Verizon Communications Inc. (NYSE:VZ) announced a major change to its business model today, as Verizon Fios bent to the changing dynamics of the pay-TV industry and its recent move towards a-la-carte programming.
The wild success of streaming video content on the web, best evidenced by Netflix, Inc. (NASDAQ:NFLX) and its rapid growth, has forced a number of pay-TV distributors to adapt their pricing and offerings as consumers explore cheaper, more personalized TV options.
With VZ earnings scheduled to come out on Tuesday, is it time for Verizon — or other cable TV heavyweights like Comcast Corporation (NASDAQ:CMCSA) and Time Warner Cable Inc (NYSE:TWC) — to think about simply buying out NFLX as a hedge against falling subscriber revenues?
What Verizon Fios Did and Why
Backing away from the traditional cable model — one which offers large packages of channels despite the fact customers only watch a handful of them — Verizon Fios will now offer smaller “channel packs” of 10 to 17 channels, eliminating much of the excess programming consumers don’t really care about.
A recent report from Nielsen, for example, showed that American cable subscribers received an average of 189 channels in 2013, but only watch about 17 of them, according to the Wall Street Journal. Verizon’s new base plan will go for $55 per month, with each additional 10-to-17-channel package going for $10 a pop.
Unfortunately, it may be too little, too late for VZ stock. Revenue grew just 5.4% last year, and is projected to slow to less than 2% by 33% by 2016. So don’t expect much better news from Tuesday’s earnings report.
Last month, I explained why I thought NFLX stock was a perfect buyout candidate:
“As subscriber growth wanes and customers disavow cable in favor of far cheaper subscription streaming video services, pay TV companies like CMCSA, Time Warner Cable Inc and even Verizon Communications Inc. will be increasingly incentivized to wet their beaks and own a slice of the industry that’s eating away at their prized cash cows.”
Since then, the contrast between the mouthwatering growth prospects of NFLX and the stagnancy of cable heavyweights has grown even starker: Netflix reported surging first-quarter subscriber growth on Wednesday that far exceeded expectations and instantly sent shares rocketing 12% higher on the news.
If Verizon doesn’t spring for NFLX or develop its own serious streaming service, it’ll cede ground to the likes of DISH Network Corp (NASDAQ:DISH) and Apple Inc (NASDAQ:AAPL), both of which have major plans in the world of streaming content.
With the Dish Sling TV package starting at $20 a month and Netflix charging less than $10 a month, Verizon Fios is kidding itself if it thinks the new “channel pack” strategy — which starts at $55 per month — suddenly makes it relevant. VZ will have to learn the hard way: if its services aren’t good enough, consumers will cut the cord.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
