Verizon Communications Inc's acquisition of Intel Corp's venture to create a web-based TV service may be the catalyst that pushes U.S. cable players to start similar products to fend off fast-growing video rivals such as Netflix Inc and Amazon.com Inc.
The deal, announced on Tuesday, came two weeks after Sony Corp revealed it was working on its own cable-like video service and makes it likely that Internet-delivered TV services may be getting closer after attempts from Apple Inc and other technology companies.
Amazon has also considering an online TV service, and has been talking with content owners about licensing TV networks, according to the Wall Street Journal.
Verizon said it acquired Intel Corp's OnCue service for an undisclosed sum to accelerate its push into next-generation video services, including integrating it with its FiOS product, the fiber-based Internet and TV offering that has 5.3 million video subscribers, about 5 percent of pay TV households.
In a more ambitious move, Verizon also says it intends to deliver "over the top to any device," which almost certainly would kick off a race to capture eyeballs that will force cable operators to offer standalone services outside their service territories.
"For Verizon this could be an opportunity for them to offer a triple play to subscribers in the rest of the country," said Blair Westlake, who until recently headed Microsoft Corp's media and entertainment group. "If you're a Comcast that may get you thinking that it's time to start offering video in other markets as well."
Verizon has the brand, marketing dollars and customer relationships to make it a viable threat to cable operators, said UBS analyst John Hodulik.
There is a likely market waiting for it as well. North American consumers will spend $6 billion in 2014 on entertainment from over-the-top services such as Netflix, more than twice what they spent in 2010, according to PwC's annual entertainment and media forecast.
Cable TV operators, meanwhile, are losing video subscribers to satellite and telecom operators, according to SNL Kagan, putting pressure on their operating margins due to rising programming costs.
If Verizon's move prompts a similar bid from cable companies, it would upset a decades-long balance in the cable TV industry, which operates in near monopoly status with markets carefully carved up by local governments. Customers could choose between Comcast and Time Warner Cable for their video service, or Verizon for that matter.
Comcast may be furthest along with a potential over-the-top service with its Xfinity X1 platform, which allows a subscriber to its traditional video service to toggle between live and on-demand programming with a slick interface.
A Comcast spokeswoman said the company is focused on getting that product released across its markets and not on an "over-the-top" service.
"If Comcast really launches one, it starts a war between all the different cable companies that are already incumbents," said BTIG analyst Rich Greenfield. "That probably means they fight over price, service and features that are great for the consumer."
It won't be easy for a new entrant to get started, however. Content owners so far have not granted cable operators the digital rights to sell their shows outside their markets.
That has not stopped both cable and satellite companies from eyeing the opportunity. Both Time Warner Cable Inc and satellite operator DirecTV bid on Hulu - the video streaming site owned by Walt Disney Co's ABC network, Comcast's NBCUniversal and Fox parent Twenty-First Century Fox Inc. Hulu's owners, the major content companies, decided instead to invest in it rather than sell it.
Charter, which has made a bid to buy No. 2 cable provider Time Warner Cable, has openly floated the idea. "We may sell subscriptions everywhere," Charter Chief Executive Officer Tom Rutledge said in an November conference call, responding to a question about Charter's streaming TV application.
Cable's competitors aren't sitting idle. DirecTV CEO Mike White has said the No. 1 satellite operator is working on an "over-the-top" video package to suit niche audiences, such as Hispanic or kids programming. DirecTV's rival Dish Network Corp is also eyeing the online opportunity.
"We're thinking of over the top too," Dish CEO Joe Clayton said on the sidelines of the Consumer Electronics Show in early January.
Craig Moffett, an analyst at MoffettNathanson research, is skeptical that online video newcomers such as Sony can be profitable enough to take on the incumbents. When folks start using huge amounts of bandwidth for TV viewing, he predicts Internet bills will jump as providers start charging by usage.
"A virtual provider like Sony could be left with a me-too service," Moffett says, "and an even higher total cost to the end user than the Pay TV subscription they would be hoping to replace."
For some cable operators, this could mean opportunity emerging from the chaos. Cablevision Systems Corp CEO James Dolan, for one, has said he sees a future in which cable operators no longer use their wires to offer video service and instead just offer broadband Internet, which makes more money.
(Reporting by Liana B. Baker in New York and Ronald Grover in Los Angeles; Additional reporting by Sinead Carew in New York and Noel Randewich in San Francisco; Editing by Christian Plumb and Lisa Shumaker)