The Charter-Disney Negotiations Impasse Will Change Cable & Streaming

Every year hundreds of broadcast stations and cable networks negotiate new subscriber fees with MVPD’s. While many contract renewals are non-eventful, other negotiations can be prolonged. The result is a bundle of channels going dark until an accord is reached. Earlier this month, two high-profile companies Disney and Charter Communications
reached a negotiation impasse, with Disney removing 19 channels including ESPN and ABC owned and operated stations, from the channel lineup of Charter. Some industry analysts believe the outcome between Disney and Charter will change the current cable model permanently as streaming continues to be disruptive.

With 14.07 million video subscribers, Charter Communications is the second largest MVPD behind Comcast
. Charter’s footprint extends to 41 states and is available in parts of New York and Los Angeles. Charter pays Disney a reported $2.2 billion to access their linear TV content each year. As part of the negotiation, Charter wants Disney to allow their subscribers free access to their streaming content. Charter notes that Disney (along with other media conglomerates) have been prioritizing streaming content instead of linear television. Hence, Charter says it is paying a premium for Disney content, but is not receiving premium content in return. According to Nielsen’s Gauge report for July 2023, streaming commanded an audience share of 38.7% while cable TV shares fell to 29.6%

Disney claims they are continuing to invest on the programming on their television networks. In addition, Disney regards their streaming services as a separate business from their linear television networks.

Similar to other cable television owners, Disney has been losing subscribers as a result of cord cutting. For example, according to Nielsen ESPN’s subscriber base reached its high-water mark in May 2011, when the all-sports network had 100.1 million household subscribers, covering 86.4% of all U.S. TV households. By September 2023, ESPN’s subscriber count fell to 70.9 million, with a U.S. TV household penetration of 57.3%. PwC projects that by 2027 there will be fewer than 50 million cable TV homes.

With the loss of Disney, Charter has given subscribers a $15 rebate. Charter has also informed their customers to subscribe to FuboTV, at a price discount. On the other hand, Disney has been informing Charter subscribers to switch to Hulu + Live TV, a Disney owned vMVPD as a substitute. Deadline reports subscriptions to Hulu Live + TV have risen 60%.

Consumers dropping their cable service can result in a fall-off in revenue from cord-cutting and smaller audiences. At a reported $9.42 each month per subscribing household, ESPN, one of cable’s highest rated networks, commands the highest subscriber fees of any U.S. ad supported cable network. By continuing to increase their subscriber fees, ESPN remains a Disney profit center. In 2010, before the onset of cord-cutting, S&P Global Market Intelligence reported ESPN’s monthly subscriber fees had been $4.39 with operating revenue of $7 billion. This year, despite the continued prevalence of cord cutting, S&P forecasts ESPN will take in $7.8 billion in subscriber revenue, an increase from 2022.

The number of subscribers for ESPN+, a streaming service, has also slowed down. In its most recent earnings report, ESPN+ had 25.2 million subscribers, a slight decline from 25.3 million in the previous quarter. It marked the first subscriber falloff in their five-year history. Although ESPN+ live streams thousands of sporting events every year, the most popular games are seen on ESPN and ABC. Also, a majority of ESPN+ subscribers access the service via the cut-rate Disney bundle (with Disney+ and Hulu). In its most recent earnings report, Disney’s streaming unit lost $512 million. Since Disney+ was launched in 2019, Disney’s streaming unit has lost $11 billion.

ESPN leaving Charter comes at a time when the cable networks audience is at their strongest. The network has been televising the two-week U.S. Open (tennis) as well as college football and its top-rated show NFL Monday Night Football. In October ESPN will televise early rounds of post season MLB and the NHL and NBA regular season begins. In fourth quarter 2022, ESPN was cable’s top-rated network averaging 2.7 million primetime viewers. Furthermore, in recent years, the cable networks viewing has actually been on the upswing.

