Over the last two weeks, Verizon and Disney have been having a public spat about the future of cable television. Verizon wants to offer its customers a selection of slim cable bundles with its FIOS service. Disney says it violates their contract, specifically splitting off ESPN and ESPN 2 into a separate sports package. Verizon knows that, regardless of what the actual contract says, publicizing this offering is an easy win, so long as Disney takes the blame for not letting it happen.

"A way to give consumers what they want."

"I think the right way to answer this without getting too public about our contractual situations –— look, this is a product that the consumer wants," Verizon CFO Fran Shammo said on the company’s earnings call. "It’s all about consumer choice. I mean, if you look at the TV bundles today, most people only on average watch 17 channels. So this a way to give consumers what they want on a choice basis."

The bigger picture here is that the basic business model of cable, where consumers buy a giant bundle of channels, most of which they will never watch, suddenly seems on the verge of extinction. The rise of new options from Netflix, Amazon, Sling, Sony, and perhaps Apple in the near future has forced Verizon, typically not a company that rocks the boat, to acknowledge that consumers are coming to expect a new reality.

A nation of cord cutters waiting for a savior

This tectonic shift in the industry was not always so obvious, even in recent history. Let’s time travel back to November of 2012, when Nilay Patel wrote about a nation of cord cutters waiting for a savior. We all knew that the old model was broken. But at the time it seemed things weren’t likely to change. Between 1995 and 2005 the number of channels in the average cable bundle doubled in size and bills rose three times faster than inflation. FCC chairman Kevin Martin pointed out that "the average cable subscriber was paying for more than 85 channels that she didn’t watch in order to obtain the approximately 16 channels that she does."

The problem was that the cash cow of cable TV was too good for the big-name brands like HBO and ESPN to endanger by breaking away, and that meant the oversized bundle of lesser channels was also here to stay. "We have the rights to do it and we would do it if we thought it was in our economic best interest," Jeff Bewkes said on an earnings call back in the spring of 2013, but the market for a stand-alone HBO streaming service in the US was "not significantly large enough to be attractive at this point."

As it turned out, the tide had already turned, we just didn’t know it yet. 2013 turned out to be a historic inflection point, the first full year in which the pay-TV industry lost subscribers. The losses widened in 2014. TV viewing, as measured by Nielsen, has been dropping at around 10 percent a quarter, a ratings plunge that has advertisers terrified. Not only was the number of pay-TV subscribers falling, but the customers that stuck around were buying much slimmer bundles. The end result was that ESPN, the top dog of cable, reached fewer homes by the end of 2014 than it did in 2010. This was enough motivation for the companies to finally take the plunge and start experimenting with streaming-only options.

Cable's reach into American homes has been shrinking

Over the last six months, a flurry of announcements have highlighted the tectonic changes that are reshaping the industry: HBO introduced a stand-alone streaming service. ESPN became available without a cable subscription as part of a slim package on Sling TV. Sony rolled out its Vue service on the Playstation. Apple is reportedly in the late stages of putting together its own streaming service that would feature very pared down bundles of premium channels, including ESPN, at a cost far less than the typical cable package.

"We had been waiting for multiple years for it to happen, but 2015 is finally the year of the virtual MVPD [multichannel video programming distributor]," wrote Brandon Ross over at BTIG Research. We won’t see many channels beyond HBO who have the clout and audience to go it alone. But Ross says the market will increasingly splinter into skinny bundles available to anyone with an internet connection. "We expect many more to come, targeting different groups and demos, each with a unique way of packaging its networks."

Networks will need to pick winners and losers

We’re not going to get the nirvana of complete a la carte entertainment just yet. "For the most part the content companies are going to keep bundling up networks together when they sell them," says Ross. But the bundles will slim down. "They are going to have to pick winners and losers within their own portfolio, you’ve already seen that with Sling. Those that can’t make their way into the smaller bundles will die off. Who needs the military channel at Discovery?"

As some old cable networks fade, new ones may be born, like Vice, that originated on the web. The next few years will be a Cambrian explosion of options for watching TV , with many networks dying out in the process. "We are at the tip of the iceberg. A lot of the deals you are seeing to make content available online in more complete and live, or live-like, packages, are laying the groundwork for a big unbundling," says Daniel Ernst, an analyst with Hudson Square Research. "There are still risks. This year will prove to be the amoebae stage. What life forms come out of that, which live and die, we will see rapidly."

Can Apple accelerate the industry's transformation?

Ernst believes one company in particular could lead the way. "A lot of it really does depend on Apple and what they are able to put together. We saw a very similar thing 15 years ago with digital music." It’s a company with the cash and cache among consumers to make a big bet on how we consume TV. It was the exclusive launch partner for HBO and is now reported to be preparing for a refresh on its Apple TV hardware. "So far pay-TV has been coming apart slowly, a little trickle here and there," says Ernst. "We’ll see soon if the dam is set to burst."

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