Verizon Communications’s proposed acquisition of Intel Media’s assets has little to do with creating a “virtual” MSO. Rather, it has almost everything to do with unleashing a strategy that will allow the telco to build and control the next-gen IP video hardware and software platform for FiOS TV, and help it match up with Comcast’s X1 platform, industry sources who are familiar with the plan told Multichannel News last week.
Still, speculation ran rampant last week that the deal meant Verizon would soon try to take FiOS TV beyond its franchise borders and essentially pick up Intel Media’s original plan for its over-the-top pay TV offering, to be called “OnCue.” Sources said Verizon’s intentions, particularly in the near-term, are much less explosive while still establishing a strategic direction for its infootprint FiOS video service.
The acquisition, sources said, will give Verizon a new hardware and software platform that it can apply toward its ambitious IP-video transition. Verizon’s FiOS TV service still relies heavily on a QAM/MPEG-based transport architecture that most MSOs use today to deliver digital video.
The acquisition, sources said, would allow Verizon to command and control that underlying IPTV ecosystem, establishing independence that would free it from the product roadmaps established by its current suppliers, which include Arris and Cisco Systems.
CATCHING UP TO COMCAST
Once those assets bear fruit, Verizon will be in position to mold its IP-video platform any way it sees fit, creating a model enjoyed now by DirecTV and Dish Network, and one that Comcast is achieving with X1 and the Reference Design Kit, a pre-integrated software stack for IP-capable gateways and set-tops.
“Fundamentally it’s a box-and-software play; it’s about independence of the software and the CPE [consumer premises equipment],” explained a source familiar with Verizon’s rationale for the Intel Media acquisition. “[Verizon] will now have the ability to go build a vertically-integrated in-house solution that they can control.”
This approach, which will reduce Verizon’s reliance on the current model while trimming down software licensing fees, could end up saving Verizon a lot of money and enable it to get a quick return on the investment. Some sources estimate that Verizon, which is expected to secure an attractive chipset supply agreement from Intel as a result of the sale, stands to save $100 million to $200 million a year on CPE capex alone. That by itself would justify the reported $150 million to $200 million Verizon is said to be paying for the assets.
It will also give Verizon the ingredients needed to improve its video product and catch up to Comcast, which has leapfrogged the market by pouring resources into developing X1, an IP-based platform with a cloud-based interface for set-tops that can also be extended to tablets and smartphones. Comcast has also credited X1 for helping it to grow video subs “moderately” in the fourth quarter (Comcast will report earnings on Jan. 28).
There’s still no telling how long it will take the results of Verizon’s acquisition to show up in the marketplace. Comcast started work on its next-gen platform as early as 2009. It completed the bulk of the X1 rollout last year, and now has more than 1 million customers on the platform.
But Verizon is not starting from scratch. Plus, the Intel Media team will largely stay intact to see it through. Verizon said it will employ “substantially all” of the 350-person Intel Media unit, which will remain in Santa Clara, Calif., and be led by its current management team, including Erik Huggers, the corporate vice president and general manager of Intel Media.
Even if it takes years for Verizon to deliver a next-gen video product, the good news is that it is still gaining video subs, albeit at a slower pace. Last week it reported adding 92,000 FiOS TV subs in the fourth quarter of 2013, off from the 134,000 it added in the year-ago period.
Verizon, meanwhile, has been somewhat cryptic about its interest in the OnCue assets. Speaking on Verizon’s earnings call last Tuesday (Jan. 21), company chief financial officer Fran Shammo said the deal will speed the company’s IPTV transition and enable it to tie in more tightly with Verizon Wireless’s 4G/LTE network.
“As far as the OnCue acquisition…the focus here is really to accelerate the availability of the nextgeneration IP-video service, which will integrate into FiOS,” Shammo said. In addition to offering an opportunity to reduce video service costs, the deal “really accelerates us … if we were to build IPTV versus buying the IPTV technology,” he added.
“We’re positioning ourselves strategically to be in a position to competitively compete around the whole mobile-fi rst world and video,” Shammo said.
BUYING, NOT BUILDING
Verizon declined to elaborate on Shammo’s comments. But the deal is another indication that Verizon is happy to buy, rather than build, the technologies it needs to speed up product development.
Of note, Verizon Digital Media Services, the company’s cloud video unit, recently bought two companies: EdgeCast, a content delivery network company, and upLynk, a startup that has developed a streamlined multiscreen video publishing platform that already powers authenticated apps such as Watch Disney and Watch ABC.
The sale will also make it easier for Intel to continue doing business with the pay TV industry. When the chip maker was developing OnCue, it was also working on a service that was poised to compete with its MSO customers.
With those assets sold, Intel can now move to develop and sell its lineup of set-top and DOCSIS chips without that conflict-of-interest hanging over the company.
Verizon’s interest in acquiring Intel Media is connected to its desire to compete with Comcast and its X1 platform rather than a desire to be a “virtual” MSO.