Can Intel succeed as a pay-TV provider?

Where does all the programming come from?

The idea of launching an Internet-delivered pay-TV service is not new: Companies like Sony, Dish Network, Apple, and Microsoft have all sat down with media companies recently to discuss possibilities. And these sorts of talks aren’t new, at least for many players: Microsoft, Google, and Apple have been looking at the possibility for years.

What’s been holding them back? Licensing deals. Although firms like Netflix, Apple, and Amazon have had reasonable success getting streaming and download licenses for video programming, those licenses are subject to exclusivity windows — Netflix is out to 56 days with Warner Bros., and the clock only starts ticking with a DVD release that’s potentially many months after broadcast. Furthermore, those licenses are a wholly separate matter from the licenses that would enable Internet-based services to carry live television content from broadcast networks like ABC, CBS, Fox, and NBC, or cable outlets like ESPN, CNN, Discovery, and more. The only reason Hulu gets to carry recent television content is that it’s owned by consortium of networks and studios, including NBCUniversal, Disney-ABC, and Fox. Hulu has never carried CBS content in the United States, and has gotten into tiffs with firms like Viacom, which pulled The Daily Show and The Colbert Report off the service for a year, thinking it could maximize their value elsewhere.

Licensing fees for live television programming are substantial. Market data suggests nationwide cable and satellite TV operators pay on the order of $3 billion a year for television programming. Although smaller operators pay less money total each year, they pay more on a per-subscriber basis. Television content providers are constantly increasing their fees: That’s one reason it’s not uncommon to see notices that channels may go dark as networks and operators play down to the wire on distribution licenses.

An IP-based television service wouldn’t necessarily have to incur all the fees of a traditional cable or satellite operator. For years, traditional television providers focused on expanding their breadth of their program offerings by expanding the number of channels available. More channels meant more to watch, which meant more eyeballs watching more television. This played hand-in-hand with television creators: More channels equates to more “air time,” which means more programming to support advertising slots that are (in theory) more specifically targeted at different audiences. As a result, channels often come in large packages. Distributors make it more lucrative for operators to license all channels in a package — whether that be things like sports, food, travel, drama, educational, childrens’, or what-have-you — rather than offering just one or two. Again, that all comes down to brand-building and advertising. If a carrier only wants one or two channels, distributors will charge more to make up for their reduced revenue opportunities.

An IPTV operator doesn’t necessarily have to follow the same economics. One common consumer complaint with traditional pay-TV offerings is that there might be 500 channels, but there’s nothing on. Many consumers never watch a significant portion of the channels they pay for in their pay-TV service. An IPTV operator could, in theory, break into the market by offering a la carte programming, enabling consumers to subscribe to (and pay for) just the channels they want. Don’t like sports? You don’t have to pay for it! Don’t want channels crammed with crime dramas and Law & Order re-runs? You wouldn’t have to pay for that either.

It’s unknown whether Intel has enough clout with distributors to make an a la carte pay-TV service happen. Media companies and distributors will resist un-bundling their channels since they will make less revenue off them. Intel could counter that concern by offering a premium to media companies to sell channels a la carte, but that means Intel’s cost to offer television programming would be higher than cable operators.  Offering fewer channels at higher prices is not a great way to compete in the television marketplace.

Intel does have pockets deep enough to run a pay-TV service at a loss. The idea would be to absorb higher costs for programming rather than passing them along to consumers in hopes that the service will gain traction and take off, eventually turning into a money-maker down the road. But that’s a hard sell to make to investors, who traditionally have trouble looking past the next quarterly revenue statement — particularly when faced with the prospect of launching a new business model in an untested market. Adding to doubts, Microsoft, Apple, and Google also have pockets deep enough to launch IPTV services and absorb higher programming costs in order to keep things affordable for consumers. To date, they haven’t done it — although rumors continue to swirl around Apple.

Does Intel understand media?

A big question on the horizon is whether Intel understands the media market well enough to launch a successful pay-TV service, even with folks like Erik Huggers on the payroll. Intel has tried — and failed — make big splashes in digital media distribution several times. Remember Intel Viiv? Intel launched its Viiv platform back in 2005 in an attempt to make Intel-powered media devices — then mostly PCs, notebooks, and home theater PCs — the entertainment centers of a digital home. Viiv included support for DRM copy protection and Media Server software designed to sling media around a home network to Viiv-compatible devices. Viiv went basically nowhere, and Intel scrapped the project in 2008.

intel viivViiv’s successor was arguably Intel Insider, which launched barely a year ago. Anyone remember that? Didn’t think so. Intel Insider is a content protection system built into Intel’s Sandy Bridge line. At the moment, it’s basically only used by CinemaNow and Warner Bros. WB Shop; other content distributors have declined to embrace the technology.

In both these cases, Intel didn’t handle digital content directly: It tried to convince digital content distributors to rely on Intel technology to power their services. If Intel were to launch its own pay-TV service, it would have to develop — or acquire — expertise and infrastructure to acquire and distribute digital television programming in real time. Right now, it doesn’t have an existing business to build on.

With both Viiv and Intel Insider, Intel relied on baking capabilities into its own processors to fuel digital media services. In creating its own set-top boxes, Intel seems to be taking a similar tack. With Viiv and Intel Insider, distributed failed to adopt the technology largely because of the limited reach of Intel’s hardware into consumers’ lives. Although the company maintains a commanding dominance of the notebook and desktop computer markets, it has yet to gain traction in mobile — which now means smartphones and tablets — or the living room (smart televisions, game consoles, or popular set-top boxes like TiVo). Intel is trying to expand its business outside traditional computers, but it’s not clear how much success a pay-TV offering can have if it can’t integrate with consumers’ existing mobile devices and electronics.

Can Intel handle consumers?

Another huge potential hurdle for an Intel pay-TV service: Intel has essentially no experience running a public-facing service or dealing with consumers. Right now, Intel’s customers are primarily OEMs, enterprises, and developers: Intel doesn’t interact with or support consumers who pick up electronics by walking into Best Buy or clicking through pages at Amazon. It might sound like a simple idea to roll out a pay-TV service on your own set-top box, but once those devices start going out the doors, consumers are going to start calling (and sending email, and posting) with questions, rants, problems, and concerns. Although it’s not an exact parallel, Google learned a powerful lesson when it launched its first “superphone:” the importance of customer support. To launch a pay TV service, Intel will have to either develop a significant in-house support infrastructure before the service launches…or, more likely, outsource their support needs.

Lead Balloon?

It’s too soon to speculate what form Intel’s IPTV initiative might take, but there’s no question the company faces significant challenges to launching a service, whether in its own name or in partnership with other industry players. One thing is clear: Intel knows it has to expand its business behind traditional PCs and servers, and Internet-based entertainment and media is guaranteed to be a growth market — Intel would be foolish to ignore it.

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