It’s official. Intel Corporation (NASDAQ:INTC) is working on an Internet-based TV service and a set-top box to go along with it. Vice president of the company’s media division, Erik Huggers, claims a motley group of ex-Apple Inc. (NASDAQ:AAPL), Google Inc (NASDAQ:GOOG), and Netflix, Inc. (NASDAQ:NFLX) employees are hard at work for the eventual launch of the service. Sounds exciting — and maybe even revolutionary — but investors should eye it skeptically. In fact, I’ll go as far as to call it a gamble.
There’s one major problem: Intel has no relationship with the end consumer. The company’s current customer base is primarily made up of original equipment manufacturers, orOEMs. Unfortunately, these customers don’t buy finished goods.
As bluntly stated by Huggers at the AllThingsD Dive Into Media Conference, “We’ll offer consumers a box and they’ll buy this directly from us.” Easier said than done. Not only does this require a distribution system with the end consumer, but it also requires a relationship. Talk about deviation from the company’s core business.
Netflix had to start from scratch, too. But it benefited from a having a first-mover advantage, pioneering the first robustly successful Internet-based TV service the world has ever known. Furthermore, it fostered digital relationships with customers by enticing them via a DVD-by-mail service, meeting an unmet customer need.
With the stock up more than 129% in the last three months alone, Netflix investors don’t seem worried about Intel’s desire to enter the Internet-TV business. In fact, Netflix is on fire. The company now claims 33 million global streaming members, adding 10 million in 2012 alone. Evident by improved rates of voluntary and involuntary retention, the company’s offering is as compelling as ever. Poised for operational improvements, the company projects an expansion of its contribution margin by 100 basis points in 2013.
Then there’s Apple’s 500 million iTunes accounts and its more than 500 million iOS devices in the hands of consumers across the world. Furthermore, the company has already made significant headway with its Apple branded set-top box, selling over 5 million units in fiscal 2012. Of course, there’s also the inescapable rumors of an Apple-branded television to launch as early as this year.
Suffice it to say, Intel is has a tough road ahead, entering an extremely crowded space with some tough competition and a customer base of zero.
The bottom line
Maybe Intel’s move into media, devices, and a relationship with the end consumer will prove to be wildly successful, but I really don’t care. I don’t bet my money on completely uncertain outcomes. In other words, my Intel investment thesis remains unchanged. For now I’ll view this as an interesting side project.
I can’t say it any better than Intel Media’s vice president: “We’re shooting for a service that incorporates literally everything. … But Rome wasn’t built in a day. It’ll take time.” You’re right, Huggers. Rome wasn’t built in a day. It took centuries. Good luck.
The article 1 Major Problem With Intel’s Upcoming TV Service originally appeared on Fool.com and is written by Daniel Sparks.
Fool contributor Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends Apple, Google, Intel, and Netflix. The Motley Fool owns shares of Apple, Google, Intel, and Netflix.
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