How Intel TV failed -- pay attention, Google and Apple

analysis Intel aspired to revolutionize cable and satellite with Web TV. Just because it failed doesn't mean Apple, Google, and the rest will too -- but they're no closer to a happy ending.

Lindsey Turner/Creative Commons Public License

Intel was set to revolutionize television.

In fact, Erik Huggers, the head of Intel Media, said in February that this would be the year Intel shakes things up . After all, he had a small army of 300 at work and more than 2,000 Intel employees testing OnCue, a new box and service that would allow users to watch live TV, on-demand video, and other Internet-based offerings like video apps in one package.

Now, with 2013 in its final weeks, Intel's goal for OnCue has morphed into securing the best payday it can from somebody who will take the venture off its hands .

Erik Huggers, head of Intel Media, speaks at the AllThingsD media conference. Screenshot by Shara Tibken/CNET

Intel is just one company attempting -- and failing -- to change the TV industry, underscoring the difficulties involved with convincing the major players to move out of their comfortable and lucrative business models. There are lessons that can be gleaned from Intel's botched project, lessons that should be heeded by the likes of Apple , Google , and Sony , which are all said to be chasing the same vision.

Their goal is to leap onto the biggest screen in the household, where Americans still spend the majority of their time watching media, and deliver what cable and satellite companies do now and more, all in one.

Luckily for them, the most crippling of OnCue's problems was specific to Intel -- apathy of new management. Yes, all the tech giants must jump over some of the same hurdles, but we know other players have more of a spring in their step than Intel does: deeper pockets and more knowledge about media are examples. But the reasons OnCue lacked appeal for Intel's new CEO are the same snarls that Intel's tech competitors must untangle to make Internet-based pay TV a reality.

More money, more problems
Unfortunately for all tech companies eyeing Internet TV, the problem that rankles cable and satellite customers most -- climbing bills -- is a problem technology can't solve.

As Intel proved, the easy part was creating a new technology to deliver television with a user interface that beats cable and satellite. Test versions of OnCue have been deployed in Intel employees' homes for months.

The hard part is content. Be it TV shows, sports programs, or live events, content is expensive to produce and it's expensive to license.

Erik Bannon, analyst at IHS, called it the biggest barrier to tech companies. Media companies not only negotiate for carriage fees, he said, but also aim for a new distributor to guarantee a minimum number of subscribers.

"Out the door, you're paying for a million subs, whether you have zero or a hundred thousand," he said, noting that fee payments aren't going down over time and typically have three- to four-year terms. A new Web TV provider likely would need to commit to three to four years of content payments as though it's already operating a business with millions of subscribers.

But what does that mean for the tech competitors attempting to break through with Web TV?

The contenders
In Apple's case, making a significant investment to upend a product category comes straight from its playbook. The New York Times Magazine's recent recounting of the iPhone birth pegged Apple's investment in its development at $150 million. Apple is also the world's most valuable company, with a market capitalization of more than $500 billion, and it had $14.3 billion in cash on its balance sheet and $9.9 billion in cash flow in the last quarter. Unlike Intel, Apple has a background prodding media companies to break their molds, selling electronic music, TV and movies through iTunes.

Apple

In Google's case, the company has never shied away from pursuing outlandish innovations while it enjoys a reliable, lucrative stream of revenue from its search ads. The cash on its balance sheet rivals Apple's -- $15.2 billion -- and like Apple, both companies have a head start getting onto televisions. Apple TV and Chromecast, though not technological home runs, have proven popular: Apple virtually splits the market for set-top boxes with Roku, and Chromecast was on back order for weeks at launch in July and for weeks was the top-selling electronics item in Amazon's massive online store.

In the case of Sony, it means pushing the bounds of its PlayStation gaming console, but the company was the first to make early headway on content. Sony is the only contender reported to have have a tentative deal with a media company , Viacom, which owns Comedy Central, MTV and other channels. (Sony's gaming rival Microsoft's Xbox at one time expressed interest in morphing its console to include a full Internet-based TV service, but the company instead opted to join forces with other television providers for its Xbox One, integrating cable services instead of replicating them.)

The technology companies pursuing Web TV have stayed silent on their TV ambitions publicly. Google and Apple didn't respond to messages seeking comment, and Sony said reports of its own Internet-based TV project are based on speculation.

