Internet pay-TV is coming. Will you care?

Internet-based pay-TV will bring some consumer perks, but the biggest beneficiary may not be who you think it is - or want it to be.

Lindsey Turner/Creative Commons Public License
To hear television companies describe it, no plot is more predictable than the arrival of a Web-based TV provider.

"Somebody's going to come over the top," said David Zaslav, the head of Discovery Channel- and TLC-parent Discovery Communications, using the phrase for delivery of TV over the Internet. He made the comments last month at a UBS investor conference, where the financial chief of Disney said its arrival was a certainty and the chief of MTV's and Nickelodeon's parent, Viacom, gave it "a very strong chance" of arriving in 2014.

It has long remained an open question just who will provide an over-the-top pay-TV service. Apple, Sony, and Google have been said to be in pursuit. For nearly a year, Intel was the only company to outright broadcast its ambitions, until Sony went public with its goals at the Consumer Electronics Show earlier this month: It plans to pilot a cloud-based TV service this year that combines live television content with on-demand and DVR.

And now, later than envisioned and not quite as expected, Intel will be the first -- sort of. The chipmaker and Verizon announced Tuesday that the telecom company would buy Intel Media, the division developing the Internet-based TV service OnCue. The technology will allow Verizon's Fios television product to expand to markets that its fiber-optic infrastructure hasn't reached yet.

Whoever crosses the finish line first, when that day arrives and consumers have the choice of an Internet TV provider alongside cable, satellite, and telcos, what will that mean? The implications for consumers are largely a list of the things that won't happen, at least not at first. It turns out the people who will benefit most are the ones most certain that Internet TV is coming.

My bills are too high
One thing that Internet-based TV likely won't be -- at least at first -- is cheaper than what you can get from the current distributors, such as cable and satellite companies. Content costs are on the rise for all providers. According to SNL Kagan, the top three public cable operators -- Comcast, Time Warner Cable, and Charter -- saw their programming costs grow at about six times the pace of video revenues between 2008 and 2012. And cable operators, as the distributors with the longest negotiating history in the industry, have lower rates than newer entrants like Verizon Fios and AT&T U-verse. Comcast enjoys the most benefit here, as the single-biggest TV distributor by subscribers in the country.

That hierarchy means a new Internet pay-TV provider would be paying an even higher rate than all its competitors to get the same content, and it likely would need to pay content companies for a minimum number of subscribers, even if it has zero out of the gate. That raises the prospect of paying more per subscriber than anyone else, even if it's paying for subscribers it doesn't even have.

This is where Verizon buying Intel's OnCue technology gets interesting. Unlike the other technology companies working on an Internet pay-TV product, Verizon already has video subscribers for its Fios product. While it would need to negotiate rates for an Internet-based product, or piggyback onto the terms that Intel came close to reaching, the track record of Fios and its strong subscriber growth should add some more heft to their negotiating position than a company completely new to consumer media services (such as Intel) would have.

One possible repercussion of Verizon's purchase of Intel Media is that it could trigger a cascade of competitors in Internet-delivered programming. Comcast already has made strides on Internet-enabled delivery -- for example, its Xfinity On Campus Internet-based service delivers live TV and thousands of on-demand shows and movies to the computers of students living in on-campus housing.

If the biggest cable company in the country dives in, that forces its cable and satellite competitors to make the choice -- fail to offer the latest technology to their customers or risk a price war against a company that already has the lowest programming rates in the business. Should virtual pay-TV start to become a standard feature, it's hard to believe Apple, Sony, and Google would be content to remain on the sidelines much longer. As always, with increasing competition comes lower prices.

In that way, the emergence of a virtual pay-TV provider could lead to lower bills, but it's a long way off.

I want to get only the channels I like and none that I don't.
Nine television companies are responsible for about 90 percent of professionally produced TV content in the country, and those companies have been able to broaden the networks they run through a bundling tactic. If a distributor wanted to offer HBO to its customers, Time Warner would require the provider offer TruTV too. A cable company couldn't have ESPN from Disney without Soapnet. That has contributed to the proliferation of channels, with less popular ones riding the coattails of must-have networks to give television companies room for advertising.

The dynamic also has kept a so-called "a la carte" option out of the picture. With a la carte, a viewer can pick and choose which channels he or she pays for -- Oprah Winfrey fans could subscribe to her channel and others like it without footing the cost of ESPN, which is, by far, the network with the highest fees per subscriber. But because it would inevitably mean some channels wither and die, it's something a content provider would never allow in its deals with a distributor. Regulators and legislators haven't shown much fervor for forcing unbundling: Federal Communications Commission Chairman Tom Wheeler hasn't shown his cards on the issue yet, and an unbundling bill introduced by Sen. John McCain in 2013 received little support from Congress.

The entrance of a virtual pay-TV provider wouldn't have any effect in this circumstance. It's doing just what preceding distributors have done before, just with a different platform. It doesn't change the factors of content negotiations or disinterest in Washington.

I want to watch programming on all my devices wherever I can connect to the Internet.
The perception is that a technology company with an Internet-based pay-TV service should be the one distributor most likely to let users watch TV anywhere the Internet is available. But technological prowess isn't necessarily what has held this feature back for cable, satellite, and telephone companies -- though technological foot-dragging among some providers certainly limited it to a certain extent.

Again, this is a decision incumbent upon the content providers, who negotiate when and where their shows can be viewed, rather than the distributors.

"Content providers must think of their audience as a mobile first audience," said Albert Lai, media and broadcast chief technology officer at Brightcove, a major provider of cloud services for video. Some already have started delivering some digital content before broadcast, he said, citing as an example Disney's release of some content to iPad and Kindle before airing on its network.

But consumer awareness of "TV Everywhere" capabilities remains low. Earlier this year, an Altman Vilandrie survey found that even though all of the major pay-TV providers offer some form of TV Everywhere, only 32 percent of customers said their cable TV subscription included access to that service. For viewers older than 55, the amount dropped to 24 percent.

Why can't I afford broadband anymore?
When a virtual pay-TV service arrives, traditional distributors have an alternative line of defense to jumping on the bandwagon and offering their own as well. Cable companies and telcos that also provide high-speed Internet along with video service could shift to usage-based pricing for broadband.

Such a structure would charge customers different rates for different tiers of speed and bandwidth. This opens up the opportunity for video distributors that are also ISPs to cash in on a higher level of broadband needs from a greater number of customers. In addition, an appeals court's decision last week to throw out the FCC's Net neutrality rules opened the door for ISPs to have greater control over how they manage -- and charge people and companies for using -- their networks.

If consumers or regulators reject ISPs' attempts to do that, though, it could mean an influx of traffic without a corresponding influx of compensation for the heavier usage.

Verizon's purchase of Intel Media frees the technology from a major uncertainty had the product been rolled out by Intel: Intel can delivery the television over the Internet with the product, but Intel doesn't deliver Internet to Americans. The company would have been at the mercy of Internet service providers to keep offering affordable connectivity even to bandwidth hogs. Verizon, of course, has total control over its customers' Internet service options, but it offers them itself.

The winners
Though the eventual effects of a virtual pay-TV service could be good for consumers, content companies are the clearest, biggest beneficiaries, with more buyers of their programming entering the market. It explains why media companies like Discovery, Disney, and Viacom are so convinced that the dawn of Internet pay-TV is upon us -- they have the most to gain.

Except maybe Intel. It gained unspecified millions of dollars by selling OnCue.

CORRECTED and UPDATED at 6:55 a.m. PT: With Sony's CES cloud-TV announcement and details about Net neutrality implications.

 

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