Why A Verizon Acquisition Of OnCue Would Be Underwhelming

| About: Verizon Communications (VZ)
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Numerous reports point to Verizon Communications (NYSE:VZ) acquiring OnCue from Intel (NASDAQ:INTC), as the chipmaker, after a change in leadership, decided to focus primarily on chips for mobile devices.

OnCue was developed by Intel to provide digital streaming content ability. It was meant to empower the company to offer the same content cable and satellite companies do.

This doesn't appear to be a very lucrative move by Verizon, as it is basically acquiring a business that will allow it to be an online version of a cable or satellite company, carrying the same content.

Why a consumer would switch to Verizon is questionable at best, as the catalyst simply isn't there at this time. It's the primary reason I believe Intel is getting rid of the business.

source: StockCharts.com

Intel's Struggle

The major problem for Intel with OnCue is its inability to make a deal with content providers, as the company wanted to get creative with various channels so it could differentiate from its competitors.

As it was unable to offer consumers different channel packages, there was little OnCue could do to boost revenue and earnings at Intel.

Since that's the case, it's difficult to see how OnCue will help Verizon, as it's not likely in the near future that a la carte deals would be allowed to be made to attract more customers to Verizon.

Even though Intel is sure to lose money on a sale of OnCue, it is better to get rid of it now than put more capital into it and be forced to sell later. It is thought Intel spent as much as $500 million on the effort, and it originally was asking that for the business when it started shopping it around. It will surely go for much less than that.

Verizon's Assumption

The most obvious potential benefit to Verizon is it will be able to offer content in markets it has no physical presence in, which theoretically could generate a lot of new customers.

If content was unbundled, I see that as having real potential. But since the industry isn't there yet, it could be a long time before OnCue would generate significant growth for Verizon.

This is why I say having an entirely streaming version of cable or satellite TV has little to attract consumers. Why would they migrate from their current providers to another one that only streams content to devices? Where is the incentive?

Again, the incentive would be in the unbundling of content. Sure, Verizon will surely attract some curious customers wanting to give it a try, but overall it's doubtful it will be a big win for the company.

As a matter of fact, if it pays too much for it, we could see a backlash from investors, because it would take some time to recoup capital spent on the deal.

Cable and Satellite Companies

The next issue would be whether or not this would have any material impact on cable or satellite companies, such as giant Comcast (NASDAQ:CMCSA). Since Comcast is the largest distributor of content in the United States, that would be the company that would be the most impacted domestically, as Verizon could take some market share away if the service were to be adopted at a higher level than I think it will.

In that case, simply because of the large area Comcast covers, it is sure to lose some customers to Verizon, although I don't see it as being a big deal any time soon.

Over the last several quarters Comcast has continued to boost cable revenue at about a 6% pace, and that is unlikely to change in the near future; at least as far as it related to OnCue having anything to do with it.

That will be the same for satellite companies and other cable companies, which aren't in danger of losing much business to an Internet content company.


One analyst has said that OnCue "... has the potential to change U.S. pay-TV forever." I don't see that at all.

While there is the possibility of it incrementally increasing competition, until there is a real differentiator (like the unbundling of content), the motivation for changing carriers is slight at best.

The problem there is if content is eventually unbundled, it will be unbundled almost assuredly across all platforms and businesses, which means Verizon would lose that as an advantage as well.

Another factor is if Verizon will have to renegotiate it FiOS TV agreements for content offered via OnCue. It could drive costs up at the company if that's the case.

The only real potential in the short term is if Verizon were able to offer content to areas that don't have much in the way of cable or satellite services. It may be one of the few markets that could gain some customers. That could include some international markets as well, depending upon the terms of content deals.

Either way, this deal could easily come back and bite Verizon. Intel got out of it for a reason, and the major reason was the high upfront cost of content, which the company would have had to have paid no matter how many customers it secured. Minus content flexibility, there was little incentive for Intel to go forward with OnCue. Verizon will find out the same thing soon enough.

Disclosure: I have no positions in any 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.