The road to success for Intel Media and others that are preparing to launch “virtual” MSO services will be a rocky one, a top industry analyst said in a note issued Monday.
Craig Moffett, the former Bernstein Research analyst who formed his own firm, Moffett Research, in May, issued a note Monday that prophesized a challenging, if outright dim, future for an expected new wave of over-the-top subscription TV services.
“To have any real shot, OTT video must find a way to substantially undercut traditional Pay TV pricing,” Moffett wrote in response to aBarron’s column that presented the author’s gushing first glimpse at Intel’s yet-to-be-launched service that, as described, appears to share many of the traits and attributes that will grace cable’s new generation of cloud-based video interfaces. “There are only three possible ways to do so,” Moffett wrote. “None seem terribly likely.”
- Acquire the content more cheaply. “That’s a non-starter,” Moffett noted, pointing to a recent Reuters report indicating that Intel is struggling to get content deals even at a 75% premium versus what the traditional players pay.
- Offer smaller packages. “That may not be a non-starter, but it’s nowhere near as obvious as it sounds,” the analyst said, noting that programmers have little or no incentive to voluntarily unbundle their networks because bundling gives them “a more diversified and stable business model.” He also doesn’t like the prospects of government-mandated unbundling, calling Senator John McCain’s (R-Ariz.) à la carte proposal a “tough sell.”
- Offer a cheaper service – “to arbitrage the distribution margin charged by cable and satellite operators – that is the most interesting,” of the options, Moffett wrote.
And he thinks cable operators and other telecom providers remain well-insulated from virtual MSOs even under that third, most promising option. The “transport function” of the MSO survives regardless of whether the operator handles that on behalf of programmers, or on behalf including Netflix, Hulu or even Intel under the OTT model.
“OTT services are not ‘alternative pathways to the home.’ They are simply alternative content aggregation layers. The pathway to the home is, in either case, the cable’s company’s physical infrastructure," Moffett said. He argued that the concept of the "video margin" of about $40 per month is a misnomer and should be instead viewed as a "transport charge" that is over-and-beyond a passing through of content acquisition costs.
And he suggested that Intel’s coming service, even if it was priced well below traditional pay TV packages, could be rendered irrelevant if MSOs decided to uncork usage-based pricing. If an MSO hit subs with an additional $40 per month in broadband fees to deliver Intel’s offering, “the service would almost certainly fail.”
But that MSO option could be a fleeting one. Moffett also said current regulatory climate is causing cable's window of opportunity to “make this transport charge explicit” through the use of usage-based pricing to close.
Meanwhile, Intel has revealed little about how it intends to market, price and package its OTT TV service. At the Multichannel News and B&C Next TV Summit in New York in March, Intel Media VP and GM of content and services said Intel will use “smarter bundles” and a more personalized package to target young consumers who are eager for change. Free also said Intel Media is prepared to tweak its business model if the service is threatened by usage-based broadband consumption policies.
Fast-forwarding to this week, Intel Media remains undaunted, confident that it will strike the content deals required to get its service off the ground later this year.
“We’re still on track to launch in 2013,” spokesman Intel Media spokesman Jon Carvill, said via email, but declined to be more specific. On the content side, “we’re broadly engaged and continue to make significant progress in this area. We remain confident that we'll have a strong content offering when we launch later this year.”