By Joe Flint And Thomas Gryta
The simmering struggle over the familiar bundle of
cable-television channels broke into open warfare Tuesday as owners
of some of the most popular channels accused Verizon Communications
Inc. of violating contracts in its bid to offer slimmer, cheaper
packages of pay TV.
On Tuesday, NBCUniversal and Fox joined ESPN in saying Verizon's
offering violates the agreements under which they supply the
company with NFL football, Major League Baseball games and hit
shows like Bravo's "Real Housewives" franchise.
The dispute creates a cloud of uncertainty over Verizon's new
packages, which launched Sunday and start at $55 a month. The plans
let subscribers sign up for a smaller package of channels from
broadcasters like ABC and Fox and then add packs of specialized
programming like sports or children's TV.
Verizon Chief Financial Officer Fran Shammo said in an interview
that the company believes it can offer the programs under its
existing contracts and isn't going to back down.
"We have launched the product, we are not retracting it, and we
believe we are in our legal rights to launch it," he said.
Verizon is the country's largest wireless carrier. But it also
serves 5.7 million pay-TV subscribers, ranking it sixth among the
top providers in that industry.
The disputes put it at odds with major programmers at a time
when the pay-TV industry and content companies are experimenting
with a variety of new approaches as viewers migrate to the
Internet. Those moves are being prompted in part by the growth of
online alternatives like Netflix Inc. and Hulu as well as moves by
channels like HBO to launch their own streaming services.
In a sign of their rising clout, Verizon drops to eighth-largest
pay-TV provider from sixth if Netflix and Hulu are included,
according to the National Cable and Telecommunications Association,
an industry group.
Americans have long sought the ability to ditch hundreds of
unwatched channels and pick and choose among those they want. But
the industry has moved slowly for fear of upsetting long-lucrative
arrangements, and the companies that own the networks have tried to
protect their value with detailed contracts specifying how they can
be sold.
Some programmers counter that a typical family will have many
different programming preferences which is why the bundle works,
and that by the time one gets all the channels they want from
Verizon, the price difference would be negligible from current
rates.
Walt Disney Co.'s ESPN objected last week to Verizon's new
offering, saying it would separate the sports channel from
Verizon's core lineup. While Verizon and other pay-TV distributors
have the ability to create low-price offerings without ESPN,
whether it can then package ESPN in an offering with other sports
channels to be sold separately is a point of contention.
In a statement, ESPN said, "Verizon's new contemplated bundles
describe packages that would not be authorized by our existing
agreements. Among other issues, our contracts clearly provide that
neither ESPN nor ESPN2 may be distributed in a separate sports
package."
Comcast Corp. unit NBCUniversal, which owns many regional sports
networks as well as the entertainment channels Bravo and USA, said
Tuesday that the Verizon offering falls outside the terms of its
contract with Verizon.
Also objecting was 21st Century Fox, a large sports programmer
and the parent of entertainment channels FX and FXX. "We reject
Verizon's view that it can pursue the new packaging scheme it
announced yet still comply with our agreements," a spokesman said.
Until mid-2013, 21st Century Fox was part of the same company as
News Corp, owner of The Wall Street Journal.
"This is a change" to the old model, Mr. Shammo said, "and
people don't like change."
The details of the dispute are lost on many consumers. Dave
Schmarder, a 65-year-old retired electronics salesman in Beaver
Dams, N.Y., has programmed his cable box to skip over all the
channels he doesn't watch. The Time Warner Cable Inc. subscriber
said he only watches a few channels, including news and public
television. His area doesn't get Verizon's FiOS service, but he
said he would be interested in subscribing to a service that offers
smaller packages of channels.
"I've been paying for ESPN for 30 years and never watch it," he
said. "It all adds up. They are forcing everyone to pay for
this."
Verizon is playing to those sentiments in its marketing. The
effort includes a website that says, "Pay for what you want and not
for what you don't" and an ad that uses animation to mock the
traditional bundle. The commercial ends with the slogan, "Cable
just gives you channels, FiOS gives you choice."
FiOS's cheapest plan includes a package of basic programming and
two "channel packs" of specialized programming. Each additional
package, which can consist of about 10 to 17 channels, will cost
$10 a month. Customers will be able to switch to a different
channel pack after having one for 30 days.
"It is a product consumers want, and it is all about consumer
choice," Verizon said Tuesday.
The company has pointed to Nielsen data showing the average
number of channels Americans receive has increased 46%, to 189,
over the five years ending in 2013, while Americans still watch
only about 17.
Satellite broadcaster Dish Network Corp. has introduced a
streaming service called Sling TV that lets consumers mix and match
tiers of channels on top of a $20-a-month core package. Apple Inc.
is planning a TV service offering a "skinny" bundle of channels in
the fall, people familiar with the situation have said.
Meanwhile, operators have been slimming down their offerings to
cater to cost-conscious customers. Comcast, for instance, offers a
skinny bundle of TV channels with HBO and fast broadband.
Separately, Verizon is working on an "over the top" service that
will be delivered primarily to mobile devices.
Write to Joe Flint at joe.flint@wsj.com and Thomas Gryta at
thomas.gryta@wsj.com
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