Intel Media Lessons

Word has come out that Intel Media, which has hired some 300 people to work on its over-the-top (OTT) cable service competitor, is now looking to Samsung and/or Amazon to assist in the business. That doesn't look good for the first true OTT competitor to cable.

What have we learned here:

1. To compete on the high end of the multichannel television business, you need to have all the channels. Having any significant gaps in the lineup means your product isn't meeting the expectations of consumers for a super-premium service. So, Time Warner Cable's Internet restrictions with some programmers, even if a super-premium service provider has networks 1-15, gaps in the coverage of networks 16-50 are problematic. TWC CEO Glenn Britt made these restrictions public at the Cable Show in June.
2. To compete in the low end of the market, a new entrant must find a way to get more favorable pricing from programmers and there is little reason for the programmers to support such an effort.
3. If the programmers require Intel to meet minimum subscriber guarantees, that creates additional risk for Intel to enter the business beyond the expense of creating the distribution system and marketing it. Perhaps the programmers are unwise to do this -- after all, if Intel doesn't launch, then the multichannel distribution market (buyers of programming) is less competitive than it is otherwise, and that's not good for the programmers (sellers of programming). On the other hand, the programmers all risk annoying/jeopardizing their relationships with the current customers by selling to an OTT provider -- this is new territory and this threat/potential threat has been recognized by distributors for at least a decade. If programmers are going to antagonize their core customers, they might reasonably expect that Intel makes it worth their while. Additionally, there may be incremental costs to distribute their service over the Internet -- programming costs, creating a separate feed with separate advertising, etc.
4. The opportunity to compete with the multichannel incumbents may be smaller than Intel thought when they first pursued this effort. In the last year, it appears that the multichannel subscription television business has peaked, at least in terms of number of subscribers.
5. Perhaps an executive with experience outside the US was not the best choice to lead this business. The media and television businesses are still highly provincial as opposed to international. All of the problems that Intel has encountered were well known to me and likely dozens of other people with long histories in the US multichannel business. For clarity, I don't know Erik Huggers at all and have never heard anyone speak ill of him in any way -- my point is based solely on his CV. Having lived in the UK, I can say that its television marketplace is very different from that in the US in a number of ways -- the huge role of the public broadcaster (BBC), the national orientation of the media as opposed to local, the dominance of DBS (BSkyB) over cable in market share, the requirement that facilities-based Internet providers wholesale their infrastructure to competitors.
6. Any OTT video service faces the potential threat that limits on the amount of data a typical home broadband customer might consume could make using the video service (or using it extensively) impossible or cost prohibitive. This uncertainty certainly (pun intended) makes a big investment in a new business more problematic.

I'm sure there will be a more direct over-the-top competitor to multichannel subscription television someday, but that day looks further out now than it did a few months ago.

Updated (30 October 2013): According to Peter Kafka at AllThings D, Verizon is in talks to take Intel Media off of Intel's hands.
Updated (21 November 2013): According to Reuters' analysis, For Intel, Hollywood dreams prove a leap too far.
Updated (26 November 2013): According to Bloomberg, Intel is asking for $500 million for Intel Media/its OnCue assets

Virtual MSO - A Look at the Opportunity

On the heels of the Needham analysts Laura Martin and Dan Medina's report "The Future of TV" (.pdf link) come stories about Apple and Google planning to offer something that sounds like a virtual MSO -- a plan to offer a bundle which includes live channels direct to end users over the Internet. As my friend and former colleague Will Richmond notes, this story has flared up many times over the past year or so, with Sony, Microsoft and Intel famously among the potential cable disruptors.

Hopefully new virtual MSOs will not represent a new path into the home for poltergeists.

The Needham report provides an exceptionally clear-eyed look at the television ecosystem and makes a few points that I had not seen made as clearly anywhere else. It also provides a useful context to consider the opportunity for a so-called "virtual MSO".

• Multichannel television is about 85% penetrated to households.
• Most of the popular cable networks are controlled by a relative handful of major programming companies (Disney, Time Warner, CBS, Viacom, Fox, Discovery, Comcast/NBCU, Scripps, A&E and AMC).
• The programmers bundle their channels together for sale to distributors.
• To the extent that programmers are willing to sell their services to new providers, they will expect the new provider to carry all of their channels in the "basic" package and pay full "rate card" prices.
• The existing multichannel providers have
• superior pricing on content, and
• less restrictive packaging terms, and
• a much more substantial local advertising sales business which can take advantage of the local avails that cable networks provide with their service, and
• their own pathways to their customers, so they can provide a consistent service quality. 
• The major programmers are not interested in seeing cable as a whole become unbundled. It is not unusual for a programmer to require that a new distributor sign up many other third party cable networks as a condition of an affiliation agreement with a major programmer. 
• Some programmers have restrictions in their affiliation agreements with current distributors that do not allow them to sell their services to over-the-top providers (or provide disincentives if they were to do so).

