Verizon Looks to Give Intel’s OnCue a New Home

According to recent reports, Verizon (NYSE: VZ  ) is in negotiations to buy Intel's (NASDAQ: INTC  ) Internet-based TV service, OnCue. A recent report by Bloomberg indicates that Intel hopes to receive $500 million for the technology. The completion of this acquisition could help expand Verizon's video services and help the company compete in a growing and competitive market.

Intel's OnCue Internet-based TV service allows users to navigate a list of networks and choose current programming, or watch programs that originally aired on cable television up to three days ago. The features of this service resemble those of a DVR, but the main difference is every show is recorded and available at any time. The OnCue hardware and services are currently being beta-tested by Intel employees and select users.

Verizon has the customer base
OnCue is a perfect fit for Verizon and could easily be bundled with the company's FiOS services. Verizon could quickly make OnCue accessible to its 5.9 million FiOS Internet and 5.2 FiOS video connections. The company could further leverage the OnCue product by offering Internet-based TV services to its 101.2 million retail mobile customers.

Verizon is showing modest growth. The company reported revenue of $30.3 billion in the third quarter of 2013, a 4% increase over the same quarter in 2012. Verizon remains profitable and reported $0.78 earnings per share in the third quarter of 2013. The company is well-positioned to make investments in new technology such as Intel's OnCue.

The question is whether Verizon can strike a bargain-rate deal and scoop up OnCue for less than Intel's $500 million price tag. Once the deal is complete, investors should watch how Verizon incorporates OnCue into its business. It's important to identify whether OnCue will remain an individual product or if it will be bundled with existing services.

The brick wall of content
Although Intel created a great product, the company hesitated to obtain and license the large amounts of content that would have been required to make the service competitive. In a recent interview with Reuters, Intel's CEO, Brian Krzanich, said:

We believe we have a great user interface and the compression-decompression technology is fantastic. But in the end, if we want to provide that service it comes down to content. We are not big content players.

Intel recently reported revenue of $13.5 billion in the third quarter of 2013, the same amount of revenue reported in the third quarter of 2012. The company also reported $0.58 earnings per share in the third quarter of 2013.

Investors should watch how Intel handles negotiations with Verizon over the OnCue service. The question is whether Intel can get $500 million for OnCue. Although OnCue appears to be a great technology, it was not the right fit for Intel. Future investments must be more focused and rooted in the company's core businesses for a good return on investment.

Redbox Instant could be a good home for OnCue
Another way for Verizon to capitalize on the purchase of OnCue would be to include it in the Rebox Instant video service. Redbox Instant is a separate entity from Redbox, which operates as a joint venture between Verizon and Outerwall (NASDAQ: OUTR  ) . The addition of Internet-based TV would draw more customers to Redbox. Currently, Redbox is a movie-only business model, but expansion to include television programs would make it a complete entertainment solution for consumers.

Outerwall is showing solid growth. The company reported revenue of $587.4 million in the third quarter of 2013, a 9% increase compared to revenue of $537.6 million reported in the same quarter in 2012. The company is also showing excellent profits of $2.95 earnings per share in the third quarter of 2013.

Redbox is a major source of growth for Outerwall. Redbox reported revenue of $491.7 million in the third quarter of 2013, a 7% increase compared to revenue of $459.5 million reported in the third quarter of 2012. The company reported 199.5 million rentals in the third quarter of 2013, which represents a year-over-year increase of 13%. Redbox also reported that unique credit and debit cards rose by 8% over the prior year to 42 million unique cards.

Investors should keep tabs on Verizon's negotiations with Intel to see if Verizon acquires the OnCue Internet-based TV services. If the deal goes through, investors should pay attention to how Verizon plans to use the OnCue services. Bundling OnCue services with Redbox Instant would incentivize subscribers to use Redbox services as a complete TV and movie entertainment package. Outerwall would greatly benefit from such a bundle because more Redbox users translates into expanding revenue. Also, additional offerings under the Redbox name will improve the company brand.

The bottom line
Verizon would be a good home for Intel's OnCue Internet-based TV service. Verizon could easily market the OnCue services to its 100 million mobile and FiOS users. OnCue would be a good addition to Verizon because the company is already in the content business with Redbox Instant and FiOS TV. The question is whether Verizon can negotiate a good deal with Intel. The OnCue service would work well bundled with FiOS and Redbox Instant, or left as a stand-alone product.

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