Intel to Offer Multichannel TV Service,

Step aside, Apple: This Silicon Valley chip-maker is ready to invade the cable biz this year. But is the plan inspired or insane?

Employees at Intel Corp. are free to roam almost anywhere across the vast Santa Clara, Calif., campus they call home. Certain laboratories are off-limits of course; that’s understandable when the assembly of microprocessors could be contaminated by a human eyelash. But there is one other building where a standard-issue Intel ID isn’t going to get you past the guards inside the 80,000-ft. square space, one of the oldest edifices at the company’s headquarters. Only 300 of the more than 100,000 people who work for Intel have clearance. And they’ve been instructed not to talk.

(From the pages of the April 2 issue of Variety.)

If there’s anything conspicuously different about the structure, it’s the massive 32-foot satellite that sits atop an adjoining parking garage. Dishes that size are typically found on the premises of a breed of company nothing like Intel: pay-TV distributors who need the kind of equipment that can sweep the entire hemisphere to acquire all national TV signals. Without this kind of hardware, it would take 48 separate satellites to accomplish the same task. The Intel of old would have no use for a tool like this one.

Having the only clue of the work he’s done to date be visible to his Silicon Valley neighbors has a deeper meaning for Erik Huggers, head of the division housed inside, Intel Media, one he hopes will soon resonate among U.S. consumers.

“When you think Intel, you think something inside, a component of something sitting in your computing device,” he said. “I think there’s an opportunity for the company for the first time to have the perception of ‘Intel outside.’ If we succeed, I do think it will change the perception of Intel dramatically.”

Huggers has walled off Intel Media from the rest of the company for most of the past two years because he believes achieving his goal requires developing a start-up culture separate from the one the chip manufacturer has cultivated for itself. There’s also a more practical concern: He doesn’t want anyone to get a glimpse of the product Intel Media is solely devoted to creating until it is ready.

But full disclosure became an inevitability a little over a year ago when the first press leaks began to shed light on just what Intel was developing. By the end of 2012, in the walk-up to the Consumer Electronics Show, the leaks became a stream so steady that the company was essentially forced to confirm what anyone who cared by then pretty much already knew: Intel intended to invade the pay-TV business with a nationwide multichannel TV service of its own.

The move could be deemed either inspired or insane, depending on your point of view. It’s a direct challenge to leading pay-TV providers like cable operator Comcast and satcaster DirecTV, which may often be characterized as vulnerable but aren’t actually showing signs of weakness right now. Intel is making a headlong leap into a business where Google has barely stuck a toe in the form of Google Fiber, which has rolled out its own broadband network in two Midwest cities. And though everyone expects Apple to rock this competitive field with some sort of solution of its own, what it is doing exactly and when it will arrive is completely undefined.

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The notion that a Silicon Valley hardware stalwart would make a play for the living room seemed so preposterous it was still a little
shocking to see Huggers go public in March with additional details about his plans at an industry conference. Most salient was his vow that Intel would start selling a device that would deliver video to TVs via broadband by the end of the year. He’d gone farther than any other tech giant rumored to be considering similar services, from AT&T to Sony: actually committing to coming to market.

What made the move all the more unlikely is that Intel isn’t the innovative force it was when the company first came on the scene in 1968. Today it’s seen as still sturdy but kinda stodgy. Consumers have a vague awareness of the brand left over from the days before its fortunes faded right alongside the company with which it is most associated: Microsoft, which used Intel’s chips to power so many of the machines operating Windows.

The bigger knock against Intel is its terrible track record when it comes to diversifying beyond its comfort zone creating chips for PCs and servers.

And yet the maturation of that business makes branching out a must. “I do believe there’s a big-picture plan at Intel to avoid missing the next big shift,” said Doug Freedman, an analyst who covers Intel for RBC Capital Markets.

And while sources at several leading conglomerates confirm that Intel is in discussions with them to secure content, no deals have been announced (though Bloomberg News reported March 26 that the company has gotten closer with several major cable groups). To make those deals happen, Huggers has enlisted some media-biz insiders with impeccable credentials to consult on the project, including attorney Ken Ziffren, former MTV Networks affiliate sales chief Nicole Browning and TV programming exec Garth Ancier. But the absence of carriage contracts isn’t a confidence-builder. “Intel has nothing if they don’t get the programmers on board,” noted Richard Greenfield, who also analyzes the tech sector for BTIG Research.

Bottom line: If Intel is going to launch a product with a breadth of content on par with the cable, satellite and telco giants with which it hopes to compete, it could cost billions of dollars in carriage fees. Huggers declined to specify how much the company, which has a market capitalization of approximately $100 billion, is spending on the project, but made clear this is not some skunkworks lark. “We’re ambitious,” he said. “We wouldn’t be investing the way we’re investing if we thought we were going to be a niche player.”

Huggers understands how improbable Intel’s foray is. But that’s exactly the challenge that enticed him away from his previous post leading digital media at the BBC — another crusty monolith that didn’t seem too well-poised for a technological revolution until it happened on his watch. He’s eager to do it again in a bid to redefine what Intel is.

