Cable has been able to maintain high prices by forcing customers to buy packages of channels. Even if you only view NBC and ESPN, you still have to pay for dozens of channels you may not want or watch.
That system has massively benefited the entire pay-television industry, driving up the price the average U.S. household now pays to $64.41 per month, nearly triple the amount paid in 1995 when the Federal Communications Commission began tracking prices. This has been bad for consumers, but it's a fragile system that could have fallen apart at any time if one of the major pay-television providers had decided to offer an a la carte service.
That has not happened, as the cable companies have maintained a level of pricing collusion that would make baseball owners proud. As we have seen in the mobile phone world with T-Mobile (NASDAQ:TMUS) once one domino falls, others will tumble soon after and it appears Verizon (NYSE:VZ) will be that first domino.
What is Verizon doing?
Verizon has announced that in 2015 it will be offering a purely digital a la carte pay television service. Verizon CEO Lowell McAdam talked about the service at the recent Goldman Sachs technology conference, PC Magazine reported. He said the service would have the major broadcast networks, as well as what he called "custom channels."
"No one wants to have 300 channels on your wireless device," McAdam said, according to the website. "And I think everyone understands. It will go to a la carte."
Though McAdam gave no specific details on the service, he did suggest it would also have a user-generated content component, which would be facilitated by the Verizon broadband service.
Why will cable companies hate this?
The current system of offering tiers of channels at varying price points has worked well for cable companies. By carefully creating packages that have most but not everything a customer wants, the pay TV companies have been able to steadily move bills higher. The average family of four may have a mom who wants the NFL Network, a dad who likes the History channel, one kid who wants Disney's extended offerings, and another who wants the entire MTV family of channels. By putting some of these in a higher tier, the cable providers put mom and dad in a position where they have to pay more to get every channel the various family members want.
This forced bundling has been especially good for Comcast (NASDAQ:CMCSA) and Time Warner Cable (UNKNOWN:TWC.DL) because they also own channels and receive fees from other providers for the right to air the channels. These per-channel charges for stations simply get passed on to customers, with a healthy margin tacked on of course.
A widely available a la carte service would end this entire system.
The law of unintended consequences
The cable companies have always argued that if they were forced to offer a la carte pricing then choices would go down and prices would rise. In a way, they are correct.
If people can pick and choose what channels they want, many less popular stations would either need to charge a lot more or disappear. The per channel price would likely rise, because the stations would no longer be collecting money from people not actually watching and choice would go down since some stations would not have enough revenue to continue.
Whether your cable bill goes up or down, however, would come down to personal choice. It would be just like ordering off of a menu and customers would have the ability stick with an appetizer and a side salad or splurge on a multicourse meal.
This is going to happen
Verizon is smart to be doing this because it makes no sense to cling to a business model that technology has made irrelevant. Cable has already seen that people -- specifically younger folks -- are willing to go without a traditional pay TV subscription. Services like Netflix, Hulu, and Amazon's Prime Video, along with YouTube and countless other online offerings, have made not having cable a viable option.
Consumers are already creating their own a la carte television packages and if the cable companies wait to enter that market then they will see the same diminishing returns that have plagued the music industry. Verizon isn't being progressive so much as it is giving in to the inevitable and refusing to turn a blind eye to current market conditions. That's a lesson the other cable companies should learn.
Daniel Kline has no position in any stocks mentioned. 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.