So, where does this leave our potential virtual MSO?

• Entering a possibly saturated market.
• Signing on to higher content costs.
• Receiving little or no packaging flexibility.
• Having a minimal ability to offset content costs with advertising.
• Being dependent upon a third party (the consumer's ISP) to deliver the service with acceptable quality.
• Being dependent upon that same ISP to provide the consumer with service with no bandwidth cap so that the substantial use of the service (i.e., watching television) does not require the consumer to spend extra on its ISP service.
• Likely having to launch without some popular channels.

Some of the issues the new entrants will face are temporary, but some are more fundamental. With scale, the new entrants will likely improve their content costs and advertising sales businesses. The packaging restrictions limit creating a significantly different content offering. The service quality and bandwidth cap issues look thorny.

Not surprisingly, given these difficult tasks, the virtual MSO business is only being stalked by companies with deep pockets -- Google, Intel, Microsoft, Sony and Apple fit that bill. Perhaps they are willing to run this business on little, or no, or negative margins for a good period of time to establish it.

That list of potential entrants dovetails nicely with the only obvious unimpeded opportunity for the virtual MSO: to improve the television interface. I think are opportunities in this and I am not alone in this feeling. Apparently Intel has made progress on this front. The incumbent distributors' widely deployed set-top boxes with their grid-style electronic program guides are not especially helpful for consumers navigating hundreds of channels. The widely deployed set-top boxes with DVR storage in the consumer's home have limited capacity, are subject to failure and can rarely be accessed outside of the consumer's home, often they can only be accessed on the single set to which the box is connected.

The skills that some of these new potential entrants have also dovetail nicely with this opportunity: Apple makes great interfaces, Google is the leader in running the sort of enormous data centers that a cloud DVR would require, Microsoft has some of Apple's advantages and some of Google's (both to a lesser extent). Sony still makes great consumer devices and Intel's chips undergird systems for all of these players. For each, that's a good start.

However the intersection of the opportunity and the constraints may be small. It doesn't make sense to make a first-class interface and launch it with a low-end product. Meanwhile launching a high-end product with uneven quality of service and lacking some top channels might also be problematic and the threat of future bandwidth caps doesn't help.

Fundamentally, to sort-of channel Steve Jobs, if you can't offer a product that is much better than what is out there already, why are you doing it?

At the same time, the multichannel interfaces are a moving target. It is clear that the distributors know that their interfaces are not-so-good and that the DVR would be better placed in the cloud than in the consumer's home. Comcast's new X2 guide software, unveiled at last month's Cable Show, is working on both of these issues. Other distributors are making similar efforts, like Cox's FlareWatch product/experiment (see my prior post).

The launch of iPad apps, led by Time Warner Cable and followed by many other distributors, are another way the distributors are updating their interfaces and, this also suggests another path for Apple, Google, Intel and the others.

These apps have been ported to devices beyond the iPad. In the case of TWC TV's app, it is available on portable devices such as the iPhone, Android phones and tablets and the iPod touch, but it is also available on the Roku, a television-connected box and Microsoft's Xbox game console and is rumored to be coming to the Apple TV. Clearly Time Warner Cable is more interested in making its service more available and hence more useful to consumers than protecting the revenue stream from additional set-top box rental and additional outlet charges.

But isn't carrying the cable operator's app on an Intel-powered box a tiny victory for Intel or Apple compared to the huge win of creating a virtual MSO?

Perhaps it is, but looking at Intel's issue more broadly, the creation of the virtual MSO seems much less important. Intel does not have a strategic need to distribute video content. Intel does have a strategic need to sell more of its chips, which by and large are not used in cable set-top boxes, nor in the Apple TV or Roku boxes. Similarly, Apple and Sony are primarily in the business of making consumer devices.

If the operators will create apps for the boxes of Roku, Apple, Sony and Intel, it would not appear that there is the same need for these companies to create their own services competitive with cable, particularly if they are essentially relegated to providing me-too services.

