Verizon makes statement with new Disney deal: The economics of old pay-TV no longer make sense

It’s one thing for Netflix or Apple — companies that benefit from consumers shifting from cable TV to streaming — to declare an end to traditional media consumption. It’s quite another when it’s Verizon doing the talking.

Verizon, which owns Fios, a provider of internet, landline phone and bundled television, announced an offer this week for some of its premium wireless customers that includes Disney+, Hulu and ESPN+, at no additional cost, without a promotional roll-off deadline. Subscribers to the plans also get Apple Music included, either for six months or indefinitely, depending on the plan.

That’s quite a bit of content tied to an eligible wireless plan that starts at $45 per month. The idea of bundling content with wireless isn’t new. T-Mobile unlimited data customers can already get free access to both Netflix and Quibi. The wireless carrier also has partnered with sports website The Athletic and MLB.TV to offer free one-year subscriptions. Both annual subscriptions typically cost $60 each. AT&T offers HBO Max to its top wireless customers for free after completing a deal for Time Warner two years ago.

All of this “free” add-on content has major implications for media and telecommunications companies. Most dramatically, are we seeing the formation of a new way to sell media, when wireless and cable providers will strike exclusive deals to offer baseline packages, and consumers can choose to add streaming services a la carte? And does that mean the old way — bloated cable bundles — is dead and never coming back?

The answer, says Verizon, is yes. 

“The current value chain of the media business is not working. It’s broken,” said Frank Boulben, Verizon Consumer Group’s senior vice president of marketing and products, in an interview with CNBC this week. “Content has a key role to play, but very different from what it used to be when we were more of a traditional [multichannel video programming distributor]. I don’t think we will ever go back to the old bundle approach.”

That’s a bold statement from a telecommunications executive. It may also explain why Verizon decided not to buy a major content company when Hans Vestberg took over as the company’s chief executive about two years ago. Verizon sees its role as the gatekeeper for customer acquisition. It doesn’t need to own content to fulfill this job. Moreover, evidence from its Fios internet product is damning for programmers relying on affiliate fees from traditional pay TV. More than half of all Fios customers are choosing to buy high-speed internet without any video options at all, Boulben said.

“We are touching more consumers than any other brand daily,” Vestberg said in a CNBC interview last month. “So, of course, we can partner with Disney… we can partner with Apple on exclusives on Apple Music, and still get the same sort of our offerings for customers but with a totally different model.”

What you won’t see Verizon do is load up on streaming services and recreate a new bundle, Boulben said. First, Verizon would need to increase the price of its wireless, Fios internet or 5G Home packages if it did this, which is why traditional pay TV got into trouble in the first place. Baseline prices become too high. Second, Verizon chose the Disney and Apple offerings for a specific reason. It felt both companies offered particularly valuable and differentiated content, and locked up exclusive deals. In other words, AT&T and T-Mobile cannot offer either Apple Music or the Disney bundle with their wireless products. That’s a needle mover for Verizon, and there are few others out there like it, Boulben said.

Verizon has actually already taken small strides to deconstruct traditional bundles even with its Fios product. Verizon offers so-called “Mix and Match” TV plans, where consumers can choose YouTube TV and packages of 125, 300 or 425 channels, including one option where after 60 days, Verizon offers you a package based on what you watched. Each TV plan is sold separately from internet and phone, so that customers know what they’re paying for.

The rub here is there’s a reason for bundles, and it’s just purely that they help reduce churn. They’re also better deals for consumers. The “Triple Play” offering of TV, internet and phone has typically been a far better deal for consumers than buying the products separately, even if customers didn’t have as much clarity on how much they were paying for each service. 

It’s likely we’ll see new bundles created outside of the distributor ecosystem. In other words, instead of Verizon, Comcast or Charter giving customers packages of linear networks, content creators will band together to derive new streaming offerings for a discount.

We saw evidence of this earlier this week. Apple and ViacomCBS announced a bundle together, giving consumers the option of buying Apple TV+ ($4.99 per month), CBS All Access ($9.99 per month) and Showtime Anytime ($10.99 per month) together for $14.98 per month after a seven-day free trial. That’s a significant savings, more than 50%. The benefit for ViacomCBS is broadening penetration of its service and building subscribers. That’s great for advertising revenue and potentially wooing the National Football League, which will likely renew its rights deals with media partners next year.

These incentives to bundle apply to all media companies looking to grow their subscribers. They’re especially desirable to companies that hope growing streaming video subscriber numbers are what will drive stock prices higher, rather than near-term revenue. That’s… pretty much every company. The end result could be newer and bigger bundles that start to look more and more like cable offerings.

Still, those packaged deals will be very different than the way cable TV deals are negotiate, in backroom, private agreements made based on the perceived value of certain networks, skewed by tying certain channels to others (like ESPN) and demanding carriage of all networks or none. As Boulben said, there will be a clarity around the price and value of content that hasn’t previously existed.

That’s likely to be good news for consumers, and, in the near term, not so good news for traditional media companies.

As LightShed media analyst Rich Greenfield likes to say, #goodluckbundle.

Disclosure: Comcast is the owner of NBCUniversal, CNBC’s parent company.

Correction: This story has been updated to reflect that 50% of Verizon’s Fios internet customers do not sign up for a video package.