For those of you optimistic about the immediate prospects for some Internet-delivered version of today’s cable, satellite and telco video service, the supplier business case rests on the assumption that a cable company pays 40 percent of gross revenue to its programming suppliers.
That leaves a potential 60 percent of gross revenue to operate the service and make a profit.
So an Internet alternative, with the same programming costs, but no infrastructure to pay for, arguably could make a decent business even if offering a discount.
The high level business case would assume the Internet delivery model has room to cut operating and capital cost, even if programming expenses are equivalent or higher than what cable, satellite and telco providers face.
Assume programmers get 40 percent of gross revenue, that leaves 60 percent. Assume a big cable company makes about a 40-percent gross margin on video services. That implies a 20-percent marketing, operating expense and amortized capital investment charge.
If one assumes nothing else (leave programming costs and profit margin at 40 percent each), then an Internet provider would have room to assume lower capital investment and operating costs, if not necessarily lower marketing costs.
Assume that 10 percent of gross revenue is sufficient for long-term marketing investment.
In that case, an Internet video services supplier would still be able to pay 40 percent of gross revenue to programmers, make a 40-percent profit margin, and offer 10 percent lower prices.
Of course, all sorts of other scenarios are possible if a supplier is willing to accept profit margins lower than 40 percent.
Intel (News - Alert) Corp. has been developing an Internet-based television service that essentially would be a "virtual cable operator," presumably offering the same "bundled" approach to video entertainment as offered by cable, telco and satellite-TV operators.
Some believe the venture will launch, or at least be announced, in January 2013 at the Consumer Electronics Show. Whether program suppliers are any more willing to license their key programming assets to Intel remains to be seen.
Intel is trying to provide a sort of "beta test" environment by introducing the service "city by city," rather than nationally. Whether Intel can convince programmers that now is the time to infuriate all the rest of their main distributors is the issue.
At stake are relationships, already testy, with cable, satellite and telco distributors who pay programmers $41 billion a year in licensing fees. Any significant deals with Intel for a streaming service would put huge pressure on those other existing relationships.
Someday programmers will change their minds. But a rational person would argue that the time remains somewhere off in the distance. Ask yourself whether or not you would jeopardize a business worth billions to gain a new business of millions.
That isn't to say you would make the same decision if the choice were "a new business worth billions" to replace a "declining business worth billions." But nobody thinks that is today's choice.
So it remains to be seen whether Intel will have more luck than the others who have tried, even if Intel tries a subscription model featuring whole channels and not an "on-demand" model that allows consumers to buy single shows or programs, single channels or single genres.
While Intel might like to do so, it is doubtful programmer thinking has changed on those subjects. Everything still hinges on the money, not the technology. And the money still lies with the legacy distribution model.
Edited by Braden Becker