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Sony in talks for virtual MSO service

Conglom could roll out over-the-top channels later this year

Sony Corp. will show off a wide range of new products at next week’s Consumer Electronics Show, but one that will stay under wraps could be its riskiest: a multichannel TV service to rival cable.

The Japanese conglomerate is in active negotiations with at least two major content companies about licensing their channels for a package that could roll out in the U.S. later this year, according to sources.

Like just about every well-capitalized corporation in the technology sector, Sony has been rumored before to be contemplating becoming a so-called virtual MSO. But sources characterized the ongoing talks as far beyond exploratory and just as advanced as those of Intel Corp., another firm that has attracted a flood of recent speculation about its plans to enter the TV market.

A Sony spokesman declined comment regarding “rumors or speculation.”

Few specifics are known about the proposed service, but it would be a package of linear channels akin to what pay-TV distributors traditionally provide, only delivered via broadband connection. In contrast to the cable operators who are bound by a geographic footprint, a virtual MSO can conceivably offer TV service to any subscriber nationwide.

But while Sony would presumably be aiming to come to market at a lower price point than incumbent MSOs, that could prove difficult given the content and infrastructure costs could total billions of dollars.

Such an undertaking could be a source of concern to investors, who have yet to see the long-awaited return of stability to Sony under Kazuo Hirai, who succeeded Howard Stringer as CEO in April. The company’s stock price has since sunk to the low teens, with Hirai coming under criticism for spending nearly $2 billion on acquisitions outside of its core competencies.

But a virtual MSO strategy could make sense given the perceived vulnerabilities of existing multichannel providers thought susceptible to market-share loss given constant price increases. The endeavor would also allow Sony to leverage its already sizable footprint in U.S. living rooms via a range of connected devices including gaming console PlayStation 3, Bravia TV sets and Blu-ray players.

Sony currently uses them to offer a mix of video, music and games via both a proprietary content storefront, under the brand Unlimited, and select third-party partners like Epix, which was just added to PlayStation Network on Thursday.

It’s unclear whether Sony would have to create additional hardware to activate a multichannel service within those devices or whether a deployment would even be restricted to Sony products. The service is not expected to offer channels on an a la carte basis.

Sony could find itself competing for subs with not only cable, satellite and telco providers but other companies said to be eyeing virtual TV service including Intel and Dish. Only Google has made actual strides in this new category with Google Fiber, a TV/broadband combo in Kansas City last year. Though just a single market, Google chairman Eric Schmidt suggested last month that expansion was a possibility.

Apple and Microsoft reportedly flirted with the idea of virtual-MSO play last year only to back off. Microsoft has since partnered with select MSOs like Comcast to offer authenticated access to TV via its Xbox console, and the latest speculation on Apple TV suggests a similar route could be in its future should it ever come to market.

Sony would not go so far as to lay its own network of fiber optic cable like Google but that could represent the biggest obstacle to any company mulling a virtual MSO service. Should any new market entrant prove successful, the cable operators who are among the country’s biggest sellers of broadband could conceivably move to protect their own video business by switching to metered billing, which would dramatically increase the cost to virtual-MSO subs.

That possibility apparently gave Sony pause last year about entering the TV business. Six months after reports first surfaced in November 2011 that the conglom was exploring a TV venture, a Sony exec suggested that plans were on hold as a result of Comcast’s move to make streaming of its content to an authenticated app on Xbox Live an exception to data caps.

The comment was the only public acknowledgement Sony has made regarding even entertaining the possibility of a virtual MSO. The company has since slipped off the radar as ensuing speculation focused on Dish, and more recently, Intel.

But cost is likely a big issue being taken under consideration at Sony. Without an existing subscriber base, the conglom would almost certainly have to pony up significantly more to license channels than incumbent pay-TV providers already shell out to content companies, as the telcos did about 10 years ago for the right to compete with cable and satcasters.

What could conceivably mitigate against that level of investment is Sony going to market with a less comprehensive channel package than the incumbents. While content companies typically force distributors to take all or none of their available channels, Sony may be steering clear of some major programmers. Sources at several of the content companies contacted by Variety indicated that the company had either broken off exploratory talks long ago or never approached in the first place.

Even among the companies currently talking to Sony about licensing programming, there is some skepticism that the conglom will make it to market, but so far it has been as serious as any other partner at the negotiation table.

Given Sony also has assets in the content business, the conglom could conceivably steer programming to such a service but sources indicated no such licensing deals are in place. Sony Pictures Entertainment currently operates Sony Movie Channel and Crackle, a digital-only programming lineup that mixes original and library fare.

Cost is a sensitive subject at Sony these days as the Tokyo-based firm continues to struggle to find its footing as rivals like Samsung are seen to be hitting their stride. Years of layoffs and quarterly losses have left a tough turnaround assignment for Hirai, who raised eyebrows in the second half of 2012 for taking expensive stakes in Olympus Corp. and So-Net Entertainment intended to give Sony traction in the medical-equipment market.

But in Sony’s core business of selling entertainment devices, giving buyers the option of taking TV service could be a point of differentiation in a brutally competitive market where upstarts like Vizio have made their mark. Sony will be talking TV and much more in its CES press conference next Monday, where the focus will likely be on its line of Xperia smartphones.

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