Quick Thoughts: Next Gen TV – This Looks Like a Job for … Intel?

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–          Intel’s audacious TV play aims to redefine the living room TV experience but carries massive execution risks with a very poor track record on its previous diversification initiatives

–          The plan is to deliver a next-gen set-top with a revolutionary user interface, streaming access to first run TV content, combined with cloud-based functions to expand the TV experience.

–          Intel is not known for device or cloud software development, has no streaming infrastructure or device distribution, and seems unlikely to have negotiated content deals at a reasonable price.

–          Previous consumer products (Viiv Media Hub, Web Tablet, home networking, Pocket Concert, LCOS) have been embarrassing failures. 15 of its 17 largest acquisitions have been shut down.

Intel talks a good game. Rumors about a skunk works TV project began over a year ago, and intensified through the January CES conference. In February, Intel Media General Manager Erik Huggers revealed that the company intended to deliver a state of the art cloud infrastructure delivering live streaming content from popular television networks directly to a next-gen set-top box with a ground breaking graphical user interface, all in direct competition with traditional cable, satellite and telco multichannel TV service. Executives with experience handling negotiations for media content had been hired, and Intel employees were being set up with testing units work the kinks out of the service. Through March and April, journalists began writing that Intel was making progress in negotiations with content partners, based on input from “unnamed sources”, with unconfirmed reports that Intel had signed deals with NBC-Universal (Comcast) and Viacom. In recent weeks, Intel began giving service demos to analysts and journalists, showcasing a slick user interface able to jump quickly between live streams and content stored in the cloud.

More than one briefing attendee came away raving about the attractive interface and the responsive service – surfing channels was faster than on cable, accessing the cloud DVR was lightning fast, and simultaneously searching for channelized and streaming content was a breeze. The demo included live network feeds, and Intel explained that it could pay a premium for programming, because its box could sense who was watching and provide this detail to advertisers, who it could ask to help pay for the content. All of this is expected to be available to lucky American families before the end of the year. Maybe, just maybe, Intel has done what the post-Jobs Apple couldn’t – crack the TV problem.

Then again, maybe not. As any regular trade show attendee can tell you, there is a big difference between an impressive controlled demo and a successful commercial product. Rare is the consumer electronics company that gets the user interface right the first time. Google’s initial Android interface was a pale imitation of iOS (N.B. it got better) and GoogleTV is still a mess. Microsoft took a decade and 8 major iterations to deliver its first well received mobile interface. Even Apple, which hit a grand slam home run with the original iPhone user interface, stumbled with its first iteration of Apple TV and to this day, the iTunes interface is widely criticized. Chipmaker Intel does not have a software pedigree – acquisition McAfee and its PC security applications hardly qualify as evidence that the company is capable of delivering a fully realized gesture and voice controlled user interface for the living room, backed by a sophisticated suite of cloud applications managing content. The odds, it would seem, are against Intel succeeding on its first go at game changing TV software.

In fact, Intel’s set-top box hardware may not be particularly state of the art either. Intel’s gesture control technology, provided by Hillcrest Labs, is based on the motion of a remote control unit and echoes the functionality of a mouse to click, swipe and drag & drop objects on the screen. In contrast, Microsoft’s newest Kinect will allow the upcoming Xbox One to register facial expressions and interpret the body movements of as many as six separate people, without need for a physical remote control. Moreover, successful cloud applications require robust, web scale, distributed data centers to deliver reliable and responsive service to users, wherever they are located. Google, Amazon and Microsoft have built massive infrastructures to deliver cloud services, anchored by huge, demanding consumer web franchises that keep them on the leading edge of performance and cost. In contrast, Apple has struggled to deliver competitive cloud applications – see Maps, Siri, iCloud, etc. – and has invested billions of dollars to play catch up. For Intel, there is a huge leap between demonstrating a lightning fast cloud application served from across a corporate campus over lightly traveled communications links, and delivering a nationwide cloud service available over the public internet.

