Weekly Update

Intel pits content against capex

Intel appears to be having about as much luck as you would expect in its efforts to secure linear content rights for its planned virtual pay-TV service. Which is to say: not much.

Eighteen months of negotiations with media companies have so far yielded exactly zero deals, as the networks remain wary of disrupting their currently lucrative arrangements with existing pay-TV distributors. About the only concrete result so far appears to be prompting Time Warner Cable (and perhaps other “facilities-based” service providers) to insert poison pills into its own licensing deals with some media companies limiting the networks’ ability to make their content available to the likes of Intel.

With time running out if Intel is to meet its goal of launching the as-yet unnamed service in 2013, the chipmaker has reportedly resorted to offering the networks a 50 to 75 percent premium over the industry average per-subscriber rate as compiled by SNL Kagan.

While the networks’ reluctance to mess with the good thing they have going with traditional distributors is understandable, they might want to stop and think about this a minute. What Intel is really offering them isn’t simply more money from a new market entrant but the foundation of a whole new pricing paradigm for linear content rights.

Though cable and satellite operators complain bitterly about the networks’ ever-growing demands for higher carriage and retransmission fees, ultimately both sides recognize the pool of money available to pay those fees is constrained by other demands on the distributors’ capital. Among the biggest of those competing demands is the high cost of building and maintaining their infrastructure, whether that means laying cable or fiber, or launching satellites.

Comcast, for instance, reported $4.9 billion in capital expenditures in 2012 related to its cable operations (i.e. excluding NBC Universal), while number two operator, Time Warner Cable, reported nearly $3.1 billion in capex. Some of that spending was driven by the need to expand broadband capacity, rather than on video services. But with TV Everywhere increasingly part of the rights negotiations between the networks and distributors, that added broadband capacity is effectively part of a cable operator’s video infrastructure.

As a pure over-the-top player, Intel Media won’t face those same ongoing capital costs. In principle, then, that should leave more money available to pay for content. Just how much more is hinted at by Intel’s willingness to pay as much as 75 percent more per subscriber than the going rate.

Whether Intel can make those particular numbers work remains an open question, of course. But the size of the premium it’s apparently willing to pay should open the networks’ eyes to the potential windfall they could see from the restructuring of distributors’ balance sheets. Without all that capex on there, a much higher percentage of consumer spending on subscription video can flow through to the rights owner.

That doesn’t mean the networks should abandon the facilities-based distributors. It will be a long time yet before over-the-top distribution is able to supplant cable and satellite. Even over-the-top distribution, moreover, still requires sufficient broadband infrastructure to deliver the content so the need for significant capital spending is not eliminated from the equation.

For the rights owner, however, not having that capex on a licensee’s balance sheet has its advantages.