Cable companies have been jamming more and more channels into their bundles over the past decade or so. Since 2009, the average expanded basic bundle has more than doubled in size, going from 78 channels to 181 channels in 2015.
But Verizon (NYSE:VZ) CEO Lowell McAdam recently said he'd rather sell a skinny bundle of 40 channels or so instead of a megabundle of 300 channels. McAdam told the audience at the Internet Association's Virtuous Circle conference earlier this month that, if they could "[Verizon] would sell skinny bundles exclusively."
The only holdup is that media companies such as Disney (NYSE:DIS) are intent on stuffing as many channels as they can into so-called skinny bundles.
Custom TV bundles
Last year, Verizon started offering TV customers a new option called Custom TV. The idea is that subscribers can pick what kinds of channels they want to pay for, and they don't have to pay for anything else. When a potential customer is looking to sign up for television service, Verizon is sure to direct them toward one of its Custom TV packages.
Disney had issues with Custom TV from the start, filing a lawsuit against Verizon on claims of breach of contract. Verizon's agreement with Disney doesn't allow it to sell ESPN as an add-on as in its original Custom TV package. Verizon has since changed the structure of the bundles.
But the pricing of Verizon's Custom TV bundles indicate that it's much more profitable for it to sell them versus traditional bundles. The two Custom TV packages Verizon offers each cost $65 per month plus additional fees for the set-top-box, regional sports networks, and broadcast retransmission. That's just for 65 to 85 channels. Each add-on pack of six to 12 channels costs $6.
Verizon's traditional bundles start at $75 per month for 225 channels. Customers subscribing to one or two add-on packs for Custom TV will probably get more value out of a traditional bundle, but Verizon would make less of a profit.
What's holding Verizon back?
McAdam claims the biggest thing holding back Verizon from offering more skinny bundles are the media companies. Disney, for example, owns over a dozen different television networks. It can use its most popular networks such as ESPN and Disney Channel to force Verizon to include more of its less popular networks in its bundles.
But if McAdam really believes "the 300 channel bundle is gonna go away" and "customers don't want it," Verizon may have more leverage than he's letting on. Disney has already told analysts that it plans to aggressively pursue getting ESPN into more skinny bundles -- that could come at the expense of its less popular networks.
More importantly, others have already shown it's possible to produce a much less expensive bundle. DISH Network (NASDAQ:DISH) offers Sling TV -- an over-the-top service streaming several dozen live networks -- for as little as $20 per month. DISH says its operating margin on Sling TV customer is similar to its full-fledged satellite customers because customer acquisition costs are so much lower.
Verizon has all of the tools to offer a service like Sling TV. If it really wants to sell skinny bundles exclusively, there's very little stopping it.
It appears Verizon wants to sell its highest-margin television service as it bleeds video subscribers. That enables its operating profits to continue climbing despite losing more FiOS TV subscribers than it adds.
With the influx of over-the-top skinny bundles undercutting Verizon's pricing, Verizon may find itself entering that market sooner than later. The good thing is that Verizon has been stocking up on all the technology it needs to make the most of an over-the-top television service. By next year it will have streaming video technology, tons of digital content to differentiate its service, a strong set of digital advertising technologies, and a couple years of experience managing Go90 -- its current on-demand video streaming app. But at that point it could be facing a lot more competitors.
Adam Levy owns shares of Verizon Communications. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.