in 1H14 were merely ~0.5 million. AUO expects 4K panels to contribute to 15% of its total TV shipments in Shipment data indicated that AUO is losing market share. Unless AUO ships a surprisingly high ~4 million units in 2H14, it will not be able to meet its target. Innolux has targeted ~5.8 million units 4K TV panels in 2014, and it shipped 2.6 million units. This means the company s 4K TV panel shipments are on track to reach its annual target. LG Display shipped 1.3 million units of 4K panels in 1H14, mostly for its brand customer LG Electronics. LG Display is pushing the RGBW (M+) 4K LCD TV open cell for Chinese TV makers including Skyworth, Konka, and Changhong, and we think it's on track to achieve its annual shipment target of 3.1 million units. In terms of profitability, LG Display is still at the "sweet spot" in 4K TVs, where it is able to charge a material premium for 4K panels relative to conventional HD panels. Company mentioned in their 2Q14 earnings conference that this premium ranges from 20-30% in China to 100% or more in developed markets. It is expecting 4K TVs to be 15% of shipments for 2H14, and an average of 10% for 2014 overall. However, this is lower than the shipment share of ~6% implied by the 3.1 million shipment target, based on our forecasted TV shipment. Exhibit 24 Innolux and LGD are on track to achieve their 4K TV shipment targets, while AUO's target is under pressure LCD TV Panel Shipment 4K TV Shipment 4K as % of TV Shipment 1H E 1H E Company E (Shipment in millions) (Actual) (Target) (Actual) (Implied) Guidance AUO % 15% 15% Innolux % 12% 20% LG Display % 6% 10% Samsung % 10% 10% Others % 6% Total % 9% Source: DisplaySearch, company disclosure, Bernstein estimates and analysis. 17

18 In addition, we are starting to see tentative entry into 4K panel shipments by Chinese panel makers (Exhibit 25). As is usually the case when the Chinese decide to enter a market, we can expect profitability to be dented. Exhibit 25 We are starting to see tentative entry into 4K panel shipments by Chinese panel makers Panel Makers 2013 Actual 2014 Target 1H14 Actual Implied 2H14 Products (millions) (millions) (millions) (millions) AUO , 50, 55, 65, 75, 85 BOE , 55 China Star , 55 Innolux , 40, 42, 50, 58, 65, 75, 85 LG Display , 43, 49, 55, 65, 79, 84 Samsung ,48, 55, 65, 85, 98 Sharp , 70 Total Source: DisplaySearch, company disclosures, Bernstein estimates and analysis. Of course, the TV OEMs could not be left behind. Collectively, they are expecting to ship 20 million 4K TVs in 2014, well above our estimate of 12.7 million units (Exhibit 26). Exhibit 26 Collectively, TV OEM are expecting to ship 20 million 4K TVs in 2014, well above our estimate of 12.7 million units TV Maker 2014 Target Units (millions) Target Share Samsung % LGE 1.5 8% Sony 1.1 6% Toshiba 0.4 2% Sharp 0.6 3% Panasonic 0.4 2% Chinese Brands % TPV/Philips 1.2 6% Others % Total % Source: DisplaySearch, company disclosures, Bernstein estimates and analysis. The distribution of panel maker output to the OEMs skews (as expected) to their own brand for the captive players (Samsung Display and LG Display) but it is much more fluid for other TV OEMs (Exhibit 27). This is indicative of competition for market share among the panel makers, usually not a good sign for industry economics. 18

