Why Is Intel Investing In Big Media?

By Patrick Moorhead - May 13, 2013

Since Intel INTC +0.84%’s Erik Huggers got on stage at D’s Dive Into Media announcing details of their media strategy, there has been a lot of conversation on why Intel is doing it and if they will succeed. Some of it has been high valueconversation, some it is a bit uninformed. It’s easy to criticize Intel if you consider Intel’s ViiV, microscopes and digital music players of the past, but I think it’s important to first focus on why Intel is getting into the living room and then assess their odds of success, because many times, motivation level indicates the odds of future success.  Let’s start with the short-term benefits of Intel getting into this market.

Short Term Benefits

The short-term revenue benefits of Intel getting deep into media is straight-forward. IHS forecasts the global set top box hardware market to be around 200M units in 2014.  If I apply a $200 price to this, that’s roughly $40B in revenues.  Intel’s annual revenues in 2012 were $53B, so obviously, there is a revenue incentive to get into this market where Intel provides all of the hardware.  Then there’s the content services.  While Intel won’t be providing the pipes, they will be providing subscription content. Taking one look at #1Comcast CMCSA -0.29%’s $63B and #2 Time Warner Cable’s $22B annual revenue gives pause to the size of the opportunity here. As anyone who has experienced the frustration of the cable TV experience, you just know that this is an experience that is ripe for disruption.  Can anyone say the cable guys have helped the process?  Through a successful campaign of protectionism and threats to content providers, the final result is that the cable experience hasn't evolved in a decade while prices have increased.  Net-net, Intel gains immediate access to a very large revenue stream. We must also consider the benefits of a direct connection with end consumers.   With their STB and service, Intel will have a direct connection with consumers.  The current Intel business model shields them from the end consumer by their OEM customers and channel partners.  Through that direct consumer connection, I believe this will improve Intel’s ability to develop all of their consumer hardware, software and service platforms on phones to tablets PCs to TVs. There is also a direct connection with huge server and datacenters.  Intel will be building essentially a scale-out mega datacenter and edge capabilities to deliver their content.  They will be leveraging the media performance of their platforms and develop the software and services to do this.  Through this very expensive learning process, I can see Intel being much more valuable to any datacenter that manipulate or transcodes video. Let’s take a longer-term view of Intel’s media foray. Longer-term Benefits The potential longer-term benefits to Intel are many, but let me start with the potential for combined platform value.  If Intel is successful out of the gate, they can then focus on optimizing the experience between Intel silicon-based phones, tablets, PCs and the TV.  This is something they've never been able to pull off because first, they didn't have the TV, but as important, they didn't have the content service to offer.  While many “hardware jockeys” may beg to differ, content drive the hardware more times than not.  Strategically, if Intel can pull their solutions together in some meaningful way, this makes choosing an Intel-based phone much more likely.  Now let’s talk brand. While Intel has very high brand awareness across multiple audiences, the familiarity and loyalty is on the IT side, not with consumers.  Through Intel’s direct consumer connection on the entire experience, including hardware, software, and services, this finally gives Intel the opportunity to increase consumer familiarity and loyalty.  If Intel can do this, this gives them a higher success probability if they were to sell their own Intel-branded phone or tablet. Don’t ever count that out as a possibility as Intel won’t stop until they see success there. The final, long-term benefit I want to highlight is around business model.  For years, Intel’s business model has consisted of them developing and making ingredient products, partners buying them and integrating them into a system, and end buyers buying those products directly or through a channel.  The transaction is a one shot deal without the possibility for a recurring revenue stream.  Like McAfee, Intel media success means a recurring revenue stream that is very important to a transformation of Intel.  Recurring revenue streams are more buffered against the ebbs and tides of the overall market flow and are typically margin-rich as you aren't constantly reinventing the wheel every year trying to win with the latest widget. Motivation to Succeed? As I have hopefully outlined, there are some very intriguing reasons for Intel to get into this market, short term and long term.   And motivation is a decent barometer of just how much effort any company will put into a new business.  From my vantage point, Intel is more motivated and ready as I have ever seen them.  After nearly 25 years of working around Intel, I have learned that you should never count them out, particularly when Intel is prepared to spend billions to make this work.  Ironically, I believe this will come down to content and my content sources say their offering is unique, differentiated, and not Apple AAPL +0.3%. Disclosure: Moor Insights & Strategy provides research, advisory and consulting services to the phone, tablet, PC, TV and scale-out data center technology markets, which includes Intel.
Patrick Moorhead
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Patrick founded the firm based on his real-world world technology experiences with the understanding of what he wasn’t getting from analysts and consultants. Ten years later, Patrick is ranked #1 among technology industry analysts in terms of “power” (ARInsights)  in “press citations” (Apollo Research). Moorhead is a contributor at Forbes and frequently appears on CNBC. He is a broad-based analyst covering a wide variety of topics including the cloud, enterprise SaaS, collaboration, client computing, and semiconductors. He has 30 years of experience including 15 years of executive experience at high tech companies (NCR, AT&T, Compaq, now HP, and AMD) leading strategy, product management, product marketing, and corporate marketing, including three industry board appointments.