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TV’s Next Big Idea Is Going Small; Networks' Next Small Idea Is Staying Big

By Jamal Carnette, CFA - May 10, 2015 at 8:20AM

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While cable and satellite providers are attempting to give consumers what they want, content providers are trying to deny consumers choice.

For cable and satellite companies, the risks of cord-cutting have been discussed ad nauseam. Although it's still a small segment of the U.S. population, a growing number of households are going without subscription TV, opting for streaming-based services like Netflix and Amazon's Prime Instant video. And while the risks of cord-cutting are real for cable and satellite providers, perhaps a more insidious risk to cable channels is the growing trend of cord shaving.

Late last year, ratings measurement company Nielsen reported that, "over the past four years, the top 40 most widely distributed channels in 2010 -- household names like CNN, ESPN, and USA -- have lost an average of 3.2 million subscribers, or more than 3% of their distribution," according to The Wall Street Journal. Contrast that to pay-TV's subscriber gains during that four-year period, and the data suggests that more subscribers are opting for smaller, slimmer pay-TV packages.

More recently, it appears cable and satellite providers have noticed this trend. Perhaps the offering with the greatest buzz is Dish Network's Sling TV -- a streaming-based offering of 22 channels for $20 per month. Dish, however, isn't the only provider playing up its smaller packages. While it appears the next big trend in pay TV is going small, the cable channels are doing their best to stop cable shaving.

DirecTV to investors: We have slim bundles, too
During its first-quarter earnings call, DirecTV (DTV.DL) CEO Michael White addressed the skinny-bundle phenomenon during the question and answer section by pointing out his skinny Entertainment Select package has "over 1 million subscribers," and that th total was "7% of our residential sub-base."

Unfortunately, it seems like DirecTV is attempting to cash in on buzzwords without actually offering a skinny service. First, DirecTV's Entertainment Select package boasts 130 channels -- not exactly the definition of skinny. And although the service is priced like a skinny bundle initially, at $19.99 per month, that's only the price for the first 12 months of a required 24-month contract. The price increases to $49.99 per month in the latter months.

Networks are making it hard for providers to offer choice
In all fairness to DirecTV, it's hard to balance both the demands of consumers who increasingly are favoring smaller, cheaper packages against the desires of its powerful content suppliers who essentially want to keep the status quo  -- large, expensive packages. For example, recently Verizon (VZ 0.95%) tried to offer a skinny bundle with its "Custom TV" package, a base set of 45 channels with two "channel packs" segmented by viewer interest -- sports, entertainment, and lifestyle are a few of the additional channel packs.

The initial monthly cost is $55 per month with an additional $10 per month for every additional channel pack over the two. Verizon also allows subscribers to change channel packs every month. Although Verizon's offering falls short of a la carte cable, it offers more choice than any other offering up to this point.

However, Big Media quickly pounced on Verizon's move. First, Disney responded by stating Verizon's new offering violates its existing agreement by distributing ESPN within a separate sports package. Later, Fox Sports and NBCUniversal chimed in, agreeing with Disney. Finally, Disney filed a lawsuit in the Supreme Court of New York against Verizon, claiming Verizon violated its contractual obligations.

The issue Disney and the other media networks need to consider, however, is that neither Verizon, nor DirecTV -- or even Dish Network -- are unilaterally offering these new skinny bundles because they want to, but rather because there's considerable consumer demand for these products. In the end, there's only so long you can ask consumers to pay for products they don't want.

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Stocks Mentioned

Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
$50.94 (0.95%) $0.48
DIRECTV, LLC Stock Quote
Apple Inc. Stock Quote
Apple Inc.
$139.23 (1.30%) $1.79
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,234.03 (-0.27%) $-6.12
The Walt Disney Company Stock Quote
The Walt Disney Company
$95.65 (-0.28%) $0.27
Netflix, Inc. Stock Quote
Netflix, Inc.
$178.36 (-0.69%) $-1.24, Inc. Stock Quote, Inc.
$108.92 (1.42%) $1.52
DISH Network Corporation Stock Quote
DISH Network Corporation
$17.92 (-1.16%) $0.21
Nielsen Holdings plc Stock Quote
Nielsen Holdings plc
$23.56 (-0.42%) $0.10
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,245.13 (-0.28%) $-6.30

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