Disney vs. Spectrum: A Battle for the Future of Television

Bob Iger, CEO of Walt Disney Co., has made no secret of his company’s plans to eventually offer ESPN channels direct to consumers, bypassing its longtime partners — the cable and satellite TV providers.

“We have a great brand, we had a great business,” Iger said during an appearance on CNBC in Sun Valley, Idaho, in mid-July. “Bringing ESPN directly to consumers is inevitable. We haven’t said when yet, but we know it will happen.”

Back in Stamford, Connecticut, Charter Communications executives took notice. Charter’s four-year deal to distribute nearly two dozen Disney channels, including ESPN, ABC stations and FX, was scheduled to expire in a matter of weeks on August 31. Iger’s comments were another example of a major programmer prioritizing its streaming business at the expense of its pay-TV package, which continues to be a key revenue stream despite the devastating effects of the cable cut.

Disney’s goal of bringing ESPN direct to sports fans was one of several factors that led to the Burbank-based entertainment giant’s channels being suspended from Charter Spectrum’s 14.8 million households nationwide last Thursday, according to people close to the two companies, who were not authorized to speak publicly.

“Most of these disputes seem like a contest between two companies fighting for influence in a negotiation,” said Paul Verna, principal analyst at Insider Intelligence. “But here it feels more like a proxy fight over the future of pay-TV.”

It is unclear how long the dispute will last. Charter execs say they’re unwilling to sign another multi-year deal that would oblige them to pay even more for the right to carry ESPN and other channels while Disney tries to beat one of its biggest competitors without major concessions of Spectrum in the video channel space.

ESPN is already the most expensive station, costing distributors about $9 per month per subscriber house.

Charter broadly agreed to Disney’s financial demands but insisted on gaining more leeway in how the company offers its customers Disney’s channels and streaming apps, including ESPN+, the people in the know said.

The shift to streaming for several entertainment companies, including Disney, Warner Bros. Discovery, and Paramount Global, has become a sore point for charter and other pay-TV executives who feel their businesses and loyal customers are missing out.

Pay-TV operators have accused media companies of destroying the video channel ecosystem by increasing the fees for their programs, causing more pay-TV customers to churn, which in turn leads to higher prices for the remaining subscribers.

“We’ve seen a complete shift in the way consumers are buying and consuming video content,” said Steven Schiffman, a former senior media executive and current associate professor at Georgetown University’s McDonough School of Business. “The money that distributors pay for these channels is relevant, but this argument is more about giving charters the flexibility to offer Disney and ESPN content in the way they want their customers to.”

Spectrum customers in Los Angeles, New York, Houston and other markets missed tennis star Coco Gauff’s recent matches at the US Open tennis championships in New York.

(Eduardo Munoz Alvarez / Associated Press)

According to Charter boss Christopher Winfrey and other distribution executives, programmer practices have accelerated the decline of the pay-TV landscape.

Entertainment companies initially sold their prized reruns like Breaking Bad, Friends, and The Office to Netflix, growing the streaming service into a global giant. When executives realized they were hurting their own business by cheering on a competitor, they reclaimed the streaming rights to their popular shows and developed even more expensive series like Disney’s “The Mandalorian,” based solely on their own streaming platforms. platforms were running.

“Meanwhile, programmers have been asking linear video customers to fund their mistakes,” Winfrey told analysts during a conference call, in which he threatened that Charter could pull out of the video channel sales business if necessary.

The dispute has been smoldering for years, analysts say.

“It’s a risky game [entertainment] Companies gambled… by stripping the last remnants of compelling exclusive content from the pay-TV bundle that still paid most of their bills,” media analyst Michael Nathanson wrote in a recent report, adding that Disney executives “repeated public considerations to switch ESPN.” into a [direct-to-consumer] Service…understandably made the dealers nervous.”

Charter — whose Spectrum brand is Southern California’s largest pay-TV service — is increasingly relying on its more profitable businesses, including broadband Internet and wireless services, as pay-TV faces challenges and rising costs. While video channel offerings remain profitable, margins are shrinking, analysts say.

Consumers in more than 25 million pay-TV households – a quarter of the total from about five years ago – have canceled their subscriptions. Many have shifted their TV viewing to lower-cost streaming apps, but sports fans have largely had to subscribe to a pay-TV package to watch their favorite teams.

Disney said that 71% of charter subscribers tune in to Disney’s networks or one of its own stations in an average month. Charter executives said the number is much lower. During his presentation to analysts, Charter said about 25% of its customers “regularly interact with Disney channels.”

“Disney places great importance on the relationship with its viewers and hopes Charter remains open to further discussions to restore access to its content to Spectrum customers as soon as possible,” Disney said in a statement.

Charter has required Disney to offer streaming services, including Disney+ and ESPN+, to its customers at no additional cost. Disney has objected, saying that Charter makes unrealistic demands that no other distributor has made.

People close to Disney point to a deal the company negotiated with Philadelphia-based Comcast two years ago. The cable provider offers its customers ESPN+ on its X-1 app aggregation platform for $9.99 per month.

“Charter has requested that its customers should receive these services free of charge, which of course Disney will never accept,” Verna said.

On the other hand, Disney’s stance on offering ESPN direct to consumers — which Iger has called inevitable — is a major concern for Charter.

“The idea that someone has repeatedly said that publicly [ESPN] going direct to the consumer, and you’re entering into a long-term contract like that — it’s untenable,” Winfrey said.

Should Charter follow through on its threat to permanently stop offering Disney-owned channels to its customers, Disney would lose billions of dollars a year in programming fees. Charter has announced it will pay Disney $2.2 billion for programming this year.

Disney has been reluctant to forego charter revenue, especially when the company faces major challenges in other areas of its business, including the film and television writers’ and actors’ strikes that have paralyzed film and television production since May.

“This dispute shows how risky the business model is for both companies when it comes to pay TV,” said Verna. “Disney is in a bind.”

If charter prevails, other pay-TV providers could also take a hard line in their broadcast negotiations with Disney, resulting in further revenue losses.

Disney is also in talks with Comcast this fall to acquire full control of streaming service Hulu. The two companies didn’t agree on the price Disney would pay for Comcast’s one-third stake. According to a previous deal negotiated four years ago, Disney would have to pay Comcast at least $9 billion. Comcast is pushing for more.

Over the weekend, Disney began promoting its Hulu+ live TV service, which includes ABC stations and ESPN streams, to Spectrum customers unhappy about watching college football, the US Open tennis championships, or showing ” Jeopardy!’ on her local ABC station. and “Wheel of Fortune”.

Charter’s strategy also carries risks.

Douglas M. Arthur, an analyst at Huber Research Partners, speculated in a report that Charter may be bluffing and going out of the TV business. The cable company has nearly $100 billion in debt and its video channels business accounts for nearly a third of its total revenue.

“End video?” Arthur wrote. “We don’t buy it.”

However, other analysts say Charter could lose more subscribers if it agrees to Disney’s demands, as the cost of remaining subscribers would increase.

Winfrey said the companies have a tight window of opportunity to reach an agreement. Even more viewers could get fed up and switch to a new service ahead of a high-profile Monday Night Football game next week, which sees Aaron Rodgers make his regular-season debut for the New York in a game against the Buffalo Bills jets there. New York is one of the largest charter pay-TV markets.

“It’s a really difficult situation for Iger and other CEOs who are evaluating the demise of the most profitable business model in television history,” Schiffman said.