Could The Disney/Charter Carriage Battle Finally Break The Linear TV Bundle?

Post by: Rick Ellis 05 September, 2023

Carriage renewal showdowns are as old as the cable bundle. Multichannel video programming distributors (MVPD) are any service that provides bundled TV channels for purchase to consumers through cable, fiber, or satellite. The newer virtual services like Sling TV and Hulu TV Live are referred to in the industry as vMVPDs. All of these services need a contract from the media company that owns the cable channel in order to carry it. That contract not only dictates the monthly per-subscriber fee that the channel will cost the MVPD or vMVPD to carry it. But there can also be all sorts of other conditions imposed by either side.

One reason John Malone became a billionaire is that he realized early on that bundling a bunch of cable networks and offering them as a take-it-or-leave-it package to MVPDs was a great way to get rich. He became president of a struggling cable system called TCI, which at the time was the fourth biggest cable system in the U.S. He used the leverage of TCI's size to force cable networks into giving his company a small ownership slice to settle carriage negotiations. He also acquired smaller, niche networks and bundled them together with more popular networks in an "all or nothing" package to other MVPDs.

He also helped ensure that the "most favored nation" wording was included in every carriage contract. In other words, no MVPD could obtain a discounted deal for the cable channels. And if Malone could bully one MVPD into agreeing to a huge price increase, their competitors would have to agree to the new, higher price when their contracts came up for renewal.

These practices became the standard approach in the industry during carriage negotiations and that scenario has continued over the past few decades. The approach has only accelerated in recent years as big media companies control more and more of the cable landscape. They use their size to force MVPDs into carrying all sorts of zombie networks that are basically nothing but themed collections of reruns. Sure, MTV Classics, fyi or American Heroes have almost no viewers. But their owners are still able to grab a few cents per subscriber and that's enough to make them profitable.

Carriage negotiations have tended to play out the same way, no matter which companies are involved. If the MVPD doesn't agree to the ever-increasing charge for a bundle that includes a seemingly limitless number of zombie channels, the cable channels get pulled from the MVPD. And while no one cares if they miss this week's airing of a reality TV show from 2012, customers will complain if they suddenly lose access to ESPN or other favorite channels. So typically, the MVPD eventually folds, agrees to the higher subscription fees, and passes along the increases to customers.

But like all aspects of the legacy linear bundle, this approach couldn't last forever amid a declining customer base and competition from everything from YouTube to Netflix. The major media companies can't afford to make changes in the business model. The current "sign this contract or we'll shoot this dog" approach still provides a lucrative (if declining) revenue stream for companies such as NBCUniversal, Paramount Global, and Disney. But it's an idea that is becoming less viable financially for the MVPDs, which are seeing an increasing percentage of their revenue come from providing broadband access. Several smaller MVPDs have basically closed their TV business in recent years rather than agree to yet another round of carriage price increases. And it was clear that at some point, a larger MVPD was going to do the same. Lose access to a host of cable channels and take the heat from customers until they extract more profitable terms.

That tipping point may have come last week, as Charter was unable to come to terms with Disney and that MVPD's 14.7 million customers lost channels including ABC, Disney, FX, and ESPN. The latter channel is a big deal for sports fans, given that the college football season begins tomorrow.

For the record, here is the complete list of affected channels:

* ABC (in some markets)
* ACC Network
* Disney
* Disney Junior
* Disney XD
* ESPN Deportes
* ESPN News
* Freeform
* FX
* FX Movie Channel
* Freeform
* Longhorn Network
* Nat Geo
* Nat Geo Wild
* Nat Geo Mundo
* SEC Network

But it's not a great situation for Disney either. Charter provides nearly $200 million per month in carriage fees to Disney and there will also be an unknown number of millions lost in ad revenue.

In an example of how serious this issue is to Charter, the company held an unusual Friday morning call for investors and the press where the company laid out its position and described the situation as "dire." And that's not an exaggeration, given that the call happened in part because the company legally has to inform investors if it plans to do something that would substantially impact the value of the company.

And while the details of most carriage agreements tend to stay secret except for the overall terms, Charter executives laid out the scope of the deal it had proposed to Disney.

* Given that Disney Bob Iger has said a launch of a direct-to-consumer ESPN streaming service is "going to happen," Charter said it would agree to pay the proposed new sub fee for ESPN, but only on a short-term basis until the ESPN streaming service launched. Charter didn't ask for the ability to shift ESPN channels into a new sports-oriented add-on programming tier, but it's an idea Charter's executives have previously floated in interviews.

* Charter wants Disney to provide the ad-supported versions of Disney+ and Hulu Basic to its customers for free.

* Charter also wants the ability to create cheaper content bundles by pushing many of those so-called "zombie networks" into separate add-on programming tiers.

As you might expect, Disney has apparently told Charter that it is not interested in destroying its current shrinking gravy train and has declined to consider any of Charter's proposals. But Charter executives said in the call that if the issues aren't resolved in the next few weeks, they might reach a "point of no return."

What that looks like isn't clear, but in the call, Charter executives said that only about 25% of their current TV subscribers watch any Disney-owned TV channel and about 12% are "engaged" viewers.

In a statement over the weekend, Disney disputed those numbers and claimed that about 70% of Charter customers watched at least one Disney network a month. 

In a sign that both sides have decided this might be at a tipping point, the companies are each pushing unhappy customers to other vMVPDs. Charter has cut a deal with sports-oriented Fubo and is also suggesting Sling TV to customers looking for their favorite sports network.

On Tuesday, Disney launched a website that encouraged unhappy Charter TV customers to rival Hulu Live TV, in which Disney owns a controlling interest. However inexplicably, Disney didn't offer new subscribers a one-month discounted rate to encourage them to switch. Which is either a case of bad marketing or a belief that the two companies can still come to an agreement. 

But at this point, it's not clear what that agreement might look like, given that both companies are holding firm. 

Disney is reportedly asking Charter for an additional $1.50 per subscriber per month for the rights to air its channels. This might not sound like much until you consider that not only would that bring Disney an additional $22 million or so in additional fees each month, it would set the level which other MVPDs and vMVPDs would be forced to pay in upcoming carriage negotiations with Disney.

As for Charter, company executives continue to insist to walk away from negotiations unless they get close to the terms they are requesting. Losing Charter's subscriber base wouldn't mean a complete loss of those subscribers. Presumably some percentage would move to another service. But in the short and medium term, this could mean the loss of tens if not hundreds of millions in revenue. Plus the prospect that other MVPDs and vMVPDs would try their own variation of Charter's negotiating tactic. 

Assuming that Charter holds to their position, this could mean the end of the cable bundle as we know it. Charter will make similar demands on other media companies as their carriage agreements come up and other rival MVPDs will see this as their opportunity to extract their own more favorable deals.

If things haven't resolved in the next couple of weeks, I don't think it's hyperbole to say this could change the cable and satellite TV business forever.

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Last modified on Tuesday, 05 September 2023 15:45