In possibly the best example of how cable's pending demise, Verizon's (NYSE:VZ) CEO Lowell McAdam acknowledged the business model is flawed at the recent Goldman Sachs investor conference. Specifically, the company is planning to disrupt the current model by launching an Internet-based TV service in early 2015.
On the surface, that sounds rather innocuous, but the kicker is the company is planning to offer "a la carte" subscriptions over the current bundled channel model. Although the company appears to be positioning the service as a wireless device format, make no mistake -- this has the potential to disrupt the entire business model of cable. By paying lower costs for only what you want, the company is adjusting to consumers' preferences.
Think Netflix, but with live streaming
In a nod to the success of streaming-juggernaut Netflix, Verizon acknowledged the path forward would share many similarities with Netflix but avoids a big flaw in Netflix's value proposition: live events. Of particular interest was Mr. McAdam's comments on live sporting events; he stated the service would carry those events through multicasting – a technology that avoids congesting the network.
And that's important; sporting events and news are very important to cable companies because they provide a barrier of sorts to the so-called "cord-cutting" trend where consumers abandon cable for streaming services or nothing at all. Estimates vary, but a new study from Experian by way of USA Today pegs the number of cord cutters at 7.6 million households; good for 6.5% of households, up from 4.5% in 2010.
An odd embrace
The most interesting part of these revelations was Mr. McAdam's characterization of content partners' response to this offering. By stating that "content companies...[have] moved from almost a stiff arm to much more of an embrace," Mr. McAdam provided a peek behind the veil of the major broadcasters. Matter of fact, he stated he's having conversations with Disney (NYSE:DIS)-owned ABC, Comcast-owned NBC, CBS, and Fox.
Of course, mentioning the large providers is slightly misleading here. It is entirely possible the economics are favorable for these providers -- at least in the short run. Right now, the cable provider/pay-TV business model is based upon a revenue-sharing agreement called affiliate fees and/or retransmission revenue. Basically, a portion of the cable bill you pay finds its way back to these providers on a per-channel basis. For example, fees for Disney-owned ESPN averaged $5.54 per month in 2013 compared to $1.15 for the Disney Channel.
Could there be losers?
Are there some losers here? Based on the broad and unsettled format being bandied about currently, smaller cable stations that have benefited from inclusions on a large cable menu are probably going to suffer. Take Scripps Interactive (NASDAQ:SNI), for example, the lifestyle-themed host of TV channels (HGTV, Food Network, Travel Channel, and Great American Country) may find it hard to navigate if this catches on.
These smaller-viewed channels could perhaps find themselves in trouble if not chosen in an unbundled scenario. The second way a cable channel is paid ad-based revenue would suffer as well if viewership plummets.
Now, it is easy to remember this is still in the early stages. With that being said, it is entirely impossible that investors should keep an eye on how this potential sea-change for potential opportunities.