Compounding worries that internet-based distribution will continue to eat away from traditional cable distributors, Intel (INTC), DirecTV (DTV), Time Warner Cable (TWC), and Charter Communications (CHTR) are seeking deals to over-the-top [OTT] rights from programmers. This matters because OTT rights could give content distributors the ability to deliver TV shows via the internet rather than set-top boxes.
If such a dynamic were to take hold, the TV business could become more competitive, as it would allow virtually every participant to offer services everywhere. Thus far, only Best Ideas Newsletter holding Intel has showed that it is serious about offering a broadband TV service, while the previously-mentioned companies are said to be exploring the idea.
For Intel, OTT rights will be the only way to enter the business because it lacks an established cable infrastructure. Thus far, Intel has yet to reveal any deals with programmers, but the company is anxious to enter the content distribution business, so we believe some deals will eventually surface. The price for Intel won't be cheap, and we aren't sure how complete the product offering will be--even the company is skeptical. Nevertheless, we do not consider content distribution central to our investment thesis on the chipmaker.
As for the other firms in the running for OTT rights, we aren't sure if acquiring OTT rights makes sense. Several cable distributors enjoy high levels of profitability, and OTT streaming could lower profits in two ways. Without question, if the cable distribution market opened up, we could see package price declines. Combine lower cable prices with more expensive OTT rights and content distributors are suffering on the revenue and the cost side of the equation.
On the other hand, OTT rights make a lot of sense if the Federal government allows industry-wide vertical integration. DirecTV could offer its service via the internet, but we think it would have to acquire an internet distributor for the model to become profitable. Otherwise, Comcast (CMCSA) or another internet distributor could charge a prohibitively high rate for consumers streaming enormous amounts of video to make cable services relatively more attractive.
The cable distribution business could experience more flux as online programming continues to evolve, but we think the industry's strong profits are here to stay in the near term. Subscriber growth has largely stagnated, but we do not believe companies see a reason to destroy the industry business model as long as it remains incredibly profitable.
We think both DirecTV and Intel have additional upside from current prices. OTT rights are still a speculative issue and largely unimportant to either firm's valuation at this time. That said, we continue to monitor the situation as it relates to our long-term views on the space.
Disclosure: DTV and INTC are included in our actively-managed portfolios. I have no positions in any other stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.