Google and the TV Business: When a Small Box Can Hide Another

On Monday, Google and its manufacturing licensee Hisense announced an Android-based/GoogleTV-based home streaming box, Hisense Pulse. Yes, the increasingly crowded Internet set-top box space has another entrant.

On Wednesday, in unconfirmed news, Bloomberg reported that Google had hired investment bank Barclays to sell the Motorola Home division.

Even if not yet confirmed, this adds to the rumors reported last March by The Chicago Post-Tribune that Motorola had engaged Qatalyst Partners LP to sell the Motorola set-box box business.

“Box or no box, that is the question.”

As stalwarts like Cisco and others will testify, being in the set-top box business is not for the faint of heart. If, unlike Apple or Amazon, you do not own your own distribution channel and need to leave 30% of the retail price to your distributor, margins are notoriously low, and you will need to reach extremely high volumes to have a chance to make a dime.

When EchoStar acquired SlingMedia, its financial statements suggested that, in order to build a solid market presence, a company would need to spend as much on sales and marketing per unit as gained from a distribution partner. This leaves no room for error and makes long-term vision critical.

No, Google did not start its journey as a hardware company, but the market presence it gained in the set-top space through the acquisition of Motorola Mobility would have proven a key asset in a TV business ripe for change.

It also represents a tremendous barrier to defend – to guard against entry by other vendors including Cisco that, interestingly enough, sells the routers and switches that power the Internet and OTT distribution.

It seems likely at this stage that Google will bank on the open Internet, sell the Motorola set-top business, invest in creating an ecosystem of branded or white label OTT devices like Hisense Pulse, and continue to refine its approach to the television business.

And it has several billion reasons to do so. Remember that the traditional television and movie business—a combination of TV advertising, pay-TV, and theatrical revenue—represents about $180 billion annually. That’s a staggering 83 times the current market size of the online video advertising business.

A meager 5% inroad into this space would represent $9 billion in top-line revenue accretion for Google. That’s a real business.

If confirmed, the sale of the Motorola home division will clearly state to the market, like its YouTube video product managers say in public, that Google will continue to foster the “pure, open Internet-based view of the world” and that “all video is created equal.”

This move may be dictated by corporate culture and DNA, as we pointed out in a foretelling opinion last August. It may be driven by Silicon Valley’s impatience at the slow pace of innovation and change of the television business. It may of course be driven by a short-term focus on the economics of the set top box and video infrastructure.

But we believe that this move, if confirmed, will make Google’s forays in the television business a more elusive and quixotic conquest, as the industry has much to defend and preserve, and will not accept a purely “dis-intermediated” approach to its evolution.