1 Major Problem With Intel's Upcoming TV Service

It's official. Intel (NASDAQ: INTC  ) is working on an Internet-based TV service and a set-top box to go along with it. Vice president of the company's media division, Erik Huggers, claims a motley group of ex-Apple  (NASDAQ: AAPL  ) , Google, and Netflix (NASDAQ: NFLX  ) employees are hard at work for the eventual launch of the service. Sounds exciting -- and maybe even revolutionary -- but investors should eye it skeptically. In fact, I'll go as far as to call it a gamble.

There's one major problem: Intel has no relationship with the end consumer. The company's current customer base is primarily made up of original equipment manufacturers, orOEMs. Unfortunately, these customers don't buy finished goods.

As bluntly stated by Huggers at the AllThingsD Dive Into Media Conference, "We'll offer consumers a box and they'll buy this directly from us." Easier said than done. Not only does this require a distribution system with the end consumer, but it also requires a relationship. Talk about deviation from the company's core business.

Netflix had to start from scratch, too. But it benefited from a having a first-mover advantage, pioneering the first robustly successful Internet-based TV service the world has ever known. Furthermore, it fostered digital relationships with customers by enticing them via a DVD-by-mail service, meeting an unmet customer need.

With the stock up more than 129% in the last three months alone, Netflix investors don't seem worried about Intel's desire to enter the Internet-TV business. In fact, Netflix is on fire. The company now claims 33 million global streaming members, adding 10 million in 2012 alone. Evident by improved rates of voluntary and involuntary retention, the company's offering is as compelling as ever. Poised for operational improvements, the company projects an expansion of its contribution margin by 100 basis points in 2013.

Then there's Apple's 500 million iTunes accounts and its more than 500 million iOS devices in the hands of consumers across the world. Furthermore, the company has already made significant headway with its Apple branded set-top box, selling over 5 million units in fiscal 2012. Of course, there's also the inescapable rumors of an Apple-branded television to launch as early as this year.

Suffice it to say, Intel is has a tough road ahead, entering an extremely crowded space with some tough competition and a customer base of zero.

The bottom line
Maybe Intel's move into media, devices, and a relationship with the end consumer will prove to be wildly successful, but I really don't care. I don't bet my money on completely uncertain outcomes. In other words, my Intel investment thesis remains unchanged. For now I'll view this as an interesting side project.

I can't say it any better than Intel Media's vice president: "We're shooting for a service that incorporates literally everything. ... But Rome wasn't built in a day. It'll take time." You're right, Huggers. Rome wasn't built in a day. It took centuries. Good luck.

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  • Report this Comment On February 13, 2013, at 6:07 PM, ctstone wrote:

    Anyone remember "Intel Inside!"? It seems to me that Intel is a known commodity among most consumers, even if they've never bought a standalone Intel product. Intel has huge name recognition and brand trust. Packaging the gizmo and getting it to retailers will be easy.

  • Report this Comment On February 13, 2013, at 6:24 PM, SuntanIronMan wrote:

    Intel does have a relationship with the consumer. They are far from an Apple in that regard, but it would be incorrect to say they have no relationship at all.

    Intel has boxed processors, mother boards and solid state drives they sell for individual customers. Products that you can buy at Amazon, Best Buy and the like.

    As for digital distribution, there is Intel AppUp, an app store on Windows where apps are submitted by developers and bought by consumers.

    Again, I'm not saying Intel is going to rival Apple in the retail space or anything like that, but they have some experience at least.

  • Report this Comment On February 13, 2013, at 7:47 PM, TMFDanielSparks wrote:

    @WhichStocksWork and @ctstone.

    Thanks for the solid comments. You bring up great points. There is definitely a chance for success... But I'll still have to classify this as a side-project in which I can only speculate a successful outcome. There are way too many uncertainties. It definitely doesn't change my investment thesis. What about you?

  • Report this Comment On February 13, 2013, at 8:04 PM, techy46 wrote:

    So Intel TV is the real iTV?

  • Report this Comment On February 13, 2013, at 8:43 PM, navychop2 wrote:

    I'm guessing Intel's consumer devices would compete against Roku and Blue-Ray players, all of which have NetFlix streaming video app built in. Intel would have to offer similar simplicity to connect and use, as well as advanced features (built-in DVR, broadcast to other TVs in the house, iPhone/Android remote control app, ???) at a similar price making it compelling enough to buy instead of the other devices.

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