Monday, November 29, 2010, 10:55 AM ET|Posted by Will RichmondReuters is reporting this morning that Microsoft is exploring a range of options to get into the pay-TV business through a new over-the-top service. The article points to a potential "virtual cable provider" model whereby Microsoft would license multiple networks, which would be delivered to Xbox gaming consoles and other devices. Also under consideration are creating "content silos" to sell specific premium channels.
If Microsoft were to join the pay-TV business aggressively it would further alter industry dynamics. The number one issue in play right now is whether consumers are forsaking traditionally packaged pay-TV services and instead opting for some mix of free and paid online-delivered alternatives. Yet while Internet options are gaining in popularity (with Netflix's explosive growth to nearly 17 million subscribers at the end of Q3 the primary beneficiary), hard data supporting cord-cutting is still scarce.
If Microsoft tries to enter and focuses on Hollywood content, a fundamental choice it would need to make is whether to carry first run/live programming, or catalog TV/movies. If it chooses the former, it will need to pay comparable terms as any other current pay-TV distributor. Of course Microsoft has the resources to do so if it wants, but the big question then is what competitive differentiation will it offer. A me-too linear-style channel line-up would be tough to gain scale. Rather, a key area to focus on would be online/mobile access, but with the biggest pay-TV operators now focused on similar TV Everywhere type services, gaining distinctive advantage with this feature would be tough too.
Conversely, if Microsoft chose to focus on catalog, it will quickly run into existing competition from Netflix, Hulu Plus and pay-per-use providers (e.g. iTunes, Amazon VOD, Vudu, etc.). With a massive base of Xbox owners, Microsoft certainly has access to an attractive audience, but here again, can it offer something distinctive? Almost 2 years ago, I floated the idea that Microsoft would enter the market by acquiring Netflix. Microsoft would instantly gain a market foothold from which to grow. At the time I thought it would be interesting for Netflix too, as it needed to access more top-tier content to make its streaming feature more attractive, yet didn't have sufficient resources. With Netflix CEO Reed Hastings on Microsoft's board, the two companies were already well acquainted.
That acquisition possibility has likely passed, as Netflix has shown that it can reach big-time Hollywood deals on its own, as well as execute independently its streaming strategy. Two years ago Netflix had about 9 million subscribers, and a share price of around $30 vs. today's nearly $200. An acquisition premium would have to assume still massive upside to justify the cost. I've learned never to say never, but I think Microsoft is more likely to focus on a grow-it's-own approach rather than spend the $15 billion or more it would now take to acquire Netflix.
As I've pointed out with respect to Apple's troubles entering the pay-TV market, it's a tough nut to crack, with pretty well-defined parameters, as Google is finding out. Google is only starting to make inroads through its YouTube ownership and giving away Android and Google TV to hardware partners. Yet with both broadcast and cable TV networks now both focused on gaining monthly distribution payments, they have chosen to block Google TV, significantly undermining its value proposition. It will be interesting to see what comes of the Microsoft speculation; an aggressive move could alter the market while an incremental move would have far less impact.
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