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Why Cable Operators Might Be Secretly Rooting for Over-the-Top TV Services

Charter CEO: online television deals would give incumbents leverage over programmers

Pay TV operators have been deeply skeptical that Intel, Sony, Google, Apple or anyone else can secure a critical mass of programming agreements for Internet TV services that challenge established cable, satellite and telco providers.

But there are some reasons incubments might actually benefit from such a development.

For one thing, broadband providers would have a new way to upsell customers to faster (read: more expensive) tiers of service. High-speed Internet is a significantly higher-margin business than video.

And here’s another wrinkle: With over-the-top linear TV competitors, cable companies would be in a position to negotiate better programming terms and fees — or simply go into business with the OTT guys instead, according to Charter Communications CEO Tom Rutledge (pictured above).

If programmers cut deals with an over-the-top player like Intel or Sony, “we could drop them and have a relationship with the over-the-top provider and put those signals on the TV for the customers,” Rutledge said this week at the Bank of America Merrill Lynch Media, Communications and Entertainment conference.

“In some ways, I would like (over-the-top TV) to happen, because I think it would change the leverage relationship between us and content (providers),” said Rutledge, a former top exec at Cablevision and Time Warner Cable.

SEE ALSO: Intel Has $2 Billion War Chest for TV Deals, But None Secured Yet

Still, Rutledge remained doubtful a “virtual MSO” will ever get off the ground. TV programmers are “not going to get any incremental customers out of it” by just shuffling subscribers from cable to Internet services, he said. “If it’s a replacement service, it’s not incremental.”

Intel has been working on a broadband TV service through its Intel Media division; while it is aiming to launch that later this year, the chipmaker has had trouble inking final distribution deals with media companies. Sony, meanwhile, has reportedly reached a preliminary Internet distribution deal with Viacom, whose networks include MTV, Nickelodeon and Comedy Central.

But despite years of talk about virtual MSOs, “we still haven’t seen anybody launch one of those,” said DirecTV chief financial officer Patrick Doyle, also speaking at the BofA/Merrill conference.

Doyle similarly expressed skepticism about the feasibility of over-the-top video services becoming a replacement for current pay TV services. “It’s very hard for somebody economically” to assemble a pay-TV service that could replace cable or satellite, he said.

Echoing Rutledge’s comments, Doyle said content owners have a desire to keep the current ecosystem intact. “It’s hard for them to think about somebody who hasn’t invested in their own pipe and then delivering that content that way,” he said. “Will we see something? We might. But I don’t think it will be a threat to the linear business.”

It might be an existing pay TV provider, like Dish Network or Verizon Communications, that eventually brings the virtual MSO idea to fruition. Both companies, which have established traditional subscription TV businesses, have been rumored to be exploring the concept.

In fact, Dish chairman Charlie Ergen told Wall Street analysts earlier this year that the satcaster is well positioned to introduce an over-the-top TV service . “(A)s OTT happens, we think that’s something we can participate in… if it becomes a reality,” he said in May on Dish’s first quarter earnings call.

SEE ALSO: Ergen Says Dish Could Launch Internet TV Subscription Service

DirecTV, meanwhile, was among the final bidders for Hulu, before the Internet TV venture’s owners took it off the block this summer.

That could have enabled DirecTV to itself become a virtual MSO of sorts — providing a platform for delivering first-run TV to customers online. Doyle said Hulu’s access to next-day TV was particularly attractive, along with its base of more than 4 million paying subscribers.

DirecTV will continue to evaluate options in the subscription VOD space, he said. As for Hulu, “we’re happy to see if nothing else it went back to the content owners,” Doyle said. “Because, again, they should have a goal of not marginalizing the linear business by making this product too attractive.”

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