The Gambler: Intel Media, Verizon, And The Future Of TV
“You gotta know when to hold ‘em, know when to fold ‘em.
Know when to walk away, and know when to run.”
For Intel, it’s time to fold the cards and run. But that’s not what caught my eye about the story. No, the interesting element here is Verizon. What could it possibly see of interest in Intel Media, and how might it take advantage of Intel’s substantial R&D investment over the past few years?
Three things come to mind.
1. Intel Media = high-quality OTT user experience. I’ve long argued that the future of TV is an app model with on-demand streaming to interactive software clients on every device with a screen. From all accounts, Intel did not give up on its OTT service because the user experience was bad. On the contrary, it seems to have focused its energy on creating a “better than TV” experience delivered over the public Internet. This is non-trivial, both in terms of video encoding and decoding, as well as discovery and navigation. However, I believe it is safe to assume that, from a pure technology perspective, Intel Media’s service was equal to anything in field today (with the possible exception of Netflix, which has developed amazing technology chops of its own).
By contrast, Verizon FiOS offers a decent user experience, but certainly nothing to write home about. By acquiring Intel Media, Verizon could basically paint the Intel Media interface Verizon red, plug in its content (see below), and launch the service nationwide.
2. Verizon already has nationwide content deals with TV providers. Intel Media was starting from scratch with the content companies. Many networks are happy to license new OTT providers, as long as they (1) pay the same rates as the existing MVPDS for the same channels; and (2) provide an upfront guarantee and take-or-pay commitments, which means that the content provider gets paid for a meaningful subscriber base from day one. These commitments add up to a huge investment, especially when starting from nothing, as did Intel Media.
That said, the funny thing about U.S. MVPDs is that they all have nationwide content licenses. Only the satellite guys had a truly nationwide footprint. Everyone else – including huge companies like Verizon, AT&T, and Comcast – still must ask you for your address in order to know whether they are able to offer you service.
Content offers, however, are nationwide, both in terms of scope and substance. ESPN, for example, is the same channel in Portland, Ore. as Portland, Maine. Yes, Verizon would likely need to amend its existing agreement with Disney to cover a nationwide OTT service. However, as ESPN President John Skipper recently confirmed, as long as Verizon takes the full package of ESPN channels and pays the going rate, ESPN does not care where or how Verizon provides service to its customers in the U.S. When combined with the reach that an OTT service would offer, the combination of Intel Media’s platform and Verizon’s content muscle could make for a very interesting play.
3. Verizon has 100 million nationwide customers and a network of retail stores. Acquiring new subscribers is tough and expensive. Yes, Netflix has 40 million subscribers (just over 31 million in the U.S.), but its “overnight success” has in reality taken more than 15 years to achieve. If Intel Media were to launch today, it would be hard-pressed to attract a million paid subscribers to a new service by the end of 2014. Verizon, by contrast, already has over 100 million subscribers, most of them mobile customers, with FiOS TV basically stuck at 5% penetration (5.2 million subs at last count).
In the past, one could explain this state of affairs by highlighting the distinction between Verizon (wireline) and Verizon Wireless (which was a 55/45 joint venture with Vodafone). No more. Verizon is paying $130 billion to acquire Vodafone’s 45% interest. A key reason for this is so Verizon can operate as a single carrier with respect to its 100 million customers and its almost 2,000 company-owned retail stores across the country -- a single carrier offering a widening range of services. Multiple services mean greater revenue, higher customer satisfaction, and lower churn. You’ve got to think the new Verizon would love to have a nationwide broadband-agnostic (i.e., OTT) TV service that it could offer all those customers.
Some deals just make sense. Verizon, meet Intel Media. Intel Media, meet Verizon. Gentlemen, for the sake of the future of TV, let’s get a deal done.