Tech Newcomers Face Big Challenges Disrupting Cable

The race to disrupt the market is heating up, but huge obstacles remain to infiltrate a $100 billion industry where both content creators and distributors are happily making money hand over fist.

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Tech companies like Google and Apple have built their fortunes by disrupting industries. There’s a seemingly endless list of music retailers, cell phone manufacturers, bookstores and people in a dozen other sectors that rue the day one of the world’s largest tech companies set out to enter their market. But there’s one media enterprise that has so far been immune to substantial shakeups: television.

Sure, Netflix and Amazon offer streaming services akin to premium channels like HBO, startup Aereo offers a limited version of live TV, and both Apple and Google produce a variety of devices that make it easy to stream Internet video on a television screen. But no tech company has made a substantial play to launch a comprehensive TV subscription service similar to what customers can currently get from Comcast or Dish Network. It’s not for lack of trying: Google is in talks with television networks to launch a national pay-TV service, according to The Wall Street Journal, and already offers a pay-TV subscription in Kansas City through its Google Fiber Internet service. Apple meanwhile has reportedly developed an ad-skipping technology that would pay cable networks when viewers skip commercials, presumably to entice network owners to allow their content to be streamed live via Apple TV. Even chip-maker Intel wants a piece of the TV pie, and has plans to launch a pay-TV service by the end of the year. The race to disrupt the market is heating up, but huge obstacles remain to infiltrate a $100 billion industry where both content creators and distributors are happily making money hand over fist.

Cable operators, historically some of the least liked companies in America, don’t want added competition from more popular newcomers, so they’re implementing various tactics to keep the tech titans out. They’ve sweetened their deals with television networks by paying higher carriage fees for the right to broadcast their content. “Operators are allowing carriage fees per [subscription] per month to be driven up at a somewhat faster pace than they would have put up with ten years ago,” says Erik Brannon, a senior analyst at IHS Screen Digest. “They’re making the barrier to entry higher for [Internet-based] services.” ESPN, for instance, has raised its carriage fee from $2.17 per subscriber to $5.54 in the last ten years, according to data provided by SNL Kagan.

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Cable companies are also taking more direct measures to ensure their dominance. According to a June blog post by BTIG Research analyst Rich Greenfield, at least one traditional cable or satellite operator has included a clause in a recent contract explicitly preventing networks from working with “over the top” TV services, those that are streamed into homes via a broadband connection like Intel’s upcoming product. Some operators use financial incentives or penalties to keep the networks in line. Such practices are now under investigation by the Justice Department, according to The New York Times. “Cable operators are definitely counseling their pay-TV partners about where their money comes from,” Brannon says.

As for the networks, they’ve expressed little public enthusiasm for seeing an Apple or an Intel enter the market. Unlike the music business, which was in economic free fall when the iTunes Store launched in 2003, the cable business continues to hold onto most of its subscribers (though the number of cord cutters is growing). “As the world shifted to digital formats with regards to music…Apple gained a lot of control over the future of that industry in a very short amount of time,” says Bill Kreher, a senior technology analyst at Edward Jones. “The entertainment companies do not want to see that happen again. That’s the biggest impediment to an offering that’s probably ready.”

Tech companies are using a fairly straightforward solution to address these issues: money. Intel is willing to pay networks 75 percent more than traditional cable and satellite operators, according to Reuters. Apple wants to pay media companies when viewers skip commercials during their shows. Analysts say any newcomer in the field that is starting with zero subscribers would have to pay a premium to convince content providers to sign on. Intel spokesman Jon Carvill declined to comment on the company’s negotiations with networks.

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The biggest advantage Google, Apple or Intel might have coming to market is the ability to develop a user interface more appealing than the clunky channel surfing TV viewers have grown used to. Google’s pay-TV offering in Kansas City comes with both a traditional remote and a Nexus 7 tablet that viewers can use to quickly search through channels. Carvill says the user interface is one of the biggest advantages of Intel’s new offering.  “We really believe that television as a whole has been one area–especially the user interface around it–that hasn’t really evolved all that much in the last decade or two,” he says. “The UI for us is definitely going to be a very important part of the value proposition.”

Some cable operators are trying to improve the user experience before new competitors enter the market. Most of the major operators now offer subscribers the ability to stream live content on computers and mobile devices. Cox Communications, which has 6 million customers around the country, launched a Netflix-like recommendation engine in its set-top boxes in December and is planning to roll out an iPad app that allows for easy channel navigation this summer. The company is also testing its own over-the-top pay-TV service, called FlareWatch, in Orange County, California right now. “The broad backdrop that we’re operating in is moving to a much higher level of personalization of the video experience for our customers,” says Steve Necessary, Cox’s vice president of video product development and management. “There clearly is both a consumer expectation piece of that and a competitiveness requirement associated with it as well.”

Even if Intel, Apple or Google does break into the market, it’s not clear their service would be fundamentally different from the way pay-TV works now. While calls for a la carte cable options have grown so loud that they’ve now reached the halls of Congress, Intel at least is sticking with bundled channel package. Carvill says the company plans to offer smaller, more genre-specific options than traditional cable, though.

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So far, the barriers of entry have effectively kept newcomers out of the pay-TV space. Sezmi was an ambitious attempt to deliver live television via the Internet, but a limited channel selection led that product to fold in 2011. However, that was developed by a start-up, not the world’s largest chipmaker or most valuable tech company. Giants like Google, Apple and Intel have the resources to compete in the pay-TV space. The question is whether the high cost of entry will be too much for them to justify. “They’re going to have to suffer, and it’s not in terms of one or two years,” says Brannon. “The question is, can they stand to lose long enough in order to make that a viable future for them.”