Verizon-ESPN dispute may pave way for a la carte pay-TV programming

If ESPN prevails in court, it will ensure the costly sports channel will continue to be forced on subscribers

There's a reason ESPN sicced its lawyers on Verizon this week, shattering any pretense of being part of a big, happy pay-TV family.

Verizon's new Custom TV bundles of channels — which break off ESPN and other sports channels into a separate package — could signal the end of a business model that cable networks love and consumers detest.

The stakes couldn't be higher.

If Disney-owned ESPN prevails in court, it will ensure that the expensive sports channel will continue to be forced on subscribers who don't want it. ESPN accounts for an estimated $7 of monthly bills, more than any other channel that isn't purchased separately.

If Verizon wins, it will open the door for other pay-TV companies to break up conventional programming bundles and give consumers more freedom to choose channels.

"This is a potentially watershed event," said Rich Greenfield, a media analyst with BTIG in New York.

No one disputes that the pay-TV industry is undergoing radical change.

Like publishing, music and other businesses in the throes of digital disruption, pay-TV companies are struggling to protect Niagara-like revenue streams as consumers demand more choice and value.

Cutting the pay-TV cord was once only for the technologically savvy. Now, devices such as Roku and Apple TV have democratized streaming video.

That has sparked an explosion in quality programming from subscription services including Netflix, Hulu, HBO Now and Sling TV.

So Verizon's move toward smaller, cheaper, more competitive bundles makes perfect sense — which is why it's so threatening to ESPN.

Cable networks have long enjoyed guaranteed customers — and revenue — through contracts with pay-TV providers. In the future, they may have to peddle their wares directly to viewers, which is a lot harder.

It's no surprise, then, that ESPN is fighting to protect the status quo.

"We simply ask that Verizon abide by the terms of our contracts," said Amy Phillips, an ESPN spokeswoman.

She declined to share the relevant wording of those contracts. But they presumably require — at least in ESPN's view — more than Verizon is offering in its custom bundle.

At issue is the structure of the new package. Verizon is charging $55 a month for a base offering of 35 channels, including local stations and popular cable channels such as CNN, AMC and Food Network.

As part of the deal, subscribers can pick two of seven additional programming packs, depending on their viewing preferences, at no additional charge. These extra tiers include kid-friendly channels, news and, yes, sports.

"ESPN is disputing whether channels can be tiered," said Greenfield at BTIG. "Verizon is saying that it's just a customizable package."

Nuance is everything here.

If ESPN's contract requires that its channels be part of a pay-TV company's basic offering — that is, you have to get them no matter what — the network will argue in court that Verizon's customization violates that agreement.

Verizon will counter that because ESPN is still available to anyone who wants it at no additional charge, it's still technically part of the basic offering.

"We believe that we are allowed to offer these packages under our existing contracts," Verizon's chief financial officer, Fran Shammo, said in a conference call this week.

More to the point, he said: "Look, this is a product that the consumer wants. If you look at the TV bundles today, most people only on average watch 17 channels. So this is a way to give consumers what they want."

That's also an open question. Verizon's so-called skinny bundle could end up saving people a few bucks a month, but maybe not as much as the loss of dozens of channels might suggest.

The skinny bundle also remains a ways off from true a la carte programming that many consumers say they'd prefer — allowing them to pay only for the channels they want, picking each individually.

Analyst Michael Nathanson at media and telecom research firm MoffettNathanson wrote that it's unclear what Verizon hopes to gain "from going to war with their largest content providers."

He speculated that Verizon may be trying to light a fire under lawmakers and regulators to loosen pay-TV rules and move the entire industry closer to a la carte.

I'm not sure the deep thinkers at Verizon are that smart. I suspect they, like everyone else in the pay-TV business, know that the days of fat programming bundles are numbered.

My guess is they figured they had little to lose in pushing back against the old way of doing things. The cord-cutting will continue, and momentum will build for giving consumers more pay-TV choices. Verizon wants to appear that it's leading the trend.

Even so, you have to wonder about the company's chances in court. If ESPN's contract was as flexible as Verizon seems to think, other pay-TV companies would be running to Verizon's side, and they're not.

But Verizon nonetheless makes an important point: There are other, potentially better ways of offering pay-TV to consumers.

In that sense, Verizon can already score this as a win.

David Lazarus' column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5 and followed on Twitter @Davidlaz. Send your tips or feedback to david.lazarus@latimes.com.

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