Cord-cutting reached a new peak in 2019, with millions of American consumers ditching traditional pay TV for alternatives. But one area of pay TV that saw considerable growth last year was among virtual multichannel video programming distributors (vMVPDs). Companies including Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube, Disney's (NYSE:DIS) Hulu, AT&T (NYSE:T), and DISH Network (NASDAQ:DISH) offer live TV packages streamed over the internet. 

Consumers are drawn to vMPVDs for a couple of reasons. They typically offer smaller packages of channels that meet the entertainment needs of consumers without the bulk of typical pay-TV packages. Additionally, consumers can pause their subscriptions from month to month, giving them greater control over their entertainment bill.

Verizon Communications (NYSE:VZ) is going after the market that wants greater control over their television bill without completely cutting the cord. It announced new pricing for its internet and pay-TV packages, offering greater transparency and removing contracts that lock in customers long-term. The move may help Verizon stem its pay-TV subscriber losses without sacrificing profit margin.

A 3D rendering of Verizon's logo placed in a park.

Image source: Verizon.

Not all vMVPDs are created equal

It's important to note that not all virtual pay-TV operators grew last year. AT&T's AT&T TV Now (formerly DIRECTV Now) saw a marked decline in subscribers in 2019. It lost over 700,000 of its 1.9 million subscribers over the four quarters ending last September.

AT&T's struggles are linked largely to its reduction in promotional activity around the product and significant price increases. AT&T's management has made it clear that it's focused on only the most profitable customers and expects to keep losing subscribers. Management believes subscriber losses for its overall pay-TV business peaked in Q3, but an additional price hike for AT&T TV Now last quarter could lead to faster declines for the over-the-top service.

Meanwhile, Hulu, YouTube, and DISH Network's Sling TV are adding hundreds of thousands of subscribers every quarter despite also raising prices last year. Sling TV added 214,000 new subscribers in the third quarter, accelerating growth. Hulu and YouTube don't publicly report subscriber numbers for their live TV services, but estimates from MoffettNathanson peg their third-quarter net additions at 400,000 and 200,000, respectively.

Meanwhile, traditional pay-TV providers lost around 1.7 million subscribers total in the third quarter. Verizon lost 66,000 subscribers. Being able to emulate the offerings of virtual MVPDs may be essential to retaining subscribers.

Verizon can't quite copy the competition

It's worth noting Verizon previously explored entering the vMVPD market. It discussed plans publicly in 2017, but ultimately never launched a product. It's likely been unable to lock down the necessary contracts with media companies to offer an over-the-top service.

While its new pricing options emulate the flexibility offered by vMVPDs, Verizon is still locked into its existing contracts with media companies. Those companies include AT&T and Disney, which may be difficult to negotiate with considering they have competing distribution services. As such, Verizon may not have the rights to stream video outside of the home (or at all, for that matter) for some popular networks.

Additionally, Verizon may not be able to make a package of networks that offers the greatest appeal to consumers. Its lowest-priced TV option is $62 when you include the required set-top box, and that's before any DVR options. Interestingly, Verizon highlights YouTube TV's $50-per-month plan (including DVR) in its list of options. So, even Verizon knows it can't compete on price; it might as well take a commission on sign-ups then.

But the inability to keep channel packages small and offer relatively low prices compared to most traditional cable packages is what led AT&T TV Now to lose hundreds of thousands of subscribers in 2019. Verizon's new pricing package may have limited appeal to new subscribers.

That said, it could help the company retain existing subscribers that are thinking about canceling and switching to a virtual provider instead. And Verizon can do so without sacrificing on price. So, while Verizon might not see significant gains in gross additions from the change, net losses should decline and overall subscriber losses may come back to even for the telecom.

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