Back before the Internet was even a glimmer in Al Gore's eye, banks used unique giveaways to entice customers to open accounts. Sometimes it was a toaster. Other times it was a calendar. In general, it was something unrelated to whether putting your money in that institution was a good idea or not.
Now, as the cable industry struggles to find an answer to cord cutting, AT&T (NYSE:T) is taking a page, at least indirectly, from this very old book by offering new subscribers to its U-Verse service a free year of Amazon Prime. The deal is not quite as disconnected as a checking account and a small appliance. Prime does have a video component, which has grown in importance as the service's original benefit of unlimited free two-day shipping has become less relevant because books, music, movies, and TV have migrated to digital delivery.
What's perhaps more odd about the offer is that the video part of Amazon's service, Prime Instant Video, is exactly the type of streaming service that makes not having a cable subscription seem like a viable idea to a growing number of people.
The U-Verse deal offers a broadband Internet connection, basic cable, HBO, and a free year of Prime for $39.99 a month for the first year. The contract is only for 12 months, which makes the deal less onerous than many offered by cable companies, which offer a low price for the first year but require a multiyear commitment.
Why is AT&T trying so hard?
The number of subscribers to cable actually fell in 2013, according to research from SNL Kagan, the first time that ever happened. Streaming services are partly to blame for that, according to a Bloomberg article from March:
It's not that viewers are watching less video. Online-streaming services from Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) continue to draw more users with shows like "House of Cards," charging fees of less than $10 a month. What's changed is that fewer people are willing to shell out $40 a month or more for the wider menu of cable channels.
On the surface, this AT&T U-Verse bundle appears to in some way be laying the seeds for its own future failure by exposing customers to the Amazon service. In reality, it may be the first step toward offering a streaming-only cable package to keep cord cutters -- who still need Internet access -- in the AT&T fold. That type of service would work in concert with Prime Instant Video, and offering it for free might cause a customer to go with AT&T's version of what has been called "TV Anywhere" -- access to traditional broadcast and cable channels without a wired subscription.
AT&T has not formally announced a TV package that would not require a traditional cable subscription (though it does stream some channels for remote viewing by its cable customers). The company, however, is in the process of acquiring DirecTV (NYSE:DTV.DL), which has made its plan to offer streaming television that does not require a cable subscription clear.
It's very possible this aggressively priced U-Verse offer is a backdoor way to test pricing for a streaming-only package. At $39.99 with HBO (as well as the streaming HBO Go service) and Amazon Prime Instant Video, plus Internet access, you can actually argue that this offer makes sense for cord cutters even if they only use the digital aspects of it (which does not include every channel offered for wired use).
Will this work?
For Amazon, the deal is fabulous. The company gets new Prime members, and those are incredibly valuable since they spend twice as much as non-Prime members. For AT&T, the benefits seem a little less clear if you think of the offer as a cable/broadband bundle. In that scenario, Prime is a silly perk with some value, as it does cost $99 per year on its own, but the number of people who wished they had Prime, but didn't want to pay for it, who are also shopping for bundled cable and broadband is likely relatively small.
If you look at this as a test of pricing for a bundled broadband access, digital streaming pay TV service with HBO included, then the addition of Prime certainly sweetens the deal. Since $39.99 falls well below the estimated $60-$65 that the average American currently pays for broadband alone, that price would work well as a way for AT&T to launch such a service, while leaving it room to increase the price after a year without losing customers.
At that point, the deal essentially becomes offering television as a premium to sign up and keep broadband customers. Prime sweetens that pot, and while it won't be a game changer, it might tip the scales for on-the-fence customers much in the same way the toaster did for the banks.
Daniel Kline has no position in any stocks mentioned. He is an Amazon Prime member. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. 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.