Intel Corporation (NASDAQ:INTC) plans to come up with a new service that allows for web streaming of cable TV content. However, The New York Times illustrates that Intel could be in some trouble:
As Intel tries something audacious — the creation of a virtual cable service that would sell a bundle of television channels to subscribers over the Internet — it is running up against a multibillion-dollar barricade. That barricade is guarded by Time Warner Cable Inc (NYSE:TWC) and other cable and satellite distributors, which are trying to make it difficult — if not impossible — for Intel to go through with its plan. The distributors are using a variety of methods to pressure the owners of cable channels, with whom they have lucrative long-term contracts, not to sign contracts with upstarts like Intel, that way preserving the status quo.
Intel Corporation (NASDAQ:INTC) could be under pressure due to anti-competitive practices employed by these firms, but with Intel having $18.16 billion in cash and cash equivalents, I find it highly plausible for the company to be able to buy enough content in order to become competitive with companies like Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN). The problem is that Intel is being thwarted by industry giants and is forced to play by their rules. The company is experiencing headwinds in computer demand and in order to offset this, it is launching Intel TV by the end of the year.
Will it even work?
Just because Intel Corporation (NASDAQ:INTC) is able to divert the content from channel owners to the internet doesn’t mean it will work. It would be difficult to imagine how it would scale in the beginning stages. The company would need the support of its highest level executives in order to keep this operation going as Intel would have a very high break-even point for a project of this scale.
Plus, everyone recognizes Intel Corporation (NASDAQ:INTC) as a semiconductor company, and the thought of tuning into “Intel TV’ is sort of absurd now. But then again, the company has some of the most creative ad-men in the industry, so I am sure they could come up with something that could sway public sentiment in a positive way. The problem comes from a mix of competition and anti-competitive practices.
Companies like Time Warner Cable Inc (NYSE:TWC) may not be willing to hand over content to channel owners, so channel owners cannot stream via internet. There’s also a lot of legal jargon and anti-competitive clauses getting in the way. This is troublesome because if everything is based on a broadband connection, then cable providers like CenturyLink, Inc. (NYSE:CTL), Comcast Corporation (NASDAQ:CMCSA), and Cox will suffer terribly. The gatekeepers will keep Intel Corporation (NASDAQ:INTC) away as they have a financial interest in cable’s success.
These companies, when combined, have enormous financial resources along with non-financial resources to keep Intel away from this business. This makes it difficult for investors to buy Intel stock on the hopes that Intel TV becomes Intel’s next multi-billion dollar business.
Netflix wins with everyone
Investors would generate greater returns when investing into Netflix, Inc. (NASDAQ:NFLX). Unlike Intel Corporation (NASDAQ:INTC), Netflix was pretty smart about how it pursued its business strategy.
Start with pebbles that cause ripples, then eventually start throwing rocks that cause waves. The company has a winning strategy that compliments the pre-existing eco-system. When content is too expensive, the company develops some of its own in-house programming, which to the most part has been effective.
The company has been able to grow its subscriber base internationally, which is a part of the appeal to selling content to Netflix as it gets instantaneous international distribution, which helps content companies to monetize their entertainment rights. This is why The Walt Disney Company (NYSE:DIS) is jumping on board with Netflix and is cutting ties to its ownership stake in Hulu. After all, it makes sense for Walt Disney to sell content to the broadest distribution possible, and Netflix seems like it can effectively handle itself in this pursuit. Global web-based television will most likely happen on Netflix’s network.
Buy Amazon because of retail and cloud
Amazon.com, Inc. (NASDAQ:AMZN) is caught in a bit of a tough position with this recent Intel entry. Assuming Intel wins and is able to fight off the anti-competitive practices of the cable industry, Intel Corporation (NASDAQ:INTC) has more firepower than Amazon, Netflix, and Hulu combined. What Intel lacks is any substantial market presence, which is something Amazon Instant Video also lacks, as well. Amazon Instant Video doesn’t provide a rich of a content collection as Netflix. Amazon Instant Video also has a smaller subscriber base, making it more difficult to compete with Netflix based on scale.
I see much more upside in Amazon because of online retail and cloud virtualization. The company also plans to partner with Google Inc (NASDAQ:GOOG) in order to launch an Amazon application store in over 200 countries. The company’s growth is hinged on global online retail, increasing demand for servers, and digital content for mobile phones. The company’s growth is really strong in both cloud and retail, which is the primary reason why investors should buy the stock even though it’s unclear as to whether or not it can make a profit from Amazon Instant Video.
Also, I’m skeptical of Amazon Kindle, and believe that it will not be financially successful .The application ecosystem surrounding Kindle isn’t nearly as strong as Microsoft Corporation (NASDAQ:MSFT)’s, Google Inc (NASDAQ:GOOG)’s, and Apple Inc. (NASDAQ:AAPL)’s.
Amazon, in its most recent quarterly earnings announcement, reported 47.3% year-over-year growth in its cloud segment, which was also paired with 16% year-over-year growth in its international retail segment.
Assuming the European economy recovers and international internet adoption improves to 5 billion people, the company’s international growth efforts will be monumentally successful. In anticipation of this, analysts anticipate the company to grow earnings by 37.15% on average over the next five years.
Conclusion
Intel Corporation (NASDAQ:INTC) is doing what it needs to do, which is to pursue product ideas outside of semiconductors. The company’s efforts may fail, but at least the company is willing to invest into business activities in order to sustain both earnings and revenue growth.
I believe that there is a more compelling investment thesis in Amazon and Netflix. Netflix is well on track to growing its subscriber base internationally, giving Netflix even greater economies of scale. Amazon, on the other hand, continues to unfold its retail empire internationally while ripping apart its competitors in cloud virtualization.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Intel, and Netflix. The Motley Fool owns shares of Amazon.com, Intel, and Netflix. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Intel Television Could Become a Reality originally appeared on Fool.com and is written by Alexander Cho.
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