In mature markets, technology drivers, such as the transition to HD, are fading and the move to more efficient codecs is only progressing slowly, held back by legacy infrastructure and reduced end user budgets, the report summarised. The industry is also poised to transition to software-based encoding, which will further erode price points, particularly within distribution encoding.

“The encoder market is set to go through a significant change,” said Adam Cox, Senior Analyst, Futuresource Consulting. “If the industry is going to weather the storm, it will need new market drivers, significant growth in emerging markets, and, perhaps most importantly, a change in approach.”

The industry does have some market drivers, in the form of 4K and HEVC, but with high price points for first generation products, Futuresource doesn’t believe these will have a significant impact in the short term. Many users are also waiting to see how the transitions and technologies evolve before investing, wary after the failure of 3D.

In terms of emerging regions, the encoder markets in APAC, and to a lesser extent Latin America, are enjoying significant volume growth, with the transition to digital coupled with the rapidly expanding broadcast markets fueling demand. However, with extremely low price points, the value of the market will decrease over the coming years despite the increase in volume.

The change in approach looks set to come in the form of software encoding. In 2014, a still dominant figure of 81% of distribution encoders shipped were hardware-based, but this is expected to drop to 41% by 2019 as end users embrace the lower price points as part of the shift from CAPEX to OPEX. In turn, manufacturers will have to alter and evolve their business models, perhaps along the lines of software as a service, in order to tackle this new challenge.

“Encoders are an essential part of the broadcast chain and will have to be upgraded as the market transitions to 4K or more efficient compression technologies,” added Cox. “It is clear therefore that the encoder market will bounce back. To do so, however, it will need to change, and embracing software encoding and all that goes along with it will be an important and necessary step.”