One third of gross video additions to Verzion's FiOS TV in Q2 2015 elected to take the company's Custom HD skinny bundle. Overall the company saw 26,000 net video adds in the quarter, markedly down from the same period of the prior year in which 100,000 net subscribers joined the service. Video subscriber growth was limited as certain broadcasters refused to carry ads for FiOS services from April 2015.
Walt Disney, the owner of ESPN, reacted against the Custom HD bundle, which offers a base package plus two of seven theme packs for $54.99 a month. Disney argues that Verizon breached its programming contract by choosing not to offer ESPN as a part of Custom HD’s base package. Litigation between Disney/ESPN and Verizon has ensued. The case could set a precedent by which pay TV operators and programmers interpret carriage agreements.
Verizon’s other FiOS businesses, FiOS Internet and FiOS Digital Voice, performed well in the quarter, not suffering from the dearth of advertising like thier video sibling. Both internet and voice segments posted growth in net subscriber additions in Q2 2015: 8.1% and 5.0% respectively, compared with the same quarter of Q2 2014.
It wasn’t a surprise that programmers like Disney/ESPN would be upset after being unseated from the base package. However, it was surprising that the lack of advertising should have affected net subscriber additions at this magnitude. A mere 26,000 video additions was the weakest quarterly video subscriber gain in Verizon’s history, revealing the degree to which it is reliant on its programming partners.
This newfound power, which is evidenced by Verizon’s diminished subscriber gains, is likely to be a relief to programmers who were rightly concerned that the public would adopt the new packages en masse. The lack of significant net additions is not only due to a lack of advertising, it is a sign of the greater trend in US pay TV: cord-cutting and cord never behavior is changing the way people consume content.
As IHS has said on prior occasions, the change in the US pay TV business could be profound. Both FiOS TV and AT&T’s U-verse TV have been the only drivers of growth in the pay TV market in recent years. If Verizon’s Q2 2015 is the start of a trend, then we could see at signifcant declines in the pay TV market in the next five years. Lower ARPU on top of subscriber declines could also hit hard.
The dilemma for Disney is that, assuming Verizon’s Q2 2015 results as the norm for other operators as they roll out similar options, Disney could lose carriage fee revenue from subscribers who opt to take skinny bundles. Further exacerbating the situation is the likelihood that cord-cutting may accelerate at the same time.
Regardless of how the Verizon/Disney case plays out in the courts, the business of pay TV is in a period of change. Each of the two outcomes of the decision lead to different paths. If Verizon is vindicated, many channels will face the axe when subscriber levels and corresponding carriage fee revenues don’t justify their existence. On the other hand if Disney is victorious, cord-cutting may accelerate and push subscriber levels to a point not seen in the US since the 1980s.