19 Exhibit 27 The distribution of panel maker output to the OEMs skews (as expected) to their own brand for the captive players (Samsung Display and LG Display) but it is much more fluid for other TV OEMs 100% 90% 80% 70% 60% 2% 6% 20% 20% 4K Panel Maker and TV OEM Shipment Shares 25% 21% 50% 8% 55% 11% 75% 9% 8% 4% 4% 36% 50% 40% 30% 20% 10% 0% 72% 80% 9% 75% 33% 50% 36% 15% 25% 12% Samsung TV LGE Sony Toshiba Sharp Panasonic Chinese Brands 75% 46% 8% 10% TPV/Philips Samsung Display LG Display Innolux AUO Sharp BOE China Star Others Source: DisplaySearch and Bernstein analysis. TV set price deflation continues, putting incremental ASP pressure on 4K TVs Taking a look at TFT-LCD TV volume forecasts by price point, we can see the potential addressable market to which 4K TFT-LCD TVs are expected to sell at current price points is quite small at the moment. While some 4K TFT-LCD TV models are expected to sell at the $1,500-2,000 range, most will be priced above $2,000, especially top-tier global TV brands. The $2,000+ TV market in total is only expected to account for 2.3 million units worldwide in 2014, while the $1,500+ market will be around 5 million units, accounting for less than 3% of global TV shipments, according to DisplaySearch (Exhibit 28, Exhibit 29). The less than 3% of high-end (ASP > $1,500) TV shipment is likely to maintain or slowly decline over the next few years. Besides 4K TFT-LCD, OLED TV will also compete in the same high-end price segment. In other words, the majority of 4K TVs will be sold at increasingly declining ASPs, putting pressure on margins and profitability, as we see below. This relentless price pressure is already apparent in 4K shipment and pricing data, and is likely responsible for strong shipment performance above and beyond our original cautious forecasts. Exhibit 30 shows that actual 2013 and expected 2014 shipments of TVs priced above $1,500 are trailing well below our original forecasts. 19

20 Exhibit 28 The potential addressable market for 4K TVs at current price points ($1,500+) is expected to be less than 3% of global TV shipments 120% 100% 80% 60% 40% 20% 0% TV Shipment Forecast by Price Range 2.7% 2.2% 2.2% 1.8% 1.2% 1.0% 0.6% 6.1% 6.9% 5.9% 4.4% 4.5% 3.4% 5.0% 5.7% 4.7% 2.4% 2.6% 2.4% 2.6% 2.3% 13.5% 12.9% 12.5% 13.2% 11.0% 7.9% 15.8% 32.7% 33.9% 28.6% 31.7% 31.7% 33.3% 26.8% 41.6% 45.5% 43.7% 44.9% 45.2% 49.0% 54.1% E 2015E 2016E 2017E 2018E < $300 $300 - $500 $500 - $750 $750 - $1,000 $1,000 - $1,500 > $1,500 Source: DisplaySearch and Bernstein analysis. Exhibit 29 and forecasted to be around 5 million units in 2014 Million Units High End (ASP > $1,500) TV Shipment Forecast E 2015E 2016E 2017E 2018E $1,500 - $2,000 > $2,000 Source: DisplaySearch and Bernstein analysis. Exhibit 30 TV shipments for $1,500+ are trailing well below our original forecasts due to relentless price pressure Million Units Source: DisplaySearch and Bernstein analysis. High End (ASP > $1,500) TV Shipment Forecast Comparison (July 2013 to October 2014) E 2015E > $1500 (2Q13E) > $1,500 (3Q14E)

21 Focusing specifically on the 4K TV sets, we see that 4K ASPs have dropped faster than our original forecast, which is likely driving the improved shipment performance. Further this decline has been steeper than the Full HD set ASPs, compressing the ASP premium between 4K and Full HD TVs. Exhibit 31 through Exhibit 33 shows this breakdown for different panel sizes, with 2014 ASP premiums below 1.5x for under 60" TVs. Furthermore, these ASP premiums are expected to rapidly converge towards 1.0x, making 4K TVs not a premium high margin offering but the basic "table stakes" offering for large TVs. Only the 60"+ segment is expected to maintain a positive (but declining) premium over the next couple of years. Exhibit 31 4K ASPs have dropped faster than our original forecast, across 50-54" 50"-54" ASP (USD) 3,000 2,500 2,000 1,500 1, ,499 2, " 4K TV ASP and 4K/HD ASP Ratio Forecast Comparison (July 2013 to October 2014) 1,578 1,162 1, , E 2015E 2016E 2017E ASP (2Q13E) ASP (3Q14E) 4K/HD ASP Ratio (2Q13E) 4K/HD ASP Ratio (3Q14E) K/HD ASP Ratio Source: DisplaySearch and Bernstein analysis. Exhibit " and 55"-59" ASP (USD) 10,000 8,000 6,000 4,000 2, ,427 8,427 Source: DisplaySearch and Bernstein analysis " 4K TV ASP and 4K/HD ASP Ratio Forecast Comparison (July 2013 to October 2014) 2.0 2,719 2,149 2, ,363 1,592 1, E 2015E 2016E 2017E ASP (2Q13E) ASP (3Q14E) 4K/HD ASP Ratio (2Q13E) 4K/HD ASP Ratio (3Q14E) K/HD ASP Ratio 21

