Disney linear channels went dark for Spectrum (Charter) customers last week. If and when they come back, the whole game may be forever changed.
Typically, carriage disputes are the boring, semi-annual battles in which distributors (in this case, Disney) try to get more money from the cable providers (here, Spectrum) who carry their product. The push, pull, and posturing usually includes the distributor threatening to go dark and remove the channels; sometimes, as in this case, that actually happens. Currently, Disney-owned network ABC and cable channels ESPN, Freeform, the Disney Channel, Disney Junior, Disney XD, National Geographic, FX, FXX, FX Movie Channel, and Nat Geo Wild are unavailable to 14.7 million Spectrum subscribers.
This is where the narrative starts to get weird: Charter has already agreed to pay Disney its market-price increase. But in return, it wants to offer ad-supported Disney+, ESPN+, and Hulu to its Spectrum customers — for free.
The Charter argument comes down to this: Distributors like Disney were so desperate to grow in streaming they deprived linear cable channels of the good stuff and kept for their own pay services. So why should Charter customers have to pay for the linear channels and the streaming services?
“We’re on the edge of a precipice,” said Charter president and CEO Chris Winfrey’s position on a Friday conference call. “We’re either moving forward with a new collaborative video model or we’re moving on.”
To put it another way: Charter is more than willing to consider a world in which they don’t carry Disney channels — or any other provider that won’t come to terms. It’s no longer scared of the cord-cutters; the real profit is in broadband internet.
Cable providers have already demonstrated their willingness to live without content providers who won’t meet their terms. In 2019, Dish dropped Diamond Sports’ package of regional sports networks; later, outlets like YouTube TV and Hulu + Live TV did the same and Diamond Sports never recovered.
This example is particularly relevant for Disney, since sports rights are the most expensive in the entire television industry and Disney’s ESPN is the most expensive sports channel in the world. That also makes it the most expensive single channel in Charter’s cable-channels package, and passing those costs to the consumer generates more cord cutting.
Disney stated that Winfrey’s “collaborative” idea “does not make economic sense.” Time will tell if that is correct or incorrect, but it definitely does not make sense for Disney. Meanwhile, according to media analysts at MoffettNathanson, Charter has “nothing to lose,” and Disney is likely to learn that lesson “the hard way.” (All analyst notes in this story were obtained independently by IndieWire.)
Barton Crockett, a media analyst at investment bank Rosenblatt Securities, believes Bob Iger will not only blink first, but will end up conceding “to a lot.”
For now, Disney is pushing viewers toward its own Hulu + Live TV, as well as to other options like YouTube TV. Hulu + Live isn’t currently discounted, but Disney announced Wednesday it is temporarily slashing prices on ad-supported Disney+, for just $1.99/month for three months. Charter is also pushing customers elsewhere; it is so chill with losing video customers that it is preparing a QR code that would immediately downgrade its own customers from a Spectrum cable package to a YouTube TV or Fubo subscription. Charter would get a piece of that sale and maintain the broadband account.
Charter stated that it pays Disney more than $2.2 billion per year in affiliate fees; Crockett estimates that Disney gets more than $1 billion on top of that in the split of advertising revenue. Macquarie analyst Tim Nollen calculated that Charter’s blackout impacts about 20 percent of ESPN’s current linear-subscriber base, which will cost Disney $5 billion in revenue.
Not having those Charter subscribers also hurts Disney’s ability to renegotiate future sports rights — and could open the door for an Apple or Amazon to swoop in for the rights to the NBA and other sports.
For Charter, shedding Disney’s high costs could work out fine. Crockett estimates Spectrum could drop about one-third of its base subs and break even on dumping Disney, but that probably wouldn’t be an issue. Charter has stated that 25 percent of its subscriber base watches Disney channels, and only half of those are “avid” watchers.
“If Charter has success dropping Disney, other operators will follow suit, setting up death spiral risk for Disney’s TV networks,” Crockett wrote.
A likely outcome here is, of course, compromise. Disney and Charter are fighting over penetration minimums — the guarantee that a certain percentage of customers have (read: pay for) a subscription to your channels. A smaller Charter victory could come in its ability to offer skinnier bundles of Disney’s programming, including an option to opt out of ESPN.
The industry is watching these negotiations very closely. Charter vs. Disney may be first, but it won’t be last.
The demise of linear television, and cable in particular, is a key reason Discovery, Inc. felt the need to merge with AT&T’s WarnerMedia to form Warner Bros. Discovery. There once was much more power in the cable bundle, and no one observed its downward trajectory as closely as WBD CEO David Zaslav. As the head of Discovery, he kept you paying for a whole bunch of cable channels you didn’t watch because you had to have HGTV and/or Food Network. When it was clear that was no longer an option, he moved toward HBO, Turner Sports, and Warners’ robust film library.
Even with all those assets, Warner Bros. Discovery is more vulnerable than Disney in this battle, but it just so happened that Disney’s deal was up first. WBD generates a larger percentage of its overall revenue from affiliate fees than Disney, which is why its stock took a steep drop Friday after Disney’s channels went dark on Spectrum.
“Nobody is safe and the leverage will have permanently shifted to the distributor not because content is no longer king, but because too much content no longer requires the big video bundle and because the video bundle no longer is economically viable for distributors,” Lightshed analyst Rich Greenfield wrote in his own note to clients.
In theory, it makes sense to tie streaming services to broadband and the larger cable bundle. Comcast, which owns NBCUniversal, let its customers access Peacock for free as a way to generate subscribers and quickly scale. The organization axed that option earlier this year, because Peacock, like most other streamers (including Disney+), is still in the red.
Brian L. Roberts, head of Comcast, called the Disney-Charter beef a “transformational moment” during his keynote conversation at Wednesday’s Goldman Sachs Communacopia + Technology event. “I think we’re really well positioned for that change,” Roberts said. “Our company, we don’t look at it as linear or streaming, we look at it as linear and streaming.”
Disney has considered moving ESPN entirely to a direct-to-consumer streaming model, with Iger stating that the company is seeking a strategic partner. When that happens, Charter doesn’t want to be left holding the bag.
“Given how much of the expense is tied up in sports, Disney has to lead instead of pursuing the same playbook, which drives a vicious cycle of video customer declines,” Winfrey said. “Ultimately, Disney gave us a choice to either carry on with a bad path for consumers, or to look to complete the new video models for our customers.”