Under this scenario:

• The multichannel operator wins by making its service available on more devices, which inevitably will compete to make their boxes and interfaces more attractive, reducing the distributors' dependence on expensive proprietary set-top boxes which much be purchased, inventoried and supported and whose software tends to evolve slowly. The interface is still controlled by the operator since it has to authorize the subscriber (and no software developer would release an app that the operator won't authorize).
• The consumer benefits by having the option to buy a relatively inexpensive Internet streaming box (some Rokus cost as little as $50) and not having to rent a cable box (effectively $14.25 monthly for me on Time Warner Cable's system in Manhattan -- see picture below).
• The consumer electronics company has an easier time getting its box into a consumer's home.

1 additional outlet costs almost as much as HBO

To the extent that there is a more promising virtual MSO opportunity available down the road, Apple, Sony, Intel or whomever can then use its installed base of boxes to jump start that business. Famously, Apple did not make the first MP3 player or smartphone, they waited until what they could make was a material improvement on the state of the art.

While the Google TV box could employ the same strategy, that may not be sufficient for the company. After all, Google is primarily a services provider rather than a device provider, it is already in online video via YouTube and it has the deepest pockets of all. As the Diffusion Group notes, Google's search expertise could be bring a new paradigm to television navigation. Also, Google's experience serving up more relevant advertising might give it a leg up over the incumbent cable ad sellers, once it had meaningful scale, of course.

Another view, not inconsistent with mine: Jeff John Roberts, GigaOm

Intel-evision?

According to an article in the Wall Street Journal, Intel is looking to develop at web-based video service to compete with cable and satellite. Intel's plan is to create a virtual MSO, a business idea that many have been kicking around in one form or another.

Consumers would welcome another choice of video provider. As one measure of customer satisfaction, Consumerist's cheeky "Worst Company in America" 2012 bracket features eight providers of multichannel television (Comcast, DirecTV, Dish, Time Warner Cable, Charter, Verizon, AT&T and CenturyLink), among its 32 "contestants".

However, facts are stubborn things (hat tip, John Adams). Multichannel penetration is very high ~90% -- there are relatively few households who do not see it  as a worthwhile purchase, despite the fact that subscription prices increase every year. That suggests that the customer satisfaction issue is likely less the service itself (not that it doesn't have its frustrations - long times on hold, among them), than frustration with the price and general lack of choice. (If it didn't, Charter wouldn't be doing things like this.)

If Intel were to offer a me-too service (i.e., a comparable package of services) at a lower price, it would likely attract some customers. However, multichannel providers are already cutting prices in a de facto way, as they offer sweetheart deals for new customers, particularly in areas of high competition. It isn't easy to compete on the low end with customers churning through the introductory offers in search of the best deal.

The me-too offering would have a competitive advantage if its operating cost of delivering the service were lower than the incumbents. It won't be because of lower programming costs. A new entrant into the market, like Intel, can expect to pay 20% or more greater programming costs than the incumbents. Intel wouldn't have to build the expensive distribution system (laying cable, launching satellites) that the incumbents did, but would be on the hook for the variable cost of delivering bits to its customers. The jury is still out on how much less expensive that would be. However, that does make Intel, like Netflix, highly dependent on the ISPs (who are the cable and telephone companies) to continue to provide unlimited service to their customers.

There are alternatives to a me-too service, of course. A la carte offerings of channels is a popular request, but one that it is hard to imagine the programming community embracing. (LA Times: Don't hold your breath for a la carte cable -- is that clear enough?) Given the high penetration of multichannel television, there isn't much reason for the programmers to look at a different, potentially less lucrative business model, unless they have to do so (as the music industry had to, after rampant piracy ended their chokehold on packaging and pricing). However, the multichannel subscription television market probably has less piracy today than it did in the past, due to the changeover from less-secure analog systems to more-secure digital ones). So, it won't be driven by piracy, at least not today's piracy, but maybe tomorrow's.

This is not the first Intel over-the-top story. GigaOm reported earlier this year that Intel was "in talks to buy Roku". BTW, Roku is now looking to raise some $50 million to expand...hmmm.

It is always interesting to see new entrants to an industry as that's often the origin of the new ideas that shake things up (Walt Disney's theme parks, Apple's iPod, iPhone and iPad). If Intel has that sort of idea, there will be a place in the market for them. There is certainly room for innovation in the distribution of television.