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Verizon & AT&T Battle for Cheaper Cable: But What About Your Bill?

By Sam Mattera – Oct 18, 2014 at 9:00AM

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Verizon and AT&T are both reaching out to cord-cutters. But is the death of traditional cable as complete as it seems?

"No one wants to have 300 channels," Verizon's (VZ -0.69%) CEO, Lowell McAdam, said last month at a Goldman Sachs investor conference. McAdam was discussing his company's forthcoming Internet-based TV service, one that could feature a la carte channels -- dramatically disrupting the traditional cable bundle.

Verizon isn't alone in its push to unbundle paid-TV; its longtime wireless rival, AT&T (T -1.14%), has also been reaching out to cord-cutters.

Increasingly, it looks as though the cable bundle's days are numbered. But will consumers benefit?

Unbundling: overrated?
It's clear change is coming: Just this month, both HBO and CBS (PARA -1.26%) announced new, over-the-top services designed to make their content available to those without traditional cable packages. CBS All Access offers subscribers a catalog of on-demand CBS shows, including The Good Wife and Survivor, for a monthly fee of $6. HBO will likely offer something similar, though exact details remain unknown. Other networks should follow suit -- an over-the-top offering of CBS' premium network Showtime, for example, wouldn't be surprising.

But though the dreaded cable bundle is often derided -- 300 channels, nothing to watch -- a la carte pricing may not be as enticing as it first appears.

In May, Nielsen released a study revealing that the average American consumer regularly watches 17 different channels. That's only an average -- some may watch far more, others far less -- but it still provides a baseline.

CBS All Access includes a bevy of content -- 15 shows and catalog of legacy titles -- but it's only one channel. If every channel were to offer its own a la carte service, and priced it competitively with CBS' offering, the typical TV viewer could spend around $102 per month -- more than the $90 per month they do currently.

Of course, such a system would offer other advantages, particularly choice. Customers could see exactly what they're paying for, and adjust their viewing habits and subscriptions accordingly. Content companies, in turn, may have to work more diligently to retain subscribers, beefing up their offerings in the process.

Big cable may be just fine
If unbundling does become the standard, paid-TV providers like Verizon and AT&T could suffer -- with fewer people paying for expensive cable packages, the companies would collect fewer dollars from their FiOS and U-Verse subscribers.

So why are both firms cheering on the change? Verizon's forthcoming Internet TV service could steal customers from other providers, certainly, but it might also entice some FiOS Video subscribers to cut the cord. AT&T's new option gives U-Verse customers Internet, HBO and Amazon Prime Video for $39 per month -- a deal that might encourage some subscribers to ditch their traditional paid-TV packages.

Certainly, their revenues could decline, but that may not necessarily be a bad thing. Although providing paid-TV is a profitable venture, it isn't as profitable as one might expect: Content is expensive, and costs keep rising every year. Last quarter, for example, AT&T's operating income declined 8.1%. In its explanation for the decline, AT&T cited, among other things, higher content costs for AT&T U-Verse video.

Unlike Verizon and AT&T, Time Warner Cable's (NYSE: TWC) business is less complex, and thus offers a better look at the possible financial ramifications.

Last quarter, Time Warner's single biggest expense was content -- it paid channels over $1.3 billion, more than six times what it spent on customer service. It's difficult to calculate Time Warner Cable's exact margin on paid-TV services (many of its other costs, like marketing and sales, are shared across all its business units), but with its high content costs, providing video services is likely its least profitable venture.

If a la carte emerged as the preferred distribution method, a cable provider like Time Warner could shift its business entirely to broadband and phone services. In fact, high speed broadband would become more valuable than ever before, as consumers relying on the Internet to receive their over-the-top video would require more expensive, faster broadband connections. Though their revenues would decline, big cable firms could actually see their profitability increase.

Be careful what you wish for
It might surprise some, but the death of traditional cable might not be the death blow to cable many expect. Verizon and AT&T's efforts may not seem logical at first, but make perfect sense in the context of rising content costs.

Consumers have long called for an a la carte option, but many might be surprised when that future finally arrives. Those who only watch a channel or two would surely benefit, but the average person might find that they're actually paying more than ever before.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends, Apple, Goldman Sachs, Google (A shares), Google (C shares), and Netflix. The Motley Fool owns shares of, Apple, Google (A shares), Google (C shares), and Netflix. 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.

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