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Intel (NASDAQ:INTC) has announced it plans to launch an Internet based set top box for delivering bundles of TV channels to subscribers. The aim is to disrupt the current business model of the cable companies with this new service. I have been reading quite a few articles on this new business venture but as of yet details are scarce. Obviously the current cable companies like Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC) have a vested interest in defeating this new venture by Intel. The pay television providers have already started working on stopping Intel from getting contracts with media companies. We will discuss this more later in the article but the overall point is while the potential gains for Intel are tremendous breaking into this market in a manner that positively impacts revenues and earnings is an uphill battle.

The first major issue a new pay television provider must overcome is getting the rights to deliver content that subscribers require in order to entice them to switch services. Content comes before subscribers and therefore capital is spent before revenues can be produced through subscriptions. It is the very nature of the business to incur losses at the front end of the development of these services and Intel will undoubtedly show losses for the first year or two of its TV service while developing the necessary subscriber base. This is the short-term pain I alluded to in the title of the article. Throw in the fact that existing pay television providers are using their entrenched positions to lock out Intel and other companies wanting to provide Internet-based TV services like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) and you have a recipe for serious short-term pain. It has been reported by Bloomberg that cable companies are providing financial incentives to media companies in order to prevent them from signing content deals with web-based TV services like those being developed by Intel, Apple, and Google. Intel has already offered to pay up to 75% more than traditional cable companies in order to break into this market (Reuters). Some media companies may already have contracts that prevent them from licensing their content to these Internet-based companies or reduces the fees they earn if they do license their content.

The offer from Intel to pay substantially more for content will heighten the short-term pain from the launch of this service but the potential may in fact be worth the effort. According to (SBWire) the global market for set top box hardware will be approximately 221 million units growing quickly to 242 million units by 2016. The average price for these units is around $103 but Intel will be offering a premium service with presumably several technological advancements and may be able to command a higher price. If we assume Intel can charge $125 a unit and it can eventually break into the top 5 in terms of market share then by 2016 that would be approximately 14.5 million units (6% market share). This would provide an annual revenue increase of $1.8 billion. But Intel would not just make money on sales of the systems it would earn the monthly subscription fees too. Comcast has 25.1 million subscribers or 25.7% of the total market so let's assume there are a total of 100 million subscribers for 2016 (tvpredictions). So Intel's 6% of the market would be 6 million subscribers. I don't subscribe to a heavy load of channels personally and I have a monthly cable bill of $60 so let's assume $75 a month per subscriber, which would equate to another $5.4 billion in revenue for a total of $7.2 billion for Intel Media; 13-14% revenue growth from the development of Intel Media seems like the kind of potential that is worth pursuing. Of course if Intel Media is truly successful in disrupting the pay television industry taking Comcast's crown as top dog could potentially be worth up to $25 billion.

So what does Intel bring to this industry that would really warrant a major disruption and massive gains in subscribers? Well first Intel is trying to unbundle the channels so I can select exactly what I want or make the informed decision on how much more it would cost to add certain channels. This would add tremendous value to the customer since they would finally be in control of the content they wanted to purchase. Having all of my applications and cable integrated into one box would limit the number of controllers and buttons I would be required to push to switch between apps and TV viewing. The option to "push" a video from my phone to the TV to watch would be very convenient and not difficult to do in this scenario. I cannot count the times I watched a video on YouTube on my phone while sitting in front of my TV, pushing the video to the screen and pausing what I was previously watching would be a fantastic feature that becomes possible. Intel's set top box could be the conduit for 4K content - the next big push in TV technology - and this would be a great differentiator for the service (wired). The potential to develop an ecosystem based on Intel processors connecting all of my other devices that stream video is another potential advantage Intel has over other providers, except Apple. I do see Apple and Google being tough competitors once the initial content war is won by internet providers so this is definitely something to think about to dampen the enthusiasm about this new service. Intel would also be able to leverage the excellent brand recognition it has earned with consumers with its "Intel Inside" campaign.

The potential for Intel Media to produce long-term revenues and earnings for the company are staggering but so is the current competitive landscape. If Intel can successfully leverage its advantages to develop a truly innovative service that disrupts the cable industry we could potentially see 50% growth in the company's revenues. On the other hand the competition will be fierce and the resistance to change from the entrenched cable companies will be stiff. This will cause short-term losses for Intel Media as it struggles to break into the industry and garner the content necessary to attract the necessary subscriber base. This is certainly a service that needs to be followed closely by investors interested in Intel.

Source: Intel Media: Short-Term Pain For Long-Term Gain