New Verizon Content Deal Delivers Huge Blow to TV Operators
Cable TV was bleeding subscribers before the pandemic. Now, their pain is only increasing. Wireless carriers are making sure of that as they begin to recreate content bundles around streaming media.
Last week, Verizon Communications Inc. (NYSE: VZ) announced an exclusive content deal with The Walt Disney Company (NYSE: DIS) and Apple Inc. (Nasdaq: AAPL) that will bring their on-demand streaming media networks to wireless and internet customers.
It’s a game-changer for media sales and distribution networks.
Verizon has 94 million customers, stretching across the wireless, internet and land-line business segments. As of Aug. 20, eligible customers with at least a $45 wireless plan will be able to stream Disney+, Hulu and ESPN+ for no additional cost. They will also get either a six-month or indefinite subscription to Apple Music, depending on their Verizon contract.
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The rationale behind offering so much free content is stickiness. Verizon managers know that customers who are signed up for streaming video and music services are unlikely to leave for other carriers, especially when they can’t get the services as free add-ons elsewhere.
Verizon managers first found success with the strategy using so-called “Mix & Match” TV plans. One of the options customers can choose is YouTube TV, a slick live and on-demand TV service, run by Google. The packages include 125, 300 or 425 channel choices. After 60 days, Verizon software offers customers the option to pay for only the channels they actually watch.
Because the plans are sold independent of the wireless and internet packages, customers know exactly what they’re paying for. Built-in personal DVR services make recording all their favorite shows a snap.
This business model is way more customer friendly than traditional cable TV packages. Mix & Match, and the streaming packages from Disney and Apple, give customers a ton of content, all on-demand, at a reasonable price.
These upgrades couldn’t have come at a worse time for pay-to-watch TV operators.
For example, the satellite and cable TV sector lost 6 million customers in 2019, a stunning 7% year-over-year decline. In 2019, eMarketer predicted that only 72.7 million households would have TV in 2023.
Variety reported in February that businesses lost a staggering 1.5 million subscribers in the last quarter alone. Then the pandemic hit, and things got even worse for pay TV operators. Sports leagues stopped broadcasting live content. Media consumption went online.
In April, AT&T Inc. (NYSE: T) announced a $430 million earnings hit tied to COVID-19, according to a report in the Hollywood Reporter. The pay TV busines lost 138,000 subscribers.
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The takeaway for investors is clear: The way media is bought and consumed has changed, perhaps forever. The days of cable operators being able to coerce customers into taking channels they don’t want in order to get the ones they do are over.
Verizon’s offering provides price clarity. They’re giving customers what they want.
Media companies like Disney and Apple gain access to big distribution channels. It’s an opportunity to get their content in front of more customers to build network effects. Platforms become more valuable when your friends are there, too.
Longer-term, Disney shares are a buy. Sooner than later, the business is going to be valued less like a theme park and leisure operator, and more like Netflix, a true technology business.
Investors should strongly consider buying Disney shares into weakness.
Best wishes,
Jon D. Markman
