AT&T (NYSE:T) is offering quite an enticing package for cord cutters. The company is bundling its broadband Internet service with a basic U-Verse TV package, HBO, and Amazon.com's (NASDAQ:AMZN) Prime -- including its two-day shipping and instant video service. For customers who already have a Prime subscription, AT&T will tack an extra year onto the end.
The deal is attractive enough to make even the most ardent cord cutter sign up, at least in name, for cable. Technically speaking, these customers are pay-TV subscribers since Time Warner's (NYSE:TWX) HBO still requires at least a small cable package to subscribe to. Bundles like this one with AT&T and a similar one with Comcast (NASDAQ:CMCSA) could provide HBO with the market testing it needs to move over the top, though. It's a delicate balance.
In the age of over-the-top streaming services, pay-TV providers are offering some good bundles to persuade subscribers to keep watching their big screens. But bundles like these from AT&T and the one from Comcast -- Internet plus HBO for $50 per month -- seem to take an "if you can't beat 'em, join 'em" approach. After all, it's better to have cord cutters as customers than have them go to your competitor for Internet service.
The problem they face, however, is that cord cutters are extremely price conscious. That's why they cut the cord in the first place. After the promotion period ends, and the price goes back to normal, there's no reason for cord cutters to stick around.
In the meantime, the cord cutters subscribing to these broadband-plus-HBO packages can provide a nice boost to AT&T and Comcast's video subscriber numbers. The effect might be small, but it could hide the number of people unsubscribing from Comcast's video service. AT&T's U-Verse service continues to grow, and a package like this will make it look like it's growing faster even if these customers are on the extreme low end of video subscribers.
Testing a la carte HBO
Earlier this month, Time Warner CEO Jeff Bewkes mentioned that taking HBO direct to consumers is looking more possible than ever. Time Warner has long been hesitant to leave pay-TV operators behind since they provide a very valuable service, but the opportunity may be getting too big to ignore.
These bundles from AT&T and Comcast provide an excellent test for a stand-alone HBO service. Bewkes mentioned that the partnership with Comcast earlier this year is showing very strong demand for HBO. In other words, enough people are signing up for these bundles that it seems economically viable for HBO to support itself.
In Scandinavia, HBO offers an over-the-top service for about $10 per month and has seen excellent traction. These packages from AT&T and Comcast allow Time Warner to test the price elasticity of what's essentially stand-alone HBO. Comcast's bundle costs between $40 and $50, while AT&T's equivalent bundle costs $40 but includes Amazon Prime, which normally costs the equivalent of $8.25 per month.
Another avenue to promote Prime
The benefits to Amazon's partnering with AT&T are clear. It gets more Prime subscribers. While it's unknown whether Amazon is offering AT&T a special price per subscriber, Amazon may be getting a deal either way.
Prime members are extremely valuable to Amazon. Fool analyst Brendan Mathews provides a rough estimate that Prime members are worth about 2.5 times as much as non-Prime customers over their life. Of course, cord cutters signing up for a low-cost Internet and cable bundle probably aren't worth as much, but it gives them incentive to buy more from Amazon. Amazon already appeals to price-conscious consumers. Free shipping makes it that much more appealing.
A recent survey by RBC Capital found that Amazon may have 50 million Prime subscribers already. That's phenomenal growth from just 18 months ago, when an estimate from Consumer Intelligence Research Partners pegged the number at 10 million.
The larger subscriber base allows Amazon to invest more in streaming content to compete better with other over-the-top services. It's worth noting that one of Amazon's biggest draws recently has been a partnership with HBO to bring a lot of its old content to Prime Instant. As such, customers who get to try both with the new AT&T package may decide to go with just one or the other after its promotional price expires.
AT&T's new bundle looks like it benefits everyone involved. AT&T gets to add customers who would otherwise subscribe to Internet only or, worse, get Internet service from a competitor. HBO gets to test the price elasticity of an over-the-top service. And Amazon gets to promote its Amazon Prime service.
Most importantly, the consumer might benefit the most.
Adam Levy owns shares of Amazon.com and Apple. The Motley Fool recommends and owns shares of Amazon.com, Apple, Google (A and C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.
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