Analysis - Verizon offer tests sport networks' hold on TV bundle

By Lisa Richwine and Jennifer Saba (Reuters) - An escalating dispute between Verizon Communications Inc and media companies over Verizon's allowing customers to pick and choose bundles of TV networks underscores the importance of live sports programming to the pay TV business. The dispute is about channels delivered in a traditional subscription. But its effect also will be felt in the burgeoning world of streaming video and revives a long battle over whether customers should be able to build their own channel lineup. Walt Disney Co , Comcast Corp's NBCUniversal and 21st Century Fox pulled ads for Verizon's new television product on Thursday in New York due to a feud over contract terms. All three companies own sports networks that Verizon is grouping in add-on tiers in its new offering. Verizon's Custom TV lets viewers sign up for 36 fixed channels through its FiOS TV with the ability to choose genre-specific packages such as kids, sports or news. Fox, Disney and NBC say that violates current agreements on how the channels can be sold. In traditional packages, customers pay for larger bundles that include ESPN, NBC Sports Network, Fox Sports 1 and others. "Sports without a doubt is the glue (to the bundle)," said Michael Nathanson, a research analyst with MoffettNathanson. "All the media companies that have sports assets have wrapped them in a conglomerate bundle they are not willing to unbundle." NBC and Fox Sports declined to comment. An ESPN spokeswoman said Disney is "at the forefront" of creating new consumer offerings with distributors. That includes a landmark deal to include its programming on Dish Network Corp's Sling TV, a smaller bundle delivered online. In the case of Verizon's customised service, the distributor made "unilateral decisions" on how to offer ESPN and other Disney-owned channels, the ESPN spokeswoman said. Details of the contracts between programmers and distributors are not released. Some media executives have said they are mulling caps on the number of subscribers to new types of TV services that would trigger negotiations if exceeded. That would limit the impact of any new service on traditional bundles. Media companies are staking out their turf with sports because it attracts massive audiences who tune in at the same time, an attraction for advertisers. ESPN's "Monday Night Football" is the most-watched series on cable TV, averaging 13.3 million viewers last season, according to Nielsen. The popularity of sports helps distributors attract and keep customers, network owners say. Cable TV operators consistently rank ESPN as their most valuable network in industry surveys. Cable and satellite providers pay richly for sports content. ESPN receives $6.61 per subscriber per month, the highest fee of any basic cable network, according to estimates from SNL Kagan. The cost to air sports programming is rising. For example, Disney and Time Warner Inc's Turner Broadcasting agreed to more than double their annual payments for rights to NBA games under a deal reached last year that could be worth upward of $22.5 billion over nine years, sources familiar with the agreement said at the time. Critics say the price tag for sports gets passed on to consumers in their pay TV subscriptions even if they don't watch sports. If Verizon is successful, and some customers live without sports networks, other distributors could try to follow suit. Lifestyle and entertainment channels from Viacom Inc , Time Warner's Turner networks and Discovery Communications Inc also are included in the specialised tiers on Verizon's Custom TV and those providers have not objected to the Verizon offering. Verizon said it believes it is acting within its legal rights and will keep selling the custom packages. "This is about consumer choice and this is what consumers want," Verizon Chief Financial Officer Fran Shammo said in an interview with Reuters earlier this week. (Reporting by Jennifer Saba in New York and Lisa Richwine in Los Angeles; Editing by Dan Grebler)