For Internet-based TV to be a competitive option, it either needs to be cheaper than cable and satellite or it needs to provide the content that subscribers want in a better way. Intel knew early on that it couldn't win on price. Huggers said in February that Intel's service wouldn't cut a user's television bill in half. For the companies still working on Web TV, it would mean charging less than traditional competitors for a service while paying more than traditional competitors to offer it.

In addition, for a Web TV offering to be truly Web TV, it would need to offer all the channels consumers want alongside the "over-the-top" video capabilities like Netflix and Hulu that they associate with Internet viewing. But traditional pay-TV providers in the US have been leery of coexisting with over-the-top services, even though some pay-TV providers abroad have begun limited partnerships with Netflix.

ABC, CBS, NBC, Fox, Showtime, HBO, AMC and ESPN either declined to comment or didn't respond to messages from CNET for this story. Comcast, Time Warner Cable, DirecTV and Dish -- the largest of the country's cable and satellite TV operators -- wouldn't comment for this story. (CBS is the parent company of CNET.)

The barriers go higher
The irony of the world's top tech companies jockeying to launch virtual pay-TV services is that the traditional providers have only become more entrenched with time.

Read: More than a chip maker? Intel's blown opportunities

The idea of an online player taking over has affirmed cable and satellite companies' positions in the landscape and made all players realize what they could lose by rocking the boat, said Brannon. The prospect of new tech competitors reiterated how important the traditional distributors are -- with their massive subscriber bases -- to media companies, who need as many people watching their programming as possible -- all while measuring how many of them there are -- in order to raise ad rates, he said.

It also spurred cable and satellite to ramp up their own innovation -- but in a controlled way that fits in the existing business model. DirecTV last month said it would start streaming more than 30 channels live for viewing on devices outside the home, and Comcast in October said it was allowing 35. Time Warner Cable is nearing the end of a process ensuring that its local programming is encoded so it can be delivered via apps.

In other words, tech companies put up defenses on the front where technology companies had their biggest advantage.

Conviction at the top
One of the biggest advantages Intel's competitors have in the race for Internet-based TV is that they're not led by Brian Krzanich.

Intel's former chief operating officer succeeded Paul Otellini as CEO in May. Despite some investor hopes that Intel would seek fresh blood, the appointment of Krzanich -- a two-decade company vet in the office Intel typically uses to groom CEOs -- came as no surprise. He also wasn't expected to steer Intel's strategy in a different direction.

That is how his tenure has largely played out, with OnCue a victim of apathy.

Intel CEO Brian Krzanich Intel

Since Krzanich took charge, Intel's TV project has dropped off the radar, except for reports of Intel attempting to sell it off. Where Otellini saw Web television as the chance for Intel to take the lead in a big consumer business rife with dissatisfaction, Krzanich has focused on reviving PC and mobile business, reportedly concluding the TV project was a costly distraction.

Intel said its policy is to decline comment on rumor and speculation and said that it is continuing to trial OnCue internally.

But Apple, for one, has been clear in the past that it is keen to be the centerpiece of the living room. Former CEO Steve Jobs and his successor, Tim Cook , have stated their passions for producing a revolutionary device to supplant the typical TV.

It's easy to see why. People are still watching their TVs for most of their video, but they're increasing their viewing on connected devices. The average U.S. consumer packs in nearly 60 hours of media content each week, and more than half of that -- 35.1 hours -- is traditional television, according to Nielsen's latest cross platform report. However, the amount of time spent watching traditional TV has shrunk from a year earlier, supplanted by more time spent watching video on the Internet, game consoles, and mobile phones.

There's certainly an opening for a new entrant. Cable TV providers rank dead last in customer satisfaction. (Satellite providers tend to score better than cable.) Consumers are fed up with paying sky-high monthly bills that keep rising for a product that has been a technological slowpoke while devices like smartphones have made huge leaps forward.

That new entrant, however, won't be Intel. The deflation of its TV project offers lessons to those still vying to create a true Web TV service, even if their combined efforts have rallied the established players to defend themselves better. To bring Internet-based TV to consumers, companies like Apple, Google, and Sony may need to get over their tendency, as one media and advertising executive described it, to feel like they have answers to everything. To make Web TV a reality, they'll need to face reality first.

 

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