Very interesting read into media business.
------------------------
Intel’s Set-Top Gambit: Skeptics Ponder Competition with Customers, Pricing
In this week’s Barron’s print magazine, I wrote an article based on a demonstration by Intel (INTC) of a television service the chip giant plans to offer later this year.
A couple of sell-side analysts today weighted in on the prospects for Intel as they see it.
Let me briefly explain what’s being assessed: Intel’s offering will consist of a set-top box that brings live television over your broadband Internet connection, with no need to pay the cable provider the traditional pay TV fee, instead paying Intel for one of several bundles of channels. The service will offer time-shifting features that go beyond traditional DVR capabilities, and a new look for the on-screen menu system. Many questions are unanswered, such as pricing, branding, the exact content offerings, and the retail distribution strategy.
Raymond James’s Simon Leopold, who follows the shares of cable network technology vendor Arris Group (ARRS), and rates them Overweight, as well as Cisco Systems (CSCO) stock, also Overweight, on the one hand sees little immediate threat from an Intel effort.
Writes Leopold, “We maintain our view that the STB market will evolve to an IP hybrid, which will trigger a product cycle that in our view allows for at least stable sales if not growth for the leading players ARRIS, Cisco, and Pace.”
“Over the top (OTT) products such as the Intel product still require a piece of equipment from the network operator (cable or telco) to serve as a demarcation point for Internet service.”
At the same time, he sees Intel’s decision to be a retail product vendor putting the chip maker into competition with its customers, thus imperiling its own attempt to sell chips for the set-top:
We are not sure if Intel is competing with itself; regardless, we see a conflict. At the CES, Intel had an ARRIS gateway featuring its Puma SoC on display in its booth. Intel representatives said it did not intend to compete with its customers (e.g., ARRIS, Cisco, Pace, etc.) and that it was happy to have succeeded in breaking into what has long been a Broadcom stronghold (STBs). Intel acknowledged that it did not intend to be a consumer product company, which is what the Barron’s article suggests. Intel lacks a channel to sell this new box. The opportunity to sell Puma SoCs via ARRIS, Cisco, and Pace appears meaningful. According to Infonetics in 2012, ARRIS (via the Motorola acquisition) sold 13.3 million STBs globally and 8.3 million in North America, Cisco sold 15.0 and 8.8 million, and Pace sold 10.2 and 3.8 million, respectively. We doubt Intel would risk losing the potential to sell over 30 million units to enter the market with its own product. At the Cable Show last week, ARRIS, Pace and Cisco showed new boxes (X2) that featured the Puma SoC from Intel. We expect these new boxes begin shipping into Comcast in 4Q12 for its launch in 1Q14. Furthermore, some of the next-gen features highlighted in the article (e.g., looking back at recent episodes) are offered by leading cable providers prominently on the emerging generation of IP hybrid STBs.
My own view of Leopold’s point is that Intel and its customers such as Arris likely do not view an Internet-delivered live TV service as immediate competition for traditional set-tops.
On the other hand, as made clear in the article, Intel has already concluded that the actual revenue and profit potential from selling chips into the set-top market is somewhat limited.
In a somewhat different vein, Craig Moffett, formerly a cable analyst with Bernstein Research, and now running his own shop, Moffett Research, humorously describes the Intel ambition as “Waiting for Godot.”
After noting that Intel’s service as I describe it seems not particularly novel in terms of offering versus Comcast‘s (CMCSA) “Xfinity/X2” offering to its subscribers, Moffett goes on to explain that any offering from Intel or another party for live TV necessarily has to undercut pay TV on price as its main appeal.
Moffett sees that as being very difficult. It’s unlikely Intel can pay less per channel, and the company seems to be willing to pay a premium, as explained in an article earlier this month by Reuters’s Ronald Rover, Liana Baker and Noel Randewich.
Trying to make the providers unbundle channels probably won’t reduce cost, as Intel would likely be forced to simply pay more for each channel to the content folks.
Intel could still try to “arbitrage the distribution charged by cable and satellite operators,” by somehow cutting out the basic transport cost of the cable guys.
That’s not likely to happen, writes Moffett, as the cable guys still sell you the broadband connection you need to get Intel’s service:
Herein lies the fallacy of most OTT fantasies. The transport function of the cable operator survives regardless of whether a cable operator provides that function on behalf of content providers directly (in its traditional model) or on behalf of third party content aggregators (like Netflix, Hulu, or, yes, Intel) in an OTT model. All too often, technologists conceptualize OTT video services as an end run around the egregious margins charged by cable operators. This is simply wrong. OTT services are not “alternative pathways to the home.” They are simply alternative content aggregation layers. The pathway to the home is, in either case, the cable company’s physical infrastructure.
Cable companies could torpedo Intel’s offering if they started charging a fee based on usage, which would jack up the total cost to subscribers. Somewhat oddly, however, after asserting the power of the cable operators, Moffett actually concludes that cable companies’ ability to do so is slipping away:
But, as we also described in our initiation, there is a vast difference between adopting a pricing plan a priori that would prevent a service like Intel’s from catching on, and adopting a pricing plan ex post facto that would kill a service like Intel’s after it had gotten started. It may already be too late.
My view is that Moffett raises good questions about whether Intel can reach a viable arrangement with content providers. Intel’s point of view, as I understand it, is that the service will not be about competing on price as Moffett assumes. Intel seems to view its service as being desirable at the same price as pay TV, or even more, if the feature set is correct, including the bundles of content. Intel is betting a substantial number of people are so dissatisfied with their cable and telecom TV offerings that they would gladly pay the same amount of money or more to someone else.
Intel shares today fell 62 cents, or 2.5%, to close at $23.58.
