Is Disney’s dispute with Charter the end of cable as we know it?

Traditional purveyors of network television programming and the cable outlets distributing it know full well how video streaming has upended their decades-old model.

Nothing, however, has illuminated their uncertain futures more than an unresolved Labor Day-weekend spat between two longtime media powerhouses. And as it rolls into its second week, no one is more infuriated than TV viewers with no say in the matter.

The contract dispute between Walt Disney and Charter Communications has stripped 14.7 million cable customers of their ability to watch ESPN, ESPN2 and 17 other Disney-owned channels. Subscribers of Charter-owned Spectrum Cable missed the opening weekend of college football games broadcast on ESPN, and they’re unable to watch U.S. Open tennis matches, to which the network has exclusive rights.

It’s not the first time Disney has pulled ESPN programming in a disagreement regarding so-called carriage arrangements with distributors. This one, however, occurs as both sides seem intent on waving goodbye to the exact model over which they’re arguing.

Full Stream Ahead?
Earlier this year, The Wall Street Journal reported that Disney plans to convert its flagship ESPN channels solely to a stand-alone, subscription-streaming service, potentially bypassing traditional cable distributors altogether.

Meanwhile, Chris Winfrey, Charter’s chief executive officer, told investors Friday “this is not a typical carriage dispute.”

“I’m sorry that Disney has removed its programming from your lineup, and for the majority who don’t actively watch Disney content, I’m sorry Disney has made you pay for channels you don’t watch,” Winfrey said, noting that only 25% of Charter customers engage Disney content on a regular basis. “We’ve almost always avoided these kinds of disputes and disruption to your service. We had to draw the line in the sand on your behalf.”

However, Winfrey said the dispute provides the opportunity for Charter to evolve from “multichannel video products” that customers find too expensive and don’t meet their needs. In its place, he foresees a hybrid format that combines streaming and linear options.

In a research note, Bank of America said Charter no longer sees value in cable TV as customers have come to know it.

“Clearly, Charter believes the current linear video distribution model is no longer economically attractive for it and its customers,” BofA’s note stated. “For Charter, as well as other cable video distributors, the financial importance of linear video has been declining for years as video gross margins have been pressured by increasing content costs.”

Carriage Conflict
Carriage deals include those costs. They outline the terms and fees distributors pay to providers of content in order to deliver it to customers, who wind up paying a considerable share of those fees.

ESPN long has secured far higher carriage fees from cable providers than other content providers. Each cable customer pays about $9.42 per month for ESPN and its networks, compared with an average of 49 cents for other U.S. networks.

ESPN’s channels account for 7% of the average American cable bill of $126 per month.

Two years ago, ESPN briefly pulled its programming from YouTube TV in a similar dispute; it did the same with Dish Network and Sling TV last year.

YouTube and Sling constitute streaming options to which many former cable subscribers have gravitated. As more people choose streaming, the number of U.S. cable subscribers has fallen 30% from its peak to about 70 million. Subscription losses accelerated to an all-time high of 2.3 million in the first quarter, and cable’s share of overall TV viewership this spring fell to 31.5% from 36.8% a year earlier.

Falling cable subscriptions have filtered down to ESPN, which now appears in just 73 million homes, down 26% from a decade ago.

More Than Just Fees
But even as Disney has tried to compensate for that decline by raising rights fees to distributors—it’s charging them an average of 30-40% more per subscriber for ESPN than it did just four years ago—its dispute with Charter involves more than just fees. It also centers on streaming-only options, such as ESPN+ and Disney+.

Charter claims Disney has begun steering its premium content to those services, meaning that existing cable customers increasingly pay higher rights fees for lower-quality content. Disney counters that Charter wants to offer such services for free, “without anything in exchange.”

As non-streaming ESPN channels appear in fewer homes, Disney’s streaming-only subscriptions have surged. Though it has suffered recent declines, Disney+ currently has 146 million subscribers, and ESPN+ (which does not offer access to regular ESPN channels) has 25 million. Both figures have almost tripled in the past three years.

Financial Challenges
Still, Disney’s streaming options do not yet make money. Its streaming business lost $512 million in the second quarter, though that’s half the $1.1 billion loss in the same period last year. At the same time, its linear TV network business earned $1.9 billion, a 23% decline that mirrored ESPN’s sliding cable TV appeal.

To help remedy the streaming losses, Disney recently raised prices on its advertising-free Disney+ offering for the second time in the past year to $13.99 per month.

ESPN+, which launched in 2018 at $4.99 per month, now costs $9.99 per month. Subscribers can buy a bundle of Disney+, Hulu, and ESPN+ starting at $13 per month.

As for Charter, BofA estimates the current dispute could cost the company up to $5.4 billion, equaling about 10% of its annual revenue. Since hitting a 52-week high two days before Disney pulled the plug on Spectrum, Charter’s shares have dropped 10%. (Disney’s shares have fallen 3% since it removed its programming.)
As each day passes without a resolution, viewers will continue losing. In fact, BofA predicts the longer it drags on, the more subscribers Charter will lose, reducing its incentive to reach a deal.

So little consolation appears likely—though Spectrum reportedly has decided to offer $15 credits on subscribers’ next monthly cable bills. Investopedia