Can Intel succeed as a pay-TV provider?

Can-Intel-succeed-as-a-pay-TV-provider

Chipmaking giant Intel has been looking to expand its business beyond the chips that power notebooks, desktops, servers, and a handful of other gizmos, but hasn’t met with much success. Now word comes from The Wall Street Journal (subscription required) and other sources that Intel is considering launching its own Internet-based pay-TV business. The idea is that instead of — or perhaps in addition to — buying television service from a cable company or satellite provider, you’d go straight to Intel, paying the company for access to real-time television programming delivered via the Internet.

How would such a service work? And does Intel have a chance to pull it off where companies like Google, Apple, and Microsoft have (so far) failed?

Intel TV

Here’s the basic idea: Although an eventual service might not carry the Intel brand name, Intel would manufacturer and sell set-top boxes that would leverage a user’s existing broadband Internet connection to bring live TV programming direct to the living room. This idea is often called “over the top” (OTT) programming because it’s delivered without the television provider’s (or Internet provider’s) direct involvement. Think about services like Netflix of Hulu: Subscribers are free to choose what services they connect to or pay for, and their ISP and cable providers aren’t in the loop or able to control what content users can and cannot access at any given time. The services use the Internet to go “over the top” of barriers cable companies and telcos have erected to control access to their customers.

netflix-streaming-demoAn Intel pay-TV offering would operate on a similar principle, but with one crucial difference: It would offer live television channels. Where services like Netflix, Hulu, and Amazon Instant Video offer access to some current content (with Hulu offering next-day access to some television programming), Intel’s pay-TV offering would work just like regular TV. Users would be able to flip channels and instantly tap into live broadcasts — a huge benefit over existing Internet video services for folks who want to see new episodes as soon as they air, or for folks who are serious about their news, sports, and other live events.

Intel’s potential service would be based off set-top boxes built around Intel hardware and software. The company does have significant experience in the area. In addition to real-time video encoding and distribution technology from its video conferencing technology aimed at corporations and enterprise, Intel has recently been supplying the chips used in set-top boxes for cable providers like Comcast and France’s Iliad SA. Logitech’s poorly-received Revue was also powered by an Intel Atom processor, and Intel has inked a deal with Google to optimize Android for Intel chips — something that could help fuel future Google TV tie-ins, although is probably more directly related to smartphones and tablets. Intel also inked a $120 million patent deal with RealNetworks that seemed centered on RealNetworks’ next-generation video codec software.

The RealNetworks technology might prove to be important in overcoming a key limitation to IPTV services: bandwidth. Although Internet-savvy folks living in urban areas are increasingly used to the idea of broadband Internet in excess of 10mbps, one doesn’t have to go very far towards the edges of town to find bandwidth to the home limited to things like 1.5Mbps DSL. Intel may choose to target a possible IPTV service only at customers with fast broadband connections, but might also be looking to step around cable companies by offering a Internet-based TV solution that can work on lower-bandwidth connections in areas that are poorly served (or under-served) by traditional television providers. Technology that cam pack more high-quality video into limited bandwidth could be absolutely crucial to making a live television platform succeed.

iplayerThe iPlayer Connection

Intel may have another ace up its sleeve in the form of Erik Huggers, one of the key players behind the BBC’s iPlayer. Although not without limitations and criticisms, over the last four years iPlayer has succeeded in in making online versions of BBC television and radio programming available to the public. (In the case of video programming, it was restricted to those with UK IP addresses.) Most recently, iPlayer has added pointers to content from non-BBC broadcasters as well as social networking components.

Intel has installed Erik Huggers as the general manager of its Intel Media group, and the company has set up a development shop in London to work on interface and user experience models for television programming. Although the case of making BBC programming available online is a bit more specific than a general television service (the BBC is a tax-supported public service broadcaster), there’s little doubt Huggers brings considerable experience to the effort, and understands what consumers are likely to demand of a live television service.

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.