The most intriguing thing about Intel’s poorly concealed plan is the intention to deliver live streams of popular broadcast and cable channels. To date, media companies have been adamantly opposed to the concept, insisting that on-line access to their most popular programs be delayed by a day or more after original telecast and in many cases, available only to proven multichannel service subscribers. Until Intel, Apple was the company most often blogged about as “in negotiations with network X to bring live TV to the Internet”, with the purported failure of these negotiations the purported reason that Apple couldn’t bring Steve Jobs vision of future TV to the world. So, supposedly, Intel has succeeded where Apple could not, breaking the media embargo over live TV on the web either, because Intel hired a couple of executives who had negotiated content deals elsewhere, or, more likely, because it was willing to pay a huge premium for the content.

Given the blistering rhetoric of defiance from media executives in response to pressure from cable operators and politicians to break up their channel bundles, and allow customers to buy a la carte, I doubt any sweet talking Intel executive could get more than a courtesy lunch at Spago from any of the big six network owners without bringing an enormous wheelbarrow filled with cash. Media companies have wielded enormous power over MSOs over the years, with subscriber fees rising more than 8% a year over the last few. While I am on record with my belief that the gravy train will soon end, network suits are committed to keeping it going as long as they can and big, splashy, exclusive deals with video neophyte Intel for anything other than a King’s ransom, are not going to protect the status quo, and may not even be the best way for the media companies to monetize their programming on the Internet.

IF Intel can cut deals to get a slate of popular live TV channels streaming on their new “cord cutter’s dream” video box, the programming costs will be huge. Intel may believe they can recoup some of that cost by using its motion detectors to assess the attention paid to commercials and selling the information back to advertisers, but this seems a bit naïve given the demonstrated conservatism of the advertising community toward new formats and measurement technology. The bloggers that are so excited about the “democratization of TV” may be in for a bit of a sticker shock if Intel actually brings its vision to market intact. More than 65% of the monthly basic cable bill goes toward programming costs – the networks would need to feel very confident in taking home a LOT more than that in the new model. Rumors suggest that Intel has been offering a 75% premium, if the media companies bite on the offer, programming costs for the new service could be more than total price of existing cable.

Moreover, Intel’s streaming service will rely on residential broadband connections almost entirely controlled by the entrenched competitors to its proposed over-the-top TV service. We expect net neutrality regulation and broadband competition in the future, but data limits and throttling are a reality today, and the Intel service would be the biggest bandwidth hog ever devised. Cable and telephone companies will be looking for ways to either thwart it or exact a significant monetary toll.

Intel will also need help selling, installing and maintaining its box and supporting its service. Consumer electronics is not a “build it and they will come” proposition – particularly for a product as complicated as Intel TV. Intel does not have its own stores, like Apple. It doesn’t have hundreds of millions of visitors to its web site every day like Google or Amazon. It doesn’t have an existing installed base, like Microsoft with its 77 million Xbox households and 46 million Xbox Live subscribers. It can’t sell through carriers, who are directly threatened by the product. To be more than just one more box sitting on the shelf at Best Buy, Intel will have to pay and provide huge advertising and promotional support to boot – despite the “Intel Inside” campaign, the company has no real brand position as a provider of consumer products.

Finally, all of these obstacles could be surmounted, but it is difficult to give Intel the benefit of the doubt given its track record. More or less, all of Intel’s diversification initiatives outside of its core processor business over decades have been failures. In consumer electronics alone, there is a trail of roadkill – the Viiv media center PC platform, the Intel Web Tablet, Intel Home Networking, the Pocket Concert digital music player, the LCOS digital TV architecture, the Xscale mobile platform, blah, blah, blah. Of Intel’s 17 largest acquisitions in its history, 15 have been shut down, with the most recent two – Infineon’s mobile business, and McAfee security software – stumbling along.

I’m rooting for Intel to break the TV cartel – as a 16 year Time Warner Cable subscriber, I have my own tales of TWC’s frustrating technology and customer service abuse. Still, I kind of doubt that Intel is up to the challenge.

For our full research notes, please visit our published research site.

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