Is AT&T Making a Huge Mistake With its Cable Pricing?

By Markets Fool.com

AT&T has found a silver bullet to stop cord-cutters from dropping cable.

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The problem is that the cure may be worse than the disease, as the cable/Internet service provider's method of keeping would-be defectors on board is offering low-priced bundles where cable is essentially a throw-in. In some ways, the company's move seems desperate -- a sort of "you're going to break up with me? Well, I'm breaking up with you, first" strategy.

On the surface, the new, low-cost bundle should be seen as a defensive move -- a tactic that keeps cord-cutters in the fold (or brings them in in the first place) while the company figures out how to operate in the changing cable landscape. In reality, it may be a smart move that not only brings AT&T new Internet subscribers but also creates an interest in cable in a group that didn't previously have one.

What AT&T is doing
Cord-cutters may not need cable, but they do need high-speed internet. In general, that means picking between wireless offered by a cable company like Comcast or Time Warner Cable , or a phone-based provider like AT&T or Verizon .

To attract customers, both the cable and the phone companies have used bundling. Basically, your deal gets better per service as you add more services. Broadband alone might cost $40 or $50 dollars, but adding cable and phone brings discounts or package pricing. (Your bill is higher, but your price per service is lower).

AT&T is taking a different tactic. The company is effectively conceding that some customers -- specifically Millenials -- just want internet. These users may be used to living without cable and be perfectly comfortable using Netflix , Hulu, Amazon Prime, and other digital services to fill their entertainment needs.

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In acknowledgement of that, AT&T has made these customers an offer they can't refuse. The deal includes high-speed Internet, cable, HBO and a year of Amazon Prime for $49 a month. That essentially makes cable, HBO, and Prime throw-ins with the Internet service. HBO on its own costs around $15-$20 a month, according to HBOWatch, while Prime costs $99 a year.

It's an insanely good deal for the customer, especially because it's only a one-year contract, not a teaser price with an automatic price hike in a mandatory second year.

U-Verse is AT&T's name for its cable service. Source: AT&T.

Why is AT&T doing this?
A cynical view would be to say that AT&T has accepted that some customers simply won't pay for cable, and this deal is a land grab for Internet customers. A more positive take would be to say that some younger users may not realize how much cable has to offer. By giving it to them free for a year, AT&T may create demand for it going forward.

Perhaps these Millenial customers will become hooked on live sports or addicted to certain shows that they won't be willing to wait to watch until they come to Netflix or Hulu. By giving away cable, the company may actually spur interest in it and might be able to slowly raise prices from free to something.

That's a very long-range strategy, but it's better than letting an entire generation never sample cable and not know they might want it. Essentially, it's easy to live without something you've never had, but hard to give up something you're used to.

Will it work?
AT&T is being very aggressive, here, but it's a sensible strategy that could help it build its broadband customer base while spurring at least some interest in cable. Giving away cable, HBO, and Amazon Prime isn't sustainable over the long term (since AT&T has expenses associated with offerings those services), but it's a sensible one-year offer.

Even if many subscribers choose to drop cable and the rest of the extras, most are not likely to switch from AT&T as an ISP if they had a positive experience. This deal could help create more cable customers in the long run, but it will definitely help AT&T win Internet customers and grow its long-term subscriber base.

The article Is AT&T Making a Huge Mistake With its Cable Pricing? originally appeared on Fool.com.

Daniel Kline has no position in any stocks mentioned. He pays too much for cable. The Motley Fool recommends Amazon.com, Netflix, and Verizon Communications. The Motley Fool owns shares of Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.