“We are committed to being the best,” a gruff voice would say every two minutes, when I was waiting on hold with my local cable monopoly several years ago. You’re committed to being alone, I remember thinking. Today that company is owned by Charter Communications, America’s No. 2 cable distributor, which takes on a different tone. Cable television “is too expensive and the packages do not meet customer needs,” Charter wrote in the first line of a recent slide deck for investors.
This is a negotiating tactic in the standoff with Walt Disney (ticker: DIS), and a powerful one, akin to the old “take my ball and go home” threat from backyard football – and, as it happens. , football is at the heart of the matter. Charter’s (CHTR) stance that cable television stinks explains why Disney is likely to bow out first, and no other company will step in.
Disney and Charter are embroiled in a carriage dispute known as the Carriage Dispute. In the clinical language that cable uses to describe the entertainment business, companies like Disney that fill channels with shows are programmers, and companies like Charter that sell bundles of channels are MVPDs, or multichannel video programming distributors. Are.
Programmers make money by charging MVPD carriage fees to include their channels in bundles and by selling advertising on those channels. MVPDs charge viewers for bundles and receive a nominal share of the advertising slot, which is why commercial breaks are often a mix of national pitches for big brands, local to car dealers and furniture stores, and cable service. Are.
In the early days of cable cord-cutting, programmers could compensate for their declining subscriber numbers by negotiating higher carriage fees per subscriber when contracts came up for renewal. If the talks stall, both sides will present their case to the audience. Programmers will tell them that MVPDs are trying to take away their favorite shows. MVPD will blame programmers for inflating the bill. A deal will be made before viewers miss anything important.
At the time, no one had a stronger case than Disney, as it owned ESPN and major sports rights. Basically, in TV, older viewers are still watching cable, middle-aged people have moved to streaming, and young people can’t be bothered to get away from YouTube and Roblox. But sports remains the bastion of TV. Viewers watch live, audiences are younger and traditional networks control most of the rights.
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This time, customers of Charter’s Spectrum cable service have been without Disney channels, including ESPN, since early September. That means he’s missed tennis’s US Open and some college football. Starting September 11, they will miss the pros playing Monday Night Football. If Charter doesn’t seem particularly concerned, that may be because these are no longer the early days of cord-cutting: 25 million customers have canceled over the past five years.
Only about half of American households now pay for traditional TV, down from 90% in 2010. Cancellations are accelerating, and margins are falling. Charter says it has reached “economic indifference” on TV ownership. Many customers who cancel their cable TV stick with their providers for broadband, and broadband margins are about three times those for TV.
Charter, meanwhile, says only a quarter of its TV viewers “regularly” watch Disney content, including ESPN, though the number of occasional viewers is likely far higher. Charter pays Disney an estimated $12.50 per subscriber for its channels, three-quarters of which goes to ESPN, making it easily the most expensive channel in the bundle.
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What Charter wants is not a cap on fees but flexibility – the right to sell thinner bundles that lack games. He also wants Disney to put its own ad-supported streaming services into the cable mix. Disney will want to preserve what is left of its diminished free cash flow until streaming becomes profitable. It plans to launch a full ESPN streaming service by 2025. The current ESPN+ service, sold as part of Disney’s own streaming bundles, is a complement to the cable channel, not a replacement for it.
The price will matter a lot there. Many sports fans are not accustomed to paying their TV tab in full. Remember: All those cable subscribers who don’t watch ESPN are subsidizing those who do. Cable has already taken a tough stance with regional sports networks, which have launched streaming services costing $25 to $30 a month. A stand-alone ESPN with the full suite of sports rights may cost more. That’s why Disney is partnering with sports leagues to reduce costs.
The bottom line is that Disney has a lot more to lose. Oppenheimer estimates that this dispute alone could cost the company $4 billion in annual free cash flow, including advertising. That could derail a meaningful dividend — Disney aims to resume payments by the end of this year. Charter will lose subscription and advertising revenue, but will also be a larger driver of its content costs, leading to a more neutral overall impact on free cash flow.
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What matters is how ESPN fans get their fix. Some people will switch to virtual MVPDs, or traditional channel bundles online, like YouTube TV or Disney’s own Hulu+ Live TV, and continue to get their broadband through Charter. JPMorgan estimates that only 10% of ESPN fans will switch to a competing broadband service like Verizon Fios.
JPM says that in the near term, if ESPN gets out more bundles, prices come down and subscriber losses subside, other TV networks could benefit from the Disney scrap. In the long term, Charter’s desire to abandon TV is negative for the ecosystem. BofA Securities compares the situation in TV to the music industry when CDs were replaced by downloads and then streaming. Industry revenues peaked in 1999 and then fell 40%, not returning to growth until 2014. On that timeline, BofA says the TV business is in the late 2000s — with further struggles in the coming years.
write to Jack Hough at @[email protected]. follow him on twitter And subscribe to his Barron’s Streetwise podcast.