22 Exhibit 33 60", which is likely driving the improved shipment performance 10,000 60"+ 4K TV ASP and 4K /HD ASP Ratio Forecast Comparison (July 2013 to October 2014) "+ ASP (USD) 8,000 6,000 4,000 2, ,809 8,809 5,787 5,908 3,621 2,864 2,486 1,755 1,797 1,297 1,394 1, E 2015E 2016E 2017E ASP (2Q13E) ASP (3Q14E) 4K/HD ASP Ratio (2Q13E) 4K/HD ASP Ratio (3Q14E) K/HD ASP Ratio Source: DisplaySearch and Bernstein analysis. In the end, it's déjà vu all over again roasting the goose of the golden eggs This drive for unit shipments and market share (which is the standard in this incontinent business) has led to material pricing premium erosion over the last two years. 4K to Full HD panel pricing premiums have fallen from around 2.2x in 1Q13 to about 1.2x in 4Q14 (Exhibit 34). On the other hand, manufacturing costs between equivalent-sized 4K and Full HD panels have also fallen, as learning curves kick in, driving yields from the 60% level in 1Q14 closer to the 80-90% level currently (Exhibit 35). Exhibit 34 4K to Full HD panel pricing premiums have fallen from around 2.2x in 1Q13 to about 1.2x in 4Q14 4K/Full HD Panel ASP Ratio 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 39" " " " " " " " " " " Source: DisplaySearch and Bernstein analysis. Average

23 Exhibit 35 Manufacturing costs between equivalent-sized 4K and Full HD panels have also fallen, as learning curves kick in, driving yields from the 60% level in 1Q14 closer to the 80-90% level currently 4K/Full HD Panel Cost Ratio 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 39" " " " " " " " " " " Average Source: DisplaySearch and Bernstein analysis. But it is pretty obvious that (as usual in this business) ASPs have fallen far faster than manufacturing costs. In 1Q13, a 4K panel had on average an 80 percentage point margin premium to its less-exalted Full HD equivalent, which meant that the profit margins on 4K panels were outstanding, even if shipments were small. However, by 4Q14, that premium had on average fallen to zero, and for some of the more widely available panel sizes (40" and 42", and 55") the pricing premium was actually below the manufacturing premium, indicating that for these sizes, selling 4K panels was less profitable now than traditional Full HD panels. Putting it another way, the average area premium, represented by the incremental gross margin dollar per square meter has dropped from about $500/m 2 in 1Q14 to zero by 4Q14 (Exhibit 36). In other words, by 4Q14 selling 4K panels brings no margin or profit advantage on average. Only the very largest 4K panel sizes, over 60", have any incremental margin contribution. 23

24 Exhibit 36 The incremental gross margin dollar per square meter has dropped from about $500/m 2 in 1Q14 to zero by 4Q Increment Gross Margin: 4K vs Full HD Dollars/Square Meter Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Source: DisplaySearch and Bernstein analysis 39" 42" 50" 55" 60" 70" Average Challenges in content production and broadcast A "wait and see" attitude prevails on both sides of the Atlantic among TV channels and content owners United States Among US Media names, content owners and networks alike, nobody seems to have any plans to stimulate demand for 4K or use it as a competitive advantage. In fact, nobody is doing anything at all, outside of some minor experimentation with sports and in their own labs. We believe there is a palpable sense of "upgrade fatigue" in the US consumer market. US consumers only a few years ago went through the digital conversion (which was never well understood by the populace, but generally interpreted as "I have to buy a new TV"), which coincided with the broad(er) adoption of HD. Then there was the supposed 3D cycle, which was supported by networks such as ESPN and Discovery, who launched 3D networks, well in advance of any consumer adoption. Alas, 3D fizzled, and whatever money those networks invested seems to have been wasted. It's a fair question to ask whether the mass US market is ready for another TV upgrade cycle, for a consumer benefit that is not supported by the networks. In the face of ESPN closing its 3D network (really, if any case could be made for 3D as a consumer proposition, it would be for live sports, right?), we expect it will be a long time before any of the US media companies invest substantially behind 4K. Especially since 4K TV's can up-convert standard HD content to some degree, giving the consumer a "better" experience without the content companies or distributors doing anything different. If and when content owners will feel the need to actually start producing/distributing/up-converting content, would there be a major cost requirement for the content producers and networks (which is a different set of companies from the cable/satellite/telco distributors)? The answer (which, as we will see, seems consistent 24

