What The Hell Is Verizon Thinking?

When Verizon announced last month that it was going to offer "skinny bundles" of channels, it seemed like yet another advance on the road to an a la carte world. Under Verizon's plan, FIOS subscribers could subscribe to a basic suit of channels, including the major networks, AMC and CNN, and upgrade with genre specific packages focused on things like sports or kids. In theory, this would let subscribers (who, for instance, have kids but don't watch football) tailor their cable selection to only the channels they really want and potentially pay less.

But just as Verizon is launching the service, ESPN has launched a lawsuit against the telecom company. The suit, filed at New York's Supreme Court, asks for an injunction to stop Verizon from offering the new service.

The suit didn't come out of the blue. It now seems that Verizon never went to ESPN (or the other channels being moved off of the main tier) to ask permission to move the channels to a separate bundle. The move potentially violates the affiliate contracts Verizon has with many of the big players.

In an analysis of the situation, Michael Nathanson and Craig Moffett of MoffettNathanson question Verizon's logic here. They point out that the dispute revolves around three "common guidelines" in affiliate contracts:

 1) the requirement that major channels like the aforementioned ESPN, TBS and Fox News be on the most widely carried tier, 2) threshold limits for major channels which effectively dictates these channels be on at least 80-90% of packages, and 3) channel positioning requirements that stipulate certain networks must exist next to each other on the dial.

Given those pretty basic tenants, why the hell would Verizon launch this kind of structured package in the first place?

Verizon's FIOS service is growing quickly. For the first quarter of 2015, FIOS revenue was up 10.2% over the previous year with 90,000 additional FIOS video subscribers for a total of 5.7 million video subscribers.

By moving aggressively into a la carte, maybe Verizon was hoping to stand out and capture customers fed up with their cable companies and the never ending game of musical chairs that seems to focus very little on customers. While media giants like Disney (which owns ESPN) may not like the idea of slimmer bundles, consumers are increasingly showing their love for standalone services like Netflix , Amazon streaming and HBO Now. As companies like Dish, Sony and even CBS are making it easier than ever to pay for only what you want to watch, it's not a big surprise that Verizon wanted to get in on the action.

But they apparently didn't get permission. Dish's Sling TV offers slimmed down versions of Disney channels including ESPN but a Disney/Dish deal paved the way for the online offerings more than a year ago when Dish signed a new long-term agreement with Disney.

Nathanson and Moffett posit that maybe the skirmish is an attempt by Verizon to gain a political advantage in advance of a regulatory review of carriage laws. They point out that if this case goes to court, it could set precedent about how distributors can alter their bundles. But it's hard to see how this move gives Verizon much of an advantage if it turns out the telecom was willfully ignoring contracts it has with media companies.

It seems like this will be a high hill for Verizon to climb. Investors seemed unfazed by the suit. Verizon's stock has hovered at about $50 per share for the past few days, a three-month high.