Can This Tech Giant Win the Pay TV Game?

Nick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Google (NASDAQ: GOOG), the global online search giant, is now stepping up its efforts for a pay TV offering. Google has been contacting media companies for content and is following other technology giants in this pay TV race, including Intel (NASDAQ: INTC), Apple, and Sony. However, this is not the first time Google expressed its interest in pay TV. Google has been financing original programming for its YouTube, launching cable services on its Google Fiber network, as well as developing TV software for cable TV set top boxes.

Competitive landscape

Google’s new Internet TV service will be streaming traditional TV programming and will be competing with existing online video providers for contents, such as Netflix (NASDAQ: NFLX), Amazon.com, and Hulu, owned by Disney, Twenty-First Century Fox, and Comcast.

Amazon.com has signed a multi-year digital video licensing agreement to bring content from Viacom to Amazon.com’s Prime Instant Video. Netflix has been developing its own content aggressively after it has ended its agreement with Viacom. Besides producing its own content, Netflix is also signing up other content providers to compensate for its Viacom termination. Netflix has just expanded a multi-year licensing agreement with PBS Distribution, mainly to boost its content offerings for kids. Netflix will become the exclusive SVOD home of Super Why!, the award-winning PBS KIDS hit preschool series, in 2014. On the other hand, the owners of Hulu has rejected the $1 billion offer to sell Hulu and will instead invest $750 million to expand Hulu’s content offerings and marketing budget.

Can Google make it?

Unlike Amazon.com and Netflix’s on-demand content offers, Google is aiming for cable TV-style packages of network, allowing users to flip through channels. Google will also be competing with traditional pay TV providers, which are competing in a mature market already. On the other hand, Intel is aiming to launch its own Internet TV service by the end of 2013, and Sony is also said to be working on an Internet-based TV service. All new players into the pay TV market are facing the same barrier, as content providers are trying to protect their current lucrative deals with existing distributors; thus, new players, such as Google and Intel will need to pay higher rates for content.

Intel is seriously dedicated to the TV service and has launched an independent unit, Intel Media. With over $2 billion committed to TV programming licensing deals, Intel has agreements in principle with CBS, News Corp, and Viacom for the Internet-video services, paying a 50% to 75% premium over industry-average rates. Intel is betting on more attractive interface and personalization features to lure consumers. Google appears to follow the same mind-set as Intel, eyeing a better overall user experience to capture the market.

Another major challenge for new players is the distribution issue. While neither Intel nor Google has control over broadband into the home, delivery cost remains a major challenge for new players to compete with existing cable service providers.

Possible solutions

Instead of fighting alone, Google may consider leveraging its strengths to partner with other major new entrants, such as Intel. While the content providers are focused on expanding online and on-demand channels for programming through current distributors, they usually give the best prices to the biggest distributors. With the partnership, Google can gain buying power.

Secondly, if Google has the same mindset as Intel on how to capture the market, it makes sense for both companies to work together to penetrate the target market instead of fighting each other while surrounded by all other existing players and other potential new entrants.

Lastly, the war between Google and Apple may expand from mobile devices into pay TV market soon. While Google’s Android leverages its open platform to compete against Apple’s closed system, it is easier for Google to leverage the same strategy and open up its platform to build alliances and partners.

Bottom line

It is not the first time Google is showing interest in the pay TV market. While other tech giants are moving aggressively into Pay TV, it is Google’s best interest to step in early rather than late. A partnership may be the easiest way for Google to penetrate the market by boosting its buying power while leveraging its strengths.

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Nick Chiu has no position in any stocks mentioned. The Motley Fool recommends Google, Intel, and Netflix. The Motley Fool owns shares of Google, Intel, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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