The TV Issue

Web TV? Xbox, Verizon, Others Appear to Be up for the Challenge

Host of New Deep-Pocketed Players Look to Try Their Luck in the Market as Technology Evolves

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A group of deep-pocketed companies, including Microsoft and Verizon, are exploring delivering TV service over the web, a move that could disrupt the economics of cable TV and lead to a new generation of "virtual" cable companies that provide TV without owning the pipe into the home.

Microsoft has been in talks with TV networks about acquiring rights to provide a package of channels through Xbox in the U.S., in addition to the video-on-demand and Netflix Watch Instantly service it already carries through Xbox Live to 30 million users in the U.S.

And Verizon is exploring how it could offer Fios TV service outside its wired footprint. And, separately, it's setting up a new business unit, Verizon Digital Media Services, to enable Fios and others to deliver live TV over the web to all net-connected devices.

Neither is close to rolling out their own web TV service, but both are determined to secure the rights so that they have the option of doing so in the future. They're not alone: Cable operators are looking at web delivery to leap the confines of their wired network, and video-on-demand services such as Hulu, Apple and Amazon, as well as other brands not generally associated with TV, are looking to enter the TV market.

The talks point to a future where consumers have the option of buying broadband internet service from one provider and TV service from another. It also promises to make the current dispute between programmers and cable companies over the right to stream content to new devices like iPads look like child's play.

Microsoft, which has improbably built an enormous gaming business, has been looking at providing linear TV for years, and has recently sought the rights to do so. But whether Xbox should provide linear TV is subject to fierce debate in Redmond. Gaming is a very profitable business for Microsoft in a way video is not. Further, executives there see no competitive advantage in simply matching a cable subscription in price and content.

But if it does enter into TV delivery, Microsoft could overnight be one of the biggest providers, with 30 million potential customers, who are already spending 40% of their time on the Xbox watching video.

"What I can say is Microsoft Xbox is very interested in delivering great entertainment to consumers, entertainment in the broadest sense," said Ross Honey, head of content acquisition for Xbox. "From our perspective, gaming and TV are going to coexist."

Microsoft is making inroads into TV via partnerships with cable providers abroad. It offers a low-cost cable package in Australia via Xbox through a partnership with pay-TV operator Foxtel, designed to appeal to young male gamers, and has a deal with Sky Broadcasting to enable co-viewing experiences through Xbox in the U.K. In the U.S., AT&T U-verse subscribers can opt for an Xbox in lieu of a DVR.

The notion of an "over-the-top" video service that bypasses cable and satellite networks has been around for a long time but generally has been held back by two main factors: programmers' reluctant to license new players and cable, telco and satellite operators' control over the access to the home. They've also been held back by the limitations of the web itself: The infrastructure just isn't there to support as many live simultaneous streams of content as a popular live event like, say, the Super Bowl would create.

To solve the "Super Bowl problem," as well as the complexity of delivering video to phones, tablets and PCs, Verizon built two vast data centers in Reston, Va., and Torrance, Calif., designed to deliver live video over the web as reliably as any cable company. Verizon's Fios TV service, of course, will be a customer.

"There are fundamental internet infrastructure issues to solve, but will be able to do it at great economies of scale," said David Rips, president of the division. "This would allow Fios, Comcast, Hulu or Netflix or any other retailer become an MSO," or multiservice operator, jargon for a pay-TV provider.

Mr. Rips said targeted advertising will be part of the initial release, meaning a new revenue stream for those distributing TV on the web. In the meantime, some players aren't going to wait for technical perfection.

"Somebody is going to pull the trigger this year. It may not be 250 channels in HD, but it will be at a minimum a good handful of channels with subscription on-demand and the ability to get the content on lots of devices," said Braxton Jarratt, CEO of Clear Leap, which also provides enabling technology for web-delivered TV.

Said Mr. Rips: "It's going to be the Wild West for a while until it settles down and matures and the economics settle out."

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