Sony could turn these game boxes into cable boxes. Source: Sony.
Back in January, Sony (SNE 1.73%) CEO Kaz Hirai announced Sony plans to offer a "cloud-based TV service" before the end of 2014. Last week, the company moved one step closer when it agreed with Viacom to carry 22 of its channels. The company is reportedly in talks with other major content owners such as Fox and Disney.
Sony isn't the only company working on Internet-delivered television. Earlier this year, Dish Network (DISH +0.00%) agreed to terms with Disney to carry its channels in a potential Internet TV bundle. DirecTV (DTV +0.00%) has been in talks with content companies about live streaming, as well. But Sony has an advantage over traditional pay-TV operators: It's also a consumer electronics company.
Who wants Internet TV anyway?
Internet TV isn't for everyone, but there is certainly a market for it. For some, the biggest problem with traditional pay TV is that you need a television set. And for those living alone, $80 per month might seem steep to entertain one person. I'm describing millennials here, and it's a market that has the cable industry worried.
These cord-cutters and cord-nevers are the target of Internet-TV packages that DirecTV and Dish are working on. In DirecTV's second-quarter conference call, CEO Mike White talked about "personal streaming services," or PSS, which allow subscribers to stream video to one device at a time. Dish is working on a similar service.
The goal is to offer a package at a price below the traditional pay-TV bundle in order to capture the growing millennial market. Dish CEO Charlie Ergen says that market is growing by as many as 4 million people per year.
White says he wants the price to be sub-$30 to compete with other over-the-top services; but content owners are making it difficult to price a service there. The channel bundles that content owners want in these services will not allow companies like Dish or DirecTV to make a profit.
Sony's big advantage in this market
Sony holds a couple of advantages over traditional pay-TV operators in the market for over-the-top television. First, it doesn't already offer a pay-TV service. That means it doesn't have to worry about cannibalizing its existing products with a less expensive one. It's only incremental revenue for Sony.
Second, and more importantly, Sony is a consumer electronics company. In the press release announcing the agreement with Viacom, Sony said it had more than 75 million Internet-connected devices in U.S. homes. That includes televisions, Blu-ray players, PlayStations, and more. This is a captive audience for Sony to market its product to, and persuade them to try it with just a couple of clicks.
More importantly, it means that Sony's margins on an Internet-TV service can be minimal, with improved hardware sales making up the difference. That $30 price point seems more feasible now.
Extending the lead in consoles
Sony probably wouldn't limit itself to only servicing Sony hardware, but it seems unlikely a Sony video service would work on Microsoft's (MSFT 0.60%) Xbox. This would give consumers just another reason to choose PlayStation 4 over Xbox One.
It's worth noting that Microsoft recently shut down its Xbox Entertainment Studio. With plans for producing original content for Xbox owners, the business was shuttered in July when Microsoft eliminated 18,000 jobs.
The Xbox was designed to be more than a game console, serving as a complete entertainment device that incorporates live television and Internet video. If Sony releases an over-the-top live television service that integrates well with the PlayStation, it might just eat Microsoft's lunch. While it's at it, it could take the cable operators' lunches, too.
