Verizon Communications' Newest Acquisition Could Change the Television Landscape

Intel agreed to sell its cloud-TV platform to Verizon. The technology has potential to disrupt the cable industry.

Jan 22, 2014 at 2:30PM

Verizon (NYSE:VZ) is going to try to do what Intel (NASDAQ:INTC) could not -- bring cloud-TV to the masses. On Tuesday, the chipmaker agreed to sell its curious Intel Media business, which includes the OnCue platform, to Verizon for an undisclosed amount. The acquisition will boost Verizon's FiOS video service, which added another 92,000 subscribers in the fourth quarter.

Meanwhile, Comcast (NASDAQ:CMCSA), which has suffered at the hands of cord-cutters and telecom companies encroaching on its turf, now faces a tougher competitor. The cable giant has grown by providing the best technology in the market, but Verizon's recent string of acquisitions might have put it a step ahead.

Completing the picture
Last year, Verizon made a few important purchases. The biggest, by far, was its purchase of the 45% stake in Verizon Wireless from Vodafone for $130 billion expected to close in the coming weeks. Although Vodafone was a silent partner, there was always a strong divide between the wireless division and the rest of the company. With the purchase, Verizon is able to more aggressively attack markets it has an interest in -- like video.

To that end, Verizon also purchased upLynk, a software company specializing in encoding video on the fly for live streaming. Additionally, it purchased the content delivery network, or CDN, EdgeCast. EdgeCast allows Verizon to speed up the delivery of high-bandwidth content, such as video, by putting the data closer in the network to its destination.

With acquisition of OnCue, Verizon has completed the video delivery ecosystem. It's a much better fit than Intel, which supposedly had trouble acquiring content rights to fill out the service. Moreover, Intel's lack of consumer-facing products would have likely made it difficult for it to market the service, whereas Verizon has 100-million plus wireless subscribers and a 4G network that covers 300 million people.

Taking on Goliath
Verizon has been operating its FiOS video service for almost a decade, and has accumulated over 5 million video subscribers across both the east and West Coast regions, the stomping grounds for cable giants Comcast and Time Warner Cable. Physical limitations prevent the company from expanding its fiber to most of the middle of the country.

Fios
Source: Wikimedia Commons.

Although Verizon may initially use the OnCue technology as a means to compete where it's already laid fiber-optic lines, Verizon's press release indicated its intentions to offer OnCue as an "over the top" service. This strategy was Intel's original plan -- to market a set-top box to consumers and have them subscribe to the service. Verizon, which already has devices in the hands of over 100 million people, may be able to better sell the service.

Interestingly, Comcast's management has indicated that it's capable of going over the top as well. The only thing holding it back is a lack of content rights. If and when Verizon is able to negotiate the rights to stream content nationwide, it shouldn't take long for other multichannel video programming delivery services to follow suit. I'd expect Comcast to be one of the first.

Verizon has the advantages of vertical integration, which could leave Comcast spending even more on R&D or several acquisitions. Although Comcast has a CDN of its own, it's an on-network CDN -- meaning it only delivers content within the company's cable footprint. For off-network delivery, Comcast uses a traditional CDN like EdgeCast.

True TV Everywhere
The cable industry has been marketing TV Everywhere for some time now, but we're still far away from experiencing real TV outside of the home. Companies like Aereo have started pushing the boundaries, but Verizon could unleash cable with its recent string of acquisitions.

For Intel, the sale gets it out of a business it was failing to make a move on. The rumored sales price of $500 million is reportedly what the company sunk into the project. Those assets are significantly more valuable to Verizon, which can use them to better compete with the cable giants.

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Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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