25 with our European findings) seems to be "no". Aside from new cameras, and more data storage (which continues to get cheaper), no significant hard costs could be identified. Perhaps the biggest implication to be drawn from the universal ambivalence of the content owners and networks is on expectations for the rate of adoption and shouldering of marketing/promotion by the CE (consumer electronics) manufacturers. The networks have no plans to drive consumer interest/awareness through content (and promotion of that content). That leaves all the marketing/promotion in the hands of the manufacturers, and makes one question the rate of adoption. What will drive the consumer to "need" a 4K set? It's not so they watch the SuperBowl in 4K (although they can show off to their friends and still watch the up-converted picture). Unless consumers decide the upconverted 4K picture is substantially better than standard HD, worth many thousands of dollars, then for quite some time the main consumer driver will be "future proofing", or increasingly "it was the only large screen TV set offered". We question how many consumers will spend many thousands of dollars to future proof against something they've never heard of especially anyone who was burned by purchasing a 3D set. Europe Broadcasters We have interviewed leading European broadcasters in our coverage about their views and plans for 4K. The overall conclusion is that 4K is not really considered part of present operations, but rather still very much part of the future. The message from all respondents was that they do not shoot or commission anything in 4K format and have not directly "future proofed" any content, but: 1) everything could technically be "up-converted" from HD to 4K, at relatively low costs, and 2) even if TV delivery changes enough so that 4K-level channels become prevalent, they would still be able to broadcast HD content on these during the transition, much as SD content is still sometimes broadcast on HD channels. Sky perhaps to most advanced in 4K of the companies we spoke to has performed a couple of test broadcasts of 4K (of a Premier league game and the Ryder cup) but stated this is more for testing and learning purposes. Sky s production development team are engaged and aware of 4K, but the TV replacement cycle just isn t quite there yet. There is not the same uptake in 4K as HD had, where HD likely received a boost from a coinciding replacement cycle from cathode to flat-screens. In this current cycle, previous generations of flat-screens are still good enough and there is still too big a leap in costs to upgrade to 4K. Furthermore, the processing power of current set-top boxes the chip inside is not strong enough to process 4K, and Sky doesn't believe there is anyone who has a set-top box with the required processing power (at the moment). An upgrade to 4K for Sky will require a set-top box replacement cycle as well, where the roll out is likely to be similar in strategy to HD, as a premium service with higher subscription price and higher set-top box cost, which is most suited to Sports and /or Movies. The economics of HD worked well for Sky, however, for 4K, they are unlikely to subsidize the new set-top boxes. Sky believes that satellite transmissions are the best way to broadcast 4K due to the amount of data required. And if it were to take off tomorrow, they would need to upgrade the transponder service as well. At ITV, no content is being shot or requested in 4K format at present. The company sees 4K TV penetration as low and thus there is no consumer demand at the moment. That being said, the production teams do work with high end equipment already and content can be easily converted to 4K post-production. For ITV, the value question is "will more people watch more ads if content were offered in 4K?" and the answer is "probably not", though the company were also wary of the need to keep up with technology. Therefore, an upgrade is treated as a cost consideration rather than an investment proposition. As for provision of ITV HD channels, with the exception of ITV1, the other channels are provided for and paid by Sky. These channels have been profitable for ITV and should Sky request 4K channels, we believe similar economics will prevail. 25