“We know this is very left field, we know this is crazy, but as a company we understand we must become more user-experience-driven,” he admitted.

Here’s a precis of what little is known at this point: Intel intends to allow subscribers to purchase a package of broadcast and cable channels that will be supplemented by various VOD options. The package will also be available across mobile devices.

Intel has ruled out trying to offer a la carte channels. The programming partners (think Time Warner, News Corp., Disney, Viacom, etc.) it needs to field a competitive service would never go for that. But the company has also hinted there could be more flexibility in the bundles of channels offered, as opposed to the standard basic-cable package.

Interestingly, Intel has also made clear that its new device is not expected to come in at a lower price point than most other pay-TV services, despite the presumption establishing an alternative to cable would hinge on being cheaper. Instead, Intel’s value-add is a user experience touted as a quantum leap over the traditional multichannel set-ups that have been rendered anachronistic by innovators like Apple and Netflix.

While a cable distributor is bound to the geographic limits of its own pipes, Intel is pursuing what’s known as a virtual MSO or MVPD model capable of delivering programming to anyone in the U.S. with a broadband connection. Intel is the only company to commit to pursuing the virtual MSO model, but plenty of others have reportedly flirted with the possibility, including Microsoft and Dish Network. They’ll no doubt have an eye on Intel.

There’s a school of thought that believes the incumbent pay-TV providers are ripe for disruption given rising subscription prices, increasing programming blackouts and numerous other criticisms. However, for all the talk about cord-cutting, there’s very little evidence that consumers are so dissatisfied that they’re disconnecting — though it may very well take a viable alternative to emerge to bring about that tipping point. That’s where Intel comes in.

Good luck finding the front door at Intel Media; the division’s secretive ways are such that the only way into the building is through the employee parking garage. As we begin a tour that represents the first time a journalist has ever been admitted into its intentionally darkened doors — the company plans to add a bona fide entrance around the time the mystery product is ready — Huggers admitted he was so intent on making Intel Media a world apart from its owners that he initially sought to put down stakes outside Santa Clara. “I found something in Palo Alto, beautiful location,” he confided, before disclosing that Intel CEO Paul Otellini nixed the idea. As he remembers Otellini saying, “’Palo Alto? That’s too tony for us. We’ll allow you to be different, but not Palo Alto different.”

With all the secrecy surrounding his work, one might expect Huggers has carved out a lair several stories below the earth’s surface where his team can toil. Instead, Huggers has gutted and refurbished a building with the intent of infusing it with an energy that might seem otherwise absent at Intel, a massive cube farm seemingly colored entirely in shades of gray.

But although the cubicle walls are lower and their colors a good deal brighter, the central area where the designers, engineers and programmers of Intel Media work is a bit of a letdown. Still, by Intel standards, it’s radical chic.

Adjoining the work area are several staging areas decked out like mock living rooms, where the natural conditions for the TV-viewing experience Intel hopes to understand are recreated. Just weeks away from turning 40, Huggers surveys the workspace beaming with pride; this is where he leads biweekly all-hands-on meetings that double as pep rallies for the division’s local ranks and for developers looking on remotely from places as far-flung as China.

Huggers began his career in his native Netherlands back in 1995 as the head of interactive for Endemol, the unscripted production giant that calls that country home. By 1998 he had transitioned to Microsoft, where after a few years working on MSN overseas he spent too many more working in the U.S. on streaming media products for Windows that went nowhere.

But it was at the BBC beginning in 2007 where Huggers really came into its own.

He took over digital strategy for a global brand that wasn’t particularly renown for having one, and turned the broadcaster into a pioneer during a period when many media companies were still finding their way. BBC’s iPlayer was his masterstroke, a digital service that brought together feeds from BBC’s many TV and radio properties into an easy-to-use experience that allowed consumers to access content they may have missed going back seven days.

He also was instrumental in the development of YouView, a set-top-box that unites broadcast and broadband content into a seamless user interface. While the product has a rather long, tortured history that led to its spinoff as a freestanding unit, Huggers gets credit for being one of its earliest champions.

“I think he had quite a big impact on pushing the BBC toward online, much earlier than many other companies,” said Colin Dixon, a British new-media analyst.

When Otellini reached out to Huggers in late 2010, he wasn’t quite clear what a semiconductor company wanted with someone from the media business. But as the CEO schooled him on silicon 101, Huggers found himself willing to move his wife and two children across the Pond for the chance to make his mark in a bigger market.

Huggers didn’t get off to a great start as head of Intel’s digital home group, a division charged with getting Intel chips in all sorts of set-top boxes and smart TVs. Five months into the job, he had convinced himself that there was no point to the existence of his unit. Moreover, he came to the realization that a greater opportunity awaited Intel in a media world where most of his staff didn’t have the skill set to meet the challenge.

“I had to explain, ‘I don’t think this is a good business, we have to get out of this thing,’” he recalled, a faint accent betraying his Euro origins. “I was proposing to make my job redundant. I was proposing to find new jobs for 1,200 employees.”