Also, the rights fees of premium sports continue to escalate as such deep-pocketed tech companies as Apple
, Amazon
and Google have expressed a greater interest in streaming live sports. This year, under a new contract, ESPN will pay the NFL $2.7 billion to televise games, a 42% increase from the previous contract.

Disney’s current agreement with the NBA ends after the 2024-25 season. Disney has expressed strong interest in renewing its NBA relationship with rights fees expected to double and possibly even triple. Disney (along with Warner Bros Discovery) have an exclusive negotiating window with the NBA expiring next April.

Beginning next season, the college football playoff format will expand to 12 teams. ESPN will televise the quarterfinals, semifinals, and championship game, the media rights for the opening round of four games has yet to be negotiated. Each year the college football championship game has been among ESPN’s top-rated programs.

While ESPN remains lucrative, the overall linear cable model is becoming less profitable, raising concerns at Disney. While still generating billions of dollars, in the first six months of 2023, the revenue for Disney’s cable unit fell year-over-year by 6% with profits down 29%. Disney has been looking to cut costs. Earlier this year, Disney had laid off 7,000 employees. More recently, ESPN has let go of 20 high profile on-air talent including; Jeff Van Gundy, Suzy Kolber and Max Kellerman.

In addition, ESPN is looking to extend the brand. This November ESPN Bet will be launched competing with FanDuel, DraftKings and others for the multibillion dollar sportsbook business. ESPN will be receiving $1.5 billion from Penn Entertainment
to license its name over ten years.

Also, last month ESPN announced they would be putting 75 live Atlantic Coast Conference football games in an agreement with Theater Sports Network movie theaters. The games will be available in the visiting team market and both markets for neutral site games. In addition, the college football playoffs and a half-dozen bowl games will be available. Scott Daw, the president and COO of Theater Sports Network said, “These events will replicate the feel of a football stadium experience as fans gather and fill theaters to watch the games on the big screen.” Movie theaters will set the admission fee.

More importantly, in their first quarter earnings report call, Disney CEO Robert Iger discussed the eventuality of ESPN launching a standalone direct-to-consumer product. Iger said, “Regarding ESPN and when we might make the shift, if you’re asking me, is the shift inevitable? The answer is yes, but I’m not going to give you any sense of when that could be, because we have to do it, obviously, at a time that really makes sense for the bottom line. And we’re just not there yet. And that’s not just about how many subscribers we could get, it’s also about what is the pricing power of ESPN, which obviously ties to the menu of sports that they’ve licensed.

Industry analysts expect an ESPN standalone product to become available no later than 2026. The launch may be sooner depending on ESPN’s profitability. There is speculation on how much Disney would charge for a standalone streaming service. (ESPN+ currently costs $9.99 monthly or $99.99 annually.) Citi Research analyst Jason Bazinet believes $22 a month, with no ads, would turn a profit for Disney.

The cost is more than double the subscriber fees ESPN charges any MVPD and greater than Netflix
, Disney+ and other prominent SVOD providers. On the other hand, The YES Network charges $24 a month to stream New York Yankees and Brooklyn Nets games. NESN charges $30 a month to stream Boston Red Sox and Boston Bruins games. Industry analysts note, ESPN offering a DTC service could quicken an already accelerated cord-cutting pace impacting dozens of smaller cable networks.

Also, Iger mentioned the possibility that Disney could sell a minority stake in ESPN. In an interview with CNBC, Iger said he was looking for “strategic partners that could either help us with distribution or content.” It’s been reported Disney has had talks with the NFL, NBA and MLB. The Information reported that Disney has also had discussions with Verizon about a DTC offering.

As the Charter-Disney negotiations continue, with no resolution in sight, a Charter spokesperson has said, “The current video ecosystem is broken” and simply unsustainable. In its latest quarterly earnings report, the number of Charter’s video subscribers and revenue decreased, while their broadband subscribers and revenue increased slightly. At 30.6 million, Charter’s broadband subscribers is now more than twice the number of video subscribers.

According to Insider, Charter President and CEO Chris Winfrey said, “We’re either moving forward with a new collaborative video model, or we’re moving on.”

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