Both Netflix (NASDAQ:NFLX) and Amazon.com (NASDAQ:AMZN) reported worse-than-expected earnings data and experienced sell-offs of 15% and 10%, respectively, over the past month. However, if the behavior of pay-TV providers is any indication, both companies still pose a threat to the traditional pay-TV model. As a matter of fact, legacy wireless companies-turned-pay-TV providers AT&T (NYSE:T) and Verizon (NYSE:VZ) are looking to add to Netflix and Amazon's streaming services as differentiators with their pay-TV packages.
Pay-TV is struggling, reporting its first year-over-year subscriber loss last year. The trend toward abandoning pay-TV is so popular it's even spawned its own term: cord cutting. A recent Experian Marketing survey now finds that 6.5% of all households have abandoned pay-TV for streaming-based services such as Netflix and Amazon; that's up from 4.5% in 2010. And since pay-TV providers appear unable to stop the trend, they're now competing to offer these streaming services in addition to their subscriptions to mitigate the risk.
The latest company to offer a streaming-based add-on is Verizon, which just signed a deal with Netflix. Although the deal is limited in both time (expiring on Nov. 1) and geography (New York City area), the deal points toward a testing phase in which Verizon's management weighs demand before deciding on a nationwide rollout. In addition to a year of Netflix, you get a free $150 Visa gift card, 75/75 Internet, and 195 HD channels for $79.99 per month.
And although it's prudent to mention the deal requires a two-year contract and Netflix is good only for the first year, this appears to compete with AT&T's recent deal with Amazon. AT&T offers its new $39-per-month U-verse bundle with Amazon Prime and HBO. And while AT&T's service appears cheaper, it appears not to offer as many channels (roughly 90, versus the 195 HD that Verizon boasts of) and a data cap of 250 GB per month (additional data is $50 per 10GB) while Verizon's appears to be without a cap. In addition, after the first year, AT&T's service increases to $70-$80 per month.
The real winners here: Amazon and Netflix ... but not HBO
In an acknowledgement to the power of cord-cutters and cord-shavers (those who have downgraded pay-TV packages), Verizon and AT&T are helping Netflix and Amazon further their reach and power as pay-TV disruptors. But this trend of inclusion in pay-TV packages is better for Netflix than it is for Amazon.
Considering that Netflix is more of a pure-play streaming investment than Amazon is, and that disappointing subscriber numbers led to its falling market capitalization, this trend is better for Netflix than for Amazon. And while it should be noted that Netflix has a legacy DVD delivery business, it still derives a larger percentage of revenue from streaming video than Amazon does from its Amazon Prime service. At its heart, Amazon is and will continue to be a retail firm.
AT&T's service included Time Warner's HBO and its online streaming service HBO Go with its deal. HBO recently acknowledged that it will open up a streaming service without a pay-TV package. And while the company has yet to acknowledge the form and price, rumors peg the service as costing an astonishing $15 per month. At that price point, it is hard to see HBO's Internet-only service being a huge player in the streaming-only market.
What it means for the cable industry
Netflix and Amazon have had a rough month, no doubt about it. However, when one considers that both companies reported revenue increases of 27% and 20% over last year's corresponding quarter, perhaps the situation for these two companies isn't as dire as the media reports.
However, pay-TV appears to be responding to the threat of streaming services by including streaming services in their pay-TV packages. In a weird way, this appears to be a tacit acknowledgement that pay-TV providers are no longer in charge of their destiny and must turn to competing services to bolster demand.