Verizon Ushers in the Era of ‘Skinny Cable’

By unbundling its costly sports channels, Verizon is attacking the economics of cable


Photo illustration: 731; Photographer: Philippe Graton/Sygma/Corbis (Van Damme); Getty Images (cable box)

For years, there’s been hand-wringing over the changes Netflix, YouTube, and might force on the pay-TV industry, as the upstarts eschew bloated 500-channel offerings in favor of cheaper, slimmer packages of programs that consumers actually want to watch. But now the cable and satellite industry is facing a more immediate—and potentially more damaging—challenge from one of its own, aimed squarely at a financial linchpin of the business: the programming bundle.

Verizon Communications’ FiOS service, the No. 6 U.S. pay-TV operator, in late April began selling Custom TV, a $55-a-month package of 45 base channels, plus a customer’s choice of two small collections of entertainment, news, sports, or kids’ offerings. Other tiers can be added for $10 each. But the big difference is that no sports networks are mandatory in the core bundle. Instead, much to the dismay of cable sports programmers Walt Disney, 21st Century Fox, and NBCUniversal, Custom TV puts sports into one of the tiers that people can choose not to buy.

That subtle shift upsets the balance of a system that’s worked very lucratively for a very long time for media companies with sports channels. Disney’s ESPN charges providers $6.61 a month per subscriber, according to estimates by the financial analysis firm SNL Kagan, while Fox Sports 1 commands 99¢. That’s loose change that adds up fast when most Americans are buying traditional pay-TV from Comcast or other cable or satellite distributors. The way the big bundle works, sports are a forced part of the deal, with people who couldn’t care less about them helping pay the freight for the zealots who’d never cut the cord for fear of missing a live soccer match. It also is the reason that SNL Kagan forecasts ESPN will rake in $7.5 billion from pay-TV operators this year.

Chart: Who Profits the Most From Your Cable Bill

The unbundling shift is “a crack in the dike,” says Ed Desser, a media consultant who spent more than 20 years working for the NBA. “It’s vitally important to ESPN and ESPN’s economics that they be in 85 percent of the households, or some significantly high number.”

That’s why the move by Verizon, whose FiOS service serves only about 5.7 million U.S. pay-TV subscribers, is being taken so seriously. Disney, which has the most to lose from such a shift because ESPN charges cable operators the largest monthly per-subscriber fee of any programming service, is striking back. On April 27, ESPN sued Verizon in New York state court, accusing it of violating existing contracts that require the sports service to be included as a basic offering in subscriber packages on FiOS.

Disney-owned TV and radio stations in New York have stopped all advertising for Verizon’s Custom TV options. NBCUniversal, owner of NBC Sports Network, and Fox Sports also denounced Custom TV in statements, claiming their existing deals with Verizon were never intended to allow their content to be included in its build-your-own offering. Verizon said in a statement that it’s within its rights to offer the Custom TV package. ESPN had no comment beyond its lawsuit.

The popularity of major live sports not only lets Disney and others charge higher fees for their programming, it also gives sports network owners leverage in negotiating the distribution of their less-popular pay-TV channels. By boosting subscriber numbers on such networks, content creators can sell more ads on them. But take sports out of the basic package, and this pyramid of profits could begin to crumble. “Verizon has broken the traditional paradigm,” says Erik Bannon, a TV analyst with IHS. “If Verizon wins, this could mean billions of dollars in lost revenue for Disney.”

Skinny packages such as Custom TV aren’t going to end cable as we know it just yet, because some distributors’ current contracts with content providers limit how many subscribers their slender products can have. Also, consultant Desser says, some skinny bundles are structured in a such a minimalist way that they essentially steer many TV watchers to add extras to their discount packages. “They are creating the appearance of more choice when the vast majority of their existing subscribers are going to have exactly the same packages they have today,” he says.

The skinny trend doesn’t upset everyone in the entertainment industry. CBS doesn’t see reduced bundles as a risk to the most-watched TV network in the U.S. It streams its content online for customers for $5.99 a month. It’s just added its cable sports network to Custom TV. “We are confident that our expanding lineup of premier live programming will be a favorite among Verizon’s sports fans and that this new option will help continue grow our distribution,” CBS said in a statement. Cablevision Systems has even rolled out a “cord-cutter” offer that gives noncable customers a TV antenna for local programming and Internet starting at $34.90 a month, which can be used to stream shows.

Still, Custom TV and other new options such as Dish Network’s Sling TV—a $20-a-month service that started in February with plenty of sports, though none of the broadcast networks—could imperil second-tier pay channels that have relatively small audiences. In addition to ESPN and ESPN2, Disney owns the SEC Network, ESPNU, and ESPNews. And Fox has two versions of Fox Sports, in addition to several regional sports networks. “Until today Disney has been saying, ‘You must take these channels,’ ” Brannon says. “In a future world Disney may be saying, ‘Please take our channels.’ ”

The bottom line: Verizon’s new skinny pay-TV package costs just $55 a month. One reason: no costly sports programming.

    Before it's here, it's on the Bloomberg Terminal.