• Even Microsoft Can't Afford to Break Into the Pay-TV Business

    Here's just how expensive it has become to break into the pay-TV business: even mighty Microsoft can't afford it. Reuters reported late yesterday that Microsoft has put on hold its plan to create a pay-TV meets Netflix type subscription service, after getting sticker shock over the cost of content distribution deals. When you have $52 billion of cash and equivalents on your balance sheet and still can't figure out how to make the numbers work, that's a pretty significant statement about how expensive licensing linear content has become.

    Of course Microsoft could have just gone the Netflix/Amazon route of offering subscription access to library content, but apparently its ambitions were to go a step beyond and be a full over-the-top alternative ("virtual MSO") to today's pay-TV offerings. But that's where things get pricey; recently BTIG analyst Rich Greenfield pegged the monthly licensing cost for a full linear lineup at upwards of $40/mo for those without any meaningful current distribution. Microsoft could have tried to scrimp and not carry all the most popular channels like Sezmi did, but as that startup's recent flameout underscores, competing with one hand behind your back doesn't generally result in success.

    Meanwhile, Microsoft isn't the only powerhouse to backtrack from a pay-TV play. Over the past two years there have been abundant rumors that Apple was going to make a run too, floating the idea of a $30/month subscription plan with content providers. No surprise, as Apple's proposed retail rate is less than just the cost of the programming, never mind all other expenses, the rumors have so far come to nothing. 

    All of this underscores the good news/bad news situation that pay-TV operators find themselves in. Would-be OTT competitors are stymied in their attempts to replicate/improve upon the pay-TV model, creating high entry barriers. But the rising cost of programming is making it ever-harder for the pay-TV operators themselves to justify their value in the face of proliferating lower-cost, "good-enough" on-demand alternatives (e.g. Netflix, Amazon, YouTube, Hulu, etc.). And even pay-TV operators are struggling with rising programming costs as the ongoing MSG-Time Warner Cable blackout demonstrates.

    It's been fascinating to follow some of the news out of CES this week highlighting integrations of pay-TV apps with Smart TVs, along with these devices' whizzy new voice and motion controls. Eye-catching as these technical innovations may be, what will really get consumers' attention is pricing and packaging innovation. Until that happens I agree with Peter over at AllThingsD, the future of TV is still way out on the horizon. If juggernauts like Apple and Microsoft can't even break in, that shows how entrenched things are.

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