Charter loses 408K video subscribers, tweaks Disney DTC offer

Charter CEO Chris Winfrey on Friday appeared to somewhat counter reports that there has been tepid activation of ad-supported Disney apps now included in certain Spectrum pay TV packages at no extra cost. In comments during Q2 earnings, he said the launch of of Disney’s ad-supported Disney+ and ESPN