Verizon Communications (NYSE:VZ) recently launched a new pricing option for FiOS TV subscribers. It resembles more of a pick-and-pay system than the typical tiered bundle plans most U.S. consumers are used to. Under the new pricing, subscribers receive a base package of more than 20 channels (including local broadcast networks) and two "channel packs," which are mini-bundles of channels organized by niche. That smallest package runs $55 a month. Subscribers can add more channel packs for $10 per month each.
The move is a clear appeal to cord shavers who are looking to subscribe to only the channels they want. With HBO going over the top of cable operators, they have one less tool to keep subscribers on their video service. Being the first to move into more customized packages, Verizon may be able to steal more subscribers away from Comcast (NASDAQ:CMCSA) and Time Warner Cable (UNKNOWN:TWC.DL).
An offer subscribers can't refuse
During 2014, Comcast lost 194,000 video subscribers while Time Warner Cable lost 408,000. Many point to this decline as evidence that cord cutters are cutting into their business, but adding the growth of Verizon's FiOS service to the picture makes it less clear what exactly is going on. Verizon added 387,000 new video subscribers in 2014.
A lot of customers are switching to Verizon as it expands its territory and spends heavily on marketing and offers promotional pricing to new customers. Verizon's FiOS service passed through an additional 1.2 million premises last year.
But Verizon has made it clear that its new Custom TV pricing isn't promotional. The additional transparency may help it attract more customers from its competition, which is largely localized to Comcast and Time Warner.
Additionally, the bundle pricing for Custom TV, with its high-speed Internet service, is a compelling offer. Considering regular pricing for Verizon's 25 mbps Internet service is about $65 per month, subscribers can get a few television networks for the cost of equipment. This fact may help Verizon convert some broadband-only subscribers into video subscribers as well -- especially if their promotional pricing period has expired. As of the end of 2014, Verizon had about 1 million more Internet subscribers than video subscribers.
Affecting Verizon's margin
As mentioned, Verizon's new Custom TV offer could attract some subscribers to convert from broadband-only to TV and Internet subscribers, but only at a marginal increase in revenue. Programming and delivery costs will then cut into Verizon's margins quite heavily, and considering these aren't promotional prices, they will continue to do so. But with the premium prices Verizon charges for Internet access, it can afford to subsidize its television service if it attracts more customers from the competition.
A more interesting development, however, may be how Verizon's decision to split up the bundles affects their content costs. While delivering fewer channels to subscribers probably means its overall content costs are lower, Verizon may end up having to pay more per channel to content companies.
Content owners typically stipulate how their channels must be bundled. Disney (NYSE:DIS), for example, requires that ESPN is in the most widely distributed bundle for most cable operators and usually requires many of its other channels to be in that same bundle with ESPN. With Custom TV, ESPN is relegated to a sports-specific bundle, which may mean Verizon has to pay Disney more per subscriber of that tier.
Meanwhile, Disney has channels in five of Verizon's seven channel packs. Disney may demand that Verizon pay a higher rate for some of those channels, because it's expected that certain channels will see fewer subscribers than under the old model. After all, that's the entire point of being able to pick which channels you want.
Moving toward a la carte
While Verizon's new Custom TV offer isn't a la carte cable, it's perhaps the closest thing Americans have. As consumers demand more flexibility in their television programming, Verizon is stepping up to appeal to customers who are thinking about cutting or shaving the cord. While it could add more customers from Time Warner Cable and Comcast, those customers could be significantly lower margin. Verizon will have to rely on value-added services such as video on demand (which might appeal to the same crowd interested in a la carte television) to prop up its average revenue per subscriber.