With the growing number of a la carte video entertainment options, many believe the cable bundle is doomed. Verizon (NYSE:VZ) is taking a different approach, though, adding Netflix (NASDAQ:NFLX) -- the primary culprit in cord-cutting -- to select triple-play bundles. Verizon will offer new FiOS subscribers a free year of Netflix with a two-year agreement.
The move isn't completely unprecedented. Earlier this year, AT&T (NYSE:T) offered a free year of Amazon Prime with a one-year commitment to a slim cable package with HBO and broadband Internet. So, why are these pay-TV operators playing nice with over-the-top services?
Who's the real competitor?
As much as the media like to talk about cord-cutters and cord-nevers (I'm guilty, too), Verizon and AT&T aren't really competing with Netflix for customers. In fact, the majority of Netflix customers subscribe to pay TV.
Even if every single one of the estimated 10 million to 15 million broadband-only households were subscribed to Netflix, the company would still have 22 million to 27 million domestic subscribers that also subscribe to pay TV. Indeed, most Netflix customers see the service as a complement to cable rather than a substitute.
Nevertheless, the pay-TV industry is seeing its subscriber numbers shrink. Regardless of why the numbers are shrinking, operators are now competing for share of a saturated market. So, Verizon and AT&T are offering something their competitors are not -- a bundle that includes an over-the-top service.
While Netflix will compete with Verizon's video-on-demand (VoD) service, offering it to customers for free likely won't have a huge negative impact. As mentioned, most Netflix subscribers already have a cable subscription. In fact, if Verizon can attract new customers with its Netflix bundle, it ought to have a net positive impact on VoD viewership considering the additional potential viewers.
Netflix must love this
Sure, Netflix loves free promotion just about any way it can get it, but this offer from Verizon is a major step in the right direction for Netflix to establish closer relations with pay-TV operators. Last year, Netflix tried to make deals with pay-TV operators to integrate its service with their set-top boxes. Most of those talks fell through with nothing coming of it, but Netflix Chief Content Officer Ted Sarandos said, "The goal is to become HBO faster than HBO can become us." While he was talking about Netflix's original content compared to HBO's, it's likely Netflix is still interested in making deals with pay-TV operators.
Earlier this month, HBO announced that it would take its service over the top, bringing it much closer to Netflix. Netflix has been unable to respond, but if Verizon's experiment is successful, it could put Netflix closer to becoming part of the cable bundle, like HBO.
Becoming part of the cable bundle could help increase subscriber count, but will likely decrease Netflix's average revenue per user. Netflix would likely have to split revenue with operators, and consumers aren't going to pay more for Netflix as part of a cable bundle than they could pay for it as a stand-alone service. Then again, if bundling Netflix is able to increase subscribers, a company like Verizon or AT&T might be willing to foot the entire Netflix bill -- i.e. no revenue split, no reduced fee -- in exchange for exclusive rights to offer it as part of the bundle.
Thinking about customers
In my experience, most companies that do well in the long run are those that think about what their customers want most, then offer them exactly that. In Verizon's case, it noticed that a lot of cable subscribers also watch Netflix, so a free year of Netflix is a pretty enticing offer for potential customers, and it costs Verizon less than $100 per new customer acquisition.
In the race for Netflix to become HBO before HBO becomes Netflix, HBO is starting to take the lead. Making deals with pay-TV operators may still be in the cards for Netflix, though, especially if Verizon's experiment is a success.
Adam Levy owns shares of Amazon.com. 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.