Consumers have clamored for a la carte television for years now, and Verizon (NYSE:VZ) recently moved one step closer to delivering it with its FiOS Custom TV service. For a flat monthly fee of $55, Verizon offers a set of 45 base channels and two "channel packs" organized by niche -- sports, lifestyle, entertainment, etc. Customers can add additional channel packs for $10 each.
There's just one problem. Big media companies including Disney (NYSE:DIS), Comcast's (NASDAQ:CMCSA) NBCUniversal, and 21st Century Fox (NASDAQ:FOXA) say the service violates their contracts with Verizon. Disney's ESPN has already sued Verizon, alleging breach of contract, as ESPN isn't in the 45-channel base package Verizon is offering.
Let's see why media companies are so up in arms about Verizon's new television offer.
Traditionally, cable packages are delivered as bundles of bundles. The pay-TV operator offers a set of channels to users, and they take it or leave it. The bundle is so big because Disney, NBCUniversal, Fox, and their media peers insist on the operators including all of their channels in the bundles and want their channels in the most widely distributed bundles. You end up paying for a bunch of channels you never watch and the media companies collect as many user fees as they can.
Believe it or not, cable providers actually want to offer you a better deal, but the media companies won't let them. Members of the American Cable Association, which represents the smaller cable providers, have petitioned the Federal Communications Commission to stop channel owners from forcing them to carry lots of unwanted channels. Operators don't have much flexibility in how they offer bundles, however, since media companies hold all the leverage.
So, Verizon's decision to redraw how channels get bundled was very bold on its part. The aim is to attract those customers who might be ready to churn out of cable TV altogether and rely only on over-the-top streaming options. Overall, Verizon believes this benefits itself and the media companies that would otherwise lose viewers.
The media companies don't see it that way, and might see breaking apart the bundles as the start of something that could be much worse for them -- a la carte television.
Big media relies on control over cable providers
Big media companies use their most popular channels as leverage to get carriers to include smaller channels in bundles. In a world where they couldn't force providers to carry more channels, many networks would die or consolidate, and that would reduce the amount of revenue Fox, NBCUniversal, and Disney could generate from subscription fees.
Those carriage fees are becoming more important for a number of networks as their Nielsen ratings decline, resulting in lower ad revenue. ESPN and live sports networks remain a major exception to the trend, though, as viewers choose to watch reruns on Netflix instead of the Disney Channel, FX, or USA. In an a la carte world, that advertising revenue would decline even further due to reduced potential audience reach. That would cause them to increase subscription prices even higher to offset the decline in ad revenue.
Cable providers are tired of taking the rap for forcing more channels and higher pricing on consumers. With the Custom TV package, Verizon is coming off as consumer-friendly (which might be a first for any cable company ever). On Verizon's first-quarter conference call, CFO Fran Shammo noted, "This is a product that the consumer wants. It's all about consumer choice." Verizon is scoring points with its customers, which could prove fruitful going forward even if it loses its court battle with ESPN.
Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Verizon Communications, and Walt Disney. The Motley Fool owns shares of Apple and Walt Disney. 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.