Verizon (NYSE:VZ) has been falling and the stock is down 5% in the past six months. Recently, the company has been showing signs of slowing growth and Verizon Wireless has been the main growth driver. However, the company is looking to increase its presence in another rapidly growing and lucrative segment: Pay-TV services. Verizon is looking to buy Intel's OnCue to add to its pay-TV system. If the deal goes through, it can be a significant growth driver for Verizon.
Verizon is currently in negotiations with Intel (NASDAQ:INTC) to buy OnCue, an internet based TV system. The deal is expected to go down for about $500 million. This system includes a set of software and an on-screen interface which would allow the customers to access an array of TV channels of their choice and choose from a huge list of movies. Also, the system is equipped with a camera, which would detect the viewer and show programs accordingly.
Verizon could either provide this service to its existing 5.2 million video connections or 5.9 million internet connections. The company could also introduce OnCue as an IPTV service to its 101.2 million mobile customers. An alternative to capitalize on the acquisition of OnCue is to bundle it with the Redbox Instant video service. This service is operated by a joint venture of Verizon and Outerwall and is a separate entity from Redbox. Currently Redbox Instant provides movies only. But if it is bundled with TV programs, it would make a complete entertainment solution for the customers. In the third quarter of 2103, Redbox reported a revenue growth of 7% with its current business. This shows that the market already has potential. If this service is coupled with OnCue, the growth rate could more than double in my opinion.
OnCue: A Game Changer For Verizon?
Studies show that traditional TV customers have been decreasing for about a decade now. Analysts at research firm IHS are of the opinion that there is no light at the end of the tunnel. As of December 2013, about 54.8 million homes pay for traditional cable, which has decreased by 3.3% since 2012 and 17.6% during the past decade. Moreover, traditional cable service providers are likely to lose about 1.3 million customers in this year. OnCue is going to be a pay-TV service - the company is already offering FiOS fiber-optic service and OnCue will allow it to increase its footprint.
Pay-TV is not a new concept; however, what Verizon is trying to bring to the table is certainly new and will result in a competitive advantage for the company. The cable TV services providers offer their services on dedicated lines, which restrict their territories and deprives them of flexibility. On the other hand, OnCue's system has servers, set-top boxes and applications that can stream the content on phones, TVs and tablets. Verizon is the second largest communication company in the U.S., which gives it an advantage over its competitors. The trend indicates that the customers are looking for more interactive TV services, which OnCue can provide.
Sony (NYSE:SNE) is also looking to launch its internet-based pay-TV services in the U.S. The migration of traditional TV viewers to pay-TV will make it an extremely attractive segment and more players will want to get a piece of the pie. However, early movers will certainly benefit -- the arrival of Sony will give Verizon some competition, but currently the market is big enough to accommodate both the players. Americans pay on average $78 per month for cable TV services, one of the main reasons the customers have been moving away from traditional TV. At the moment, there are a lot of options available to these customers that are cheaper. Internet-based TV services are becoming popular due to the low cost and more flexibility. As a result, this segment is growing at a rapid pace.
One may wonder why Intel is looking to sell if the target market has so much potential. The answer is simple: the cost of the content. Intel is certainly fighting in the chips market due to the declining demand for the PCs worldwide -- I believe the company wants to focus on the core business and tap the more lucrative mobile devices market. Getting into the completely unknown entertainment and communications market would have presented some challenges. On the other hand, Verizon is already operating in the market, which should make it easier for the company to market the product. Furthermore, the already established infrastructure should allow the company to manage the cost of the content.
Verizon has been growing with a very slow growth rate for the past few years. If the acquisition of OnCue goes ahead, the company will benefit massively from this growing segment. Representatives from both the companies have refrained from commenting on the deal. However, there is no doubt that Verizon and Intel are in negotiations and I believe the deal will go through as it is in the best interest of both the companies.
Verizon wireless has been the main contributor towards the cash flows of the company in the recent past - however, internet-based TV services can be another avenue for the company to grow its revenues and cash flows. Verizon has the infrastructure in place; the company is one of the biggest internet providers in the country. The addition of an interactive pay-TV service to its products will certainly go down well with the customer as well as investors.