Profitable Web TV Is Still a Long Way Off

Intel's (NASDAQ: INTC  ) decision to stop working on its OnCue Web TV initiative underscores the challenges that any company faces when looking to provide Web TV to Internet users.

Intel created OnCue to provide the same basic bundled channels offered by cable or satellite companies. This would allow anyone to watch the shows on a device of their choice.

The problem is that to be successful, Web TV must address the issues consumers are concerned about: higher content costs and a la carte options. A la carte refers to paying for only those shows the customer wants to watch.

Intel knew this, and worked hard to secure content deals for OnCue. But even offering a 75% premium over its competitors wasn't enough to land contracts from content providers.  The real problem was that Intel wanted to offer a variety of channel options, an idea that was rejected by the industry. 

So no matter how long it took or if it ever was successful, Intel reportedly would have to pay out hundreds of millions of dollars for content upfront, essentially killing the project.

Must be competitive 
For Web TV to succeed, it must find ways to cut costs so that it will be attractive to users who are increasingly looking for lower-priced services.

The biggest hurdle with this is the studios producing the content, which now appear to be protecting existing distributors. Until that changes, it looks like any company attempting to offer Web TV will have to charge less for the service to attract customers while paying more for bundled content.

One possibility would be to go a la carte, but that isn't going to happen until content companies are forced by either the market or lawmakers to provide that option. Canada is undergoing that transformation, and it is likely that this will pressure media companies in the U.S. to do the same over time.

As it is now, there is nothing in regard to content that points to Web TV being a legitimate business model. Intel understood that technology doesn't have the answer to market demand in regard to prices and bundling. It is totally on the shoulders of studios, and until they're willing or forced to change, Web TV will remain in limbo.

Enter Verizon
Numerous reports say Verizon (NYSE: VZ  ) is close to making a deal to acquire OnCue from Intel, with some saying it could pay under $200 million for it. 

At the end of the third quarter, Verizon had approximately 5.9 million subscribers of its FiOS Internet service. For them, adding OnCue could result in a nice increase in subscribers, although its profitability will depend upon whether or not the company will have to secure new contracts for a streaming service, in addition to what it pays out now.

The benefit for Verizon is it will allow it to compete in territories it hadn't been able to before, which could have an impact on other content distributors like Comcast.

For those new subscribers the company does land, it should be able to upsell them to other services, which would increase its average revenue per user, which was up to almost $113 on a monthly basis in the latest quarter. 

Of all of its FiOS customers, almost two-thirds are triple-play customers, underscoring the potential upside for each new customer landed by Verizon for its new streaming service.

Other than short-term profitability questions, the other variable is how many consumers will acquire a streaming service that only offers the same content offered on network and cable TV channels.

The set-top box 
Interestingly, there is more coverage on the set-box side of the Web TV story than there is on the content side. That's puzzling to me as an investor, because all the set-top box does is act as a conduit for content. Many people I know already stream YouTube, Netflix, and Hulu on their TV sets, so I'm not sure what the release of a new Web-enabled set-top box (as in the case of Google (NASDAQ: GOOGL  ) ) would do to further the cause.

Google and other competitors in the field need to understand that it's not the type of set-top box offered that will determine the success of Web TV. Instead, it will be the type of content deals made -- if any -- that will determine its success.

As with a number of areas with Google, I see this as more of a marketing play rather than a serious attempt to generate revenue. This isn't the first time a tech company has entered a sector to remind investors and shareholders it's tuned into the market, rather than for the purpose of generating serious revenue. I would rather see Google enter the premium content distribution side of Web TV, instead of the hardware side. That's where the money is in this sector, and Google is already working on that with branded YouTube channels.  

Watch the content deals
The success or failure of Web TV will be determined solely by content. Once the content deals are worked out, the brands, features, and benefits of individual TV consoles will come into play. Until then, the introduction of new models should only be considered a form of marketing to keep the companies that are making them in the minds of consumers.

Streaming existing content bundles on a set-top is not a compelling proposition. This is why Web TV is a long way from becoming a reality, and is a major reason why Intel got out of the business.

Until (or if) content deals are made, it won't be known whether this will be a good business model or not. As things stand now, it's not, which is why I'm bearish on the industry for now.

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