26 In France, M6 see two requirements before 4K becomes a reality. For broadcasting, it will be dependent on the decisions made by the regulator (CSA). The timing is unclear but at some point in the next 3-5 years, the CSA will decide on whether spectrum will be allocated for TV or for Telecoms. And if it were allocated for TV, then the CSA will specify the format, i.e., 4K or HD, and the required percentage of content as part of the license. Regardless of the decision, M6 acknowledged that it will take time and more medium term than short term. However, M6's objective is to ensure broadcast equipment will be 4K friendly within 5 years. The company is already upgrading equipment so that they will be 4K ready in preparation of a future rollout, and currently increases costs at M6. In regards to content, as there are no broadcasts in 4K, there is no requirement or need to have content in 4K. For some US majors, contracts are written for specific formats, either in SD or HD, and there is no clause in the current contracts to upgrade the format. However, M6 do not see any issues in writing new contracts as and when it will be required. (note: TF1 did not respond to our questions on the matter but we would assume the situation to be similar for all legacy French broadcasters, for the moment). At Mediaset, in Italy and Spain, similarly, no content is 4K-native at the moment. Mediaset too is planning to eventually rely on "up-converting" to the 4K format but no such reprint has yet taken place. Instead, Mediaset vaguely said that "[it] strive[s] to include as many technological standards and resolutions in the contracts that [they] sign", which we take to mean that they will start including 4K when deemed necessary but that this has probably not been the case thus far. Europe Production companies We have also interviewed leading TV production companies. 4K is not on their agenda (a couple of companies' initial reaction was "what is 4K?"). This is in part a function of the rising level of outsourcing of the actual physical production to third parties. When we finally spoke to some of these physical production companies, we found they are familiar with 4K and have at least in some cases tested cameras and equipment. In general, the need to upgrade physical equipment is viewed as minor for the production of fiction and reality shows: 4K cameras for these uses are relatively inexpensive and the additional support equipment for post-production should be able to handle the additional volume of data. Additionally, no major upgrades to physical sets are required (this is different from the adoption of HD, which required replacing studio furniture because of the additional detail visible to viewers). Sport is viewed as the most difficult application for 4K, both because cameras would be more expensive and because the post production data handling has to be done in real time. In any case, lack of demand from broadcasters is the key obstacle to adoption: even HD penetration is still low outside most of continental Europe to drive another upgrade cycle. As a result, the physical production companies do not currently expect to start producing in 4K in Europe for another 4-5 years, although they would be ready to upgrade quickly if demand patterns changed. Challenges in delivery Even with advances in compression technology such as the use of the new High Efficiency Video Coding (HEVC, also known as H.265) standard the delivery of 4K content requires approximately twice the bandwidth of regular HD programming. This is true whether viewers watch it (i) on conventional pay-tv platforms (satellite, cable, or telco), (ii) as IP-based content delivered by the broadband infrastructure owners themselves (e.g., over dedicated transmission paths with managed quality of service), or (iii) as IPbased content from over-the-top providers, relying on delivery over the public internet using consumers' broadband connections. In the United States: 26

27 For conventional pay-tv platforms: Cable, satellite, and Verizon's (FTTH) FiOS have an advantage over DSL-based IPTV providers, primarily AT&T's U-verse TV and CenturyLink's PrismTV, which are more capacity constrained. This is particularly true as cable and FiOS transition from QAM- to IP-based delivery, with corresponding increases in effective capacity for video delivery, and the two satellite providers (DIRECTV and DISH) launch new, higher-capacity satellites (such as DIRECTV-14, launched earlier this month 2 ). AT&T's proposed acquisition of DIRECTV, which we expect to be approved ~2Q15, will better position the company with respect to 4K video delivery, leaving CenturyLink as the only major U.S. paytv provider facing difficulties if delivery of large volumes of 4K content becomes a competitive necessity. For IP-based content over private or public broadband: 4K is likely to require connection speeds of at least 15Mbps. As shown in Exhibit 37, today this would further limit most U.S. households in their choice of broadband provider, primarily to cable and Verizon FiOS. But all providers are upgrading their offerings to meet secular demand for faster speeds and given the expected deployment trajectory of 4K discussed above it is unlikely to have much incremental impact on cable's or telco's capex plans. We note that the outcome of ongoing policy debates about net neutrality and the state of broadband competition more generally may affect broadband providers' ability to implement data caps, paid prioritization, and data-interconnection charges, all of which will influence the economics and relative attractiveness for consumers of 4K offerings by infrastructure owners (such as Comcast) versus over-thetop providers (such as Netflix). Exhibit 37 With current broadband offerings, most U.S. consumers would have a limited choice of providers able to deliver the >15Mbps speeds required for 4K content delivery Source: U.S. Federal Communications Commission In contrast, the Asia Pacific region, with existing high deployments of FTTH in Japan, Korea and China, and a consumer population known for embracing new technology, is more likely to drive the early stages of market development. The Asia Pacific region, with high population densities in its major cities, has led in 2 See DIRECTV-Satellite-Launch/default.aspx. 27