In Huggers’ brief time at Intel, he came to see silicon less as the be all and end all of business and more as the means to an end. Instead of just selling off the company’s technology as usual, he wanted to use it to power a device Intel would manufacture itself to deliver the kind of TV user experience wholly absent in the U.S. but not altogether different than the one he had begun to broach at BBC. While plenty of companies were providing some measure of innovation in that space, Huggers reasoned, none had really cracked it at scale, which left an opening in the marketplace. If he could get the corporation to invest in a new team for him to assemble, there was an opportunity to take Intel into an entirely new market.

But Huggers may have also been calculating that it wasn’t just the sheer brilliance of his vision that would win over Intel management. While there’s still a very big business in the manufacturing of chips for PCs and servers that has been Intel’s bread and butter for decades, there’s plenty of pressure on the company to find new paths. Efforts to do just that in recent years have come up short, principally in the mobile market where Intel was late to the game. Rivals ARM Holdings and Qualcomm have become the processing powers behind most smartphones and tablets. Intel is also seeing increased competition in other areas it once dominated, which has left management hungry to get ahead of the curve lest Intel falls behind again.

But entering the TV business may bring some with long memories at Intel some misgivings because this isn’t the company’s first time at the Hollywood rodeo. Intel suffered a resounding failure in 2006 with Viiv, a technology platform rolled out with considerable marketing support aimed at positioning the PCs it powered as devices for enjoying TV and movies — years before consumers were ready to watch anything that wasn’t on the boob tube or in a movie theater.

Huggers knew it wouldn’t be an easy sell to the Intel board. “It didn’t give me pause, but I’m sure it gave some of them pause,” he said. “There was a healthy debate. I was clear that this was not for the faint of heart.”

But he was able to persuade Intel to roll the dice and hire hundreds of employees, most of whom he felt had to come from outside Intel, which would have to make way for a new culture to bloom in its midst (most of the 1,200 staffers from the digital home group were reassigned to other jobs at the firm).

Huggers began putting together an all-star team from many different disciplines hailing from companies ranging from Netflix to AT&T. Marketing the Intel device is going to be a crucial piece of the puzzle, and for that he turned to Courtnee Westendorf, who spent more than a decade at Apple helping launch everything from iTunes to iPhone before moving on to Disney.

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“Being contacted to work at Intel caught me off guard,” she said. “But meeting with Eric changed my perspective. He’s a storyteller, he comes from entertainment. He was able to paint a vision for me that drew me in.”

Intel is not yet saying what it will call the device but is indicating it will have its own separate brand name. However, it’s a likely bet that Intel will figure the technology that powers the device into the marketing, just as it’s promoted countless other products.

Another potential marketing challenge: Intel has confirmed that the device will come with a camera that will recognize which viewer in a household is watching so as to personalize the programming (and presumably advertising) to individual tastes. Big Brother-ish as it might seem, the company has made clear the feature can be turned off, and isn’t exactly unprecedented either, considering the XBox’s Kinect.

Perhaps a parallel can be drawn between Intel and the Xbox creator with which it is often mentioned in the same breath: Microsoft. There was a time not so long ago when the identity of that company began and ended with Windows, and that product is still inextricably tied to its fortunes. But who could have ever foreseen that a videogame console, Xbox, could have become as central to that business as it has. Who’s to say Intel couldn’t find itself making a similar right turn.

All it takes is the lightning strike of one well-timed, well-executed product to transform a company so closely identified with microchips to be seen as something entirely different. Dixon believes Huggers has the ability to connect with consumers with game-changing implications.

“TiVo was so popular with users because its interface was so cool,” he said. “That’s what you’re going to get out of Erik.”

For all the focus on whether Huggers will be able to close deals to bring in programmers, there’s another major consideration to take into account: the edge a virtual MSO maintains in reach over geographically bound cable operators it loses in control because it doesn’t own its own distribution network. And that could potentially prove problematic; if Intel is too successful, cable companies could impose caps on usage that would make a virtual-MSO play financially prohibitive to subscribers. And yet don’t be surprised should Intel manage to get a foothold in the marketplace that cable operators strike a deal to make an authenticated version of their programming available via a virtual-MSO device, similar to an arrangement recently reached between Time Warner Cable and Roku.

Another source of concern springs from within Intel: Otellini is exiting the company in May, which raises the prospect that whoever replaces him may feel the company’s R&D dollars are better spent elsewhere. But Huggers isn’t worried. “Because we’re governed by a board with all the senior stakeholders that matter including the chairman who is electing the next CEO, I have no concerns whatsoever,” he said.

Intel has the deep pockets and the technological savvy to bring such a product to market, but until there is a product on which to lay eyes, it may be premature to render a verdict on its prospects.

“The either-or is it goes the way of other Intel ventures outside their core expertise, which is not very far, and it’s a big hole they’ll put a lot of money into and come up empty,” said Freedman. “The other side of the coin is, I can see where it could be transformative.”

It’s that other side of the coin that drew Huggers to a challenge that will allow him to innovate in a way he’d really only just begun to while at the BBC. For him, the upside is clear. “I think this is a once in a lifetime opportunity to be part of the transformation of an iconic Silicon Valley company.”

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