The case for Intel's OnCue: It's worth the rumored $500M price tag

Josh Wein, FierceOnlineVideoHow crazy is Intel (Nasdaq: INTC) to expect someone to pay $500 million for OnCue? The price tag, reported this week by Bloomberg, seems high. Though Intel's would-be over-the-top pay-TV service has been in closed trials with some Intel employees, it never launched commercially and has no subscribers.

Contrast that with the auction process Hulu's owners held earlier this year. The site--Hulu Plus boasts more than 4 million subscribers paying $8 a month--reportedly turned down offers of more than $1 billion from strategic and financial bidders.

Hulu has subscription and ad revenue to help justify those bids. OnCue has neither, but it's said to have drawn interest from Verizon (NYSE: VZ), Liberty Global, (Nasdaq: LBTYA) and Samsung. If anyone buys OnCue they would be buying the idea of a business, not an actual business.

But the idea has potential. Observers of the pay-TV industry generally agree there's room for improvement in the video products the top distributors offer. Should an over-the-top pay-TV service ever materialize in the U.S., it's fair to suggest it would attract some subscribers.

How many would OnCue need to justify Intel's asking price?

Verizon's FiOS service had 5.2 million video customers at the end of Q3, according to the company's quarterly results. That's a decent penetration rate considering Verizon's FiOS network passes just 18.3 million households. But there are roughly 100 million pay-TV households in the U.S. and at least 83.6 million broadband households served by the top ISPs, according to Leitchman Research Group.

Among existing distributors, only Dish Network (Nasdaq: DISH) and DirecTV (Nasdaq: DTV) have the national footprint OnCue could achieve with an over-the-top strategy. And like OnCue, they lack the ability to offer broadband service that cable and phone companies enjoy. Together, they serve some 34 million customers and have combined market capitalization of nearly $59 billion. One way pay-TV assets have historically been valued is on a per-subscriber basis. Today, the public markets appear to value a satellite, standalone video subscriber at around $1,730.

By that metric, OnCue would need fewer than 300,000 subscribers to reach a $500 million valuation. And 300,000 seems like an achievable figure for an over-the-top service.

That's less than half the number of video subscribers lost by the top nine cable operators in Q3, according to Leichtman Research Group's figures. Moreover, the Wall Street Journal recently estimated that Aereo has attracted close to 100,000 subscribers in New York City alone. Yes, it's by far the largest U.S. market, but it's just one market. If OnCue--whoever owns it--can pull off a national rollout, the numbers might start to add up.

Of course, plenty of questions remain about OnCue's status that any potential owner would have to answer before agreeing to buy it. How fully-baked is the service? Can a new owner simply flip a switch and turn it on? What intellectual property and equipment are included in the deal? Would OnCue's acquirer be locked in to buying equipment like set-top boxes and servers from Intel to run OnCue or could it source components from other vendors?

And then there's the question of content. Without a full lineup of pay-TV networks, OnCue would struggle to find customers. So far, networks have been reluctant to license their programing to over-the-top services. OnCue's suitors would have to believe they could convince the networks to play ball in order to justify coming anywhere close to meeting Intel's asking price. The price paid for that content could determine whether the service is profitable.

Intel missed its chance to introduce an OTT service before the holidays, but other online video services are putting substantial marketing and promotional resources behind their products this month. In a feature this week, FierceOnlineVideo looks at some of the deals device manufacturers and online video distributors are running. Check it out and enjoy Thanksgiving.--Josh