Will 2012 be the year of the virtual MSO? Don’t bet on it

For years, we’ve been wondering how long it would be before someone created a virtual MSO, or online cable company, that would offer an over-the-top alternative to traditional video offerings from the likes Comcast, (s CMCSA) Time Warner Cable, (s TWC) Dish (s DISH) and DirecTV. (s DTV) Well, it might be sooner than you think: In an extensive blog post today, (subscription required) BTIG analyst┬áRichard Greenfield lays out why he thinks one or more virtual MSOs will pop up over the next year.

There’s been no shortage of rumors about over-the-top video bundles emerging over the last few years, and a number of huge companies have been linked to talks with programmers to bring these services to market. Apple, (s AAPL) Microsoft (s MSFT) and Google (s GOOG) have all at various times reportedly been in discussions to create virtual MSO offerings. But now, all the pieces are finally starting to fall into place in a way that might make a streaming bundle of channels an actual reality.

For one thing, broadband is finally strong and pervasive enough to support the type of streaming service that these companies would like to launch. Netflix (s NFLX) and others have shown it’s possible to build ubiquitous access to streaming services through a vast and growing number of connected devices. Consumers are showing a willingness and desire to watch over-the-top video on their broadband-connected TVs, game consoles, Blu-ray players, tablets and other devices. And programmers are increasingly comfortable with their programming appearing online and on these devices, as long as they’re getting paid for it.

So what’s stopping a company like Apple or Microsoft from building a virtual MSO? Mostly economics.

In his note, Greenfield notes that most cable companies pay about $30 per subscriber for the packages of content they’ve assembled, with more recent IPTV entrants like AT&T (s T) and Verizon (s VZ) paying in the mid-$30s per subscriber. Due to a lack of scale in the number of subscribers at start, a virtual MSO would probably be paying upwards of $40 per subscriber for content — and that’s before all the actual infrastructure costs for transcoding, storing and delivering video over the Internet are taken into account. A virtual MSO would have to operate at “razor-thin” margins to offer a competitively priced package of channels.

Anyone attempting to build a virtual MSO could offer a cheaper bundle if they did so without some key pieces of programming, like ESPN, (s DIS) or if they used hybrid over-the-air and over-the-top set-top boxes to deliver broadcast channels without paying retransmission fees for them.

Still, the price to consumers for a streaming bundle from a virtual MSO will likely come in at $50 or more, which is only a slight discount from the average $75 that consumers now pay for cable — and that’s before you take into account the cost of broadband. Due to bundling, those who chose to go with a streaming bundle might actually end up paying more.

On the broadband front, there’s also a question of bandwidth caps, which could come into play if consumers watch streaming channels with the same frequency they watch traditional TV. Greenfield notes that viewers watching eight hours of streaming video a day at the relatively low bit rate of 2 Mbps would use up 220 GB of bandwidth in a month, which doesn’t give them much wiggle room for other applications or services.

Greenfield lists a large number of possible virtual operators, including all the usual suspects: Amazon, (s AMZN) Apple, Google, Microsoft, Netflix, (s nflx) Sony, (s sne) Yahoo (s yhoo) and Walmart, (s wmt) as well as social networking companies Facebook and Twitter. He also notes that traditional pay TV providers like AT&T, Comcast, DirecTV, Dish Network and Verizon might consider over-the-top offerings as a way to differentiate their services.

But looking over that list, it doesn’t seem like anyone stands out as a real possibility. That, combined with the fact that a virtual cable offering wouldn’t come in at a huge discount for most potential customers, leads us to believe the outlook for such services aren’t very good — at least not in the short term.