First it was an AT&T (NYSE:T) U-verse deal that offered broadband Internet, basic channels, Amazon.com Prime, and Time Warner's HBO for $39.99 per month. Now, Verizon (NYSE:VZ) is replying by offering FiOS Internet, HBO or Showtime, and local news and sports for $50.00 per month.
In a way, this is a natural progression from the massive bundled packages that have dominated the landscape. Legacy pay-TV providers Time Warner Cable (UNKNOWN:TWC.DL) and Comcast (NASDAQ:CMCSA) (now in process of a possible merger) have been disrupted by a powerful trend in cord cutting -- households abandoning pay-TV for streaming services like Netflix and Hulu -- seemingly unable to adapt.
The aforementioned telecoms, less dependent on pay-TV for revenue, appear to be willing to adjust to the new reality in which Internet presents a better value proposition than pay-TV and they are adjusting well. Should Time Warner Cable and Comcast be afraid of AT&T's and Verizon's moves?
Not so fast
When AT&T announced this service last week the main knock against the deal is AT&T's rather limited reach. As of its last annual report the company boasted only 5.3 million Pay-TV subscribers. The issue was one of reach; right now, AT&T is only available in 22 states, locking many would be subscribers out of this deal. Perhaps AT&T will extend this deal to its DirecTV customers post-merger (more on that later), but right now this is only through U-Verse.
In addition, Verizon's FiOS appears to be even worse when we look at overall coverage. Although the service is in some of the larger markets (NYC, LA, Washington, and Dallas), the network is only established in 20 cities. Outside of that, you will have to deal with the legacy providers or satellite providers Dish Network or AT&T's soon-to-be-owned entity DirecTV.
Are mergers "game changers"?
Outside of the powerful trend of cord cutting, the biggest trend in pay-TV right now is merger-mania. AT&T is in the process of acquiring DirecTV (pending regulatory approval) with the deal being bolstered by DirecTV's continued exclusive agreement with the NFL via its Sunday Ticket partnership. However, the earth-shattering merger would be the Comcast/Time Warner Cable one (if approved) -- the combined entity would boast nearly 35 million subscribers.
So you'd think the post-merger Comcast Time Warner Cable would have the market power to fight price-cutting competition. But you'd be wrong. One of the big reasons for normal acquisitions is to acquire market power. However, since Comcast and Time Warner really don't compete in the same markets (the pay-TV market has been a virtual operating monopoly in most geographies), the ability to leverage market power by charging higher prices isn't as feasible. And the so-called "synergies" (read: cost cutting) by combining two companies tends to be overstated by optimistic managers.
Pay-TV's future? Less is more
But even if I'm wrong and the new Comcast/Time Warner entity attempts to use its market power to raise prices, it faces the cord-cutting issue. People aren't seeing the value in cable anymore and are forgoing the service. A recent Experian Marketing survey found that 6.5% of all U.S. households do not pay for television; that's up from 4.5% in 2010. Demand for pay-TV appears to no longer be an inelastic good. With streaming services as close substitutes, customers are no longer willing to stomach price increases as in years past.
AT&T and Verizon seem to understand this with their new products. Using a "less is more" option in terms of pay-TV, the new services tend to revolve around their Internet offerings and pay-TV basics. As a sweetener, both services include HBO's popular content. In short, it appears Verizon and AT&T understand the true competition here -- cheap, streaming services that encourage shoppers to abandon pay-TV altogether.
Even if it doesn't seem like it, the cable industry is quickly changing. Legacy providers like Comcast and Time Warner are looking to merge to hold off lower-priced packages from AT&T and Verizon. However, in this case size isn't strength, the post-merger company should focus less on threats from AT&T and Verizon and more from threats from Netflix and Hulu.
Jamal Carnette owns shares of Verizon Communications. The Motley Fool has no position in any of the stocks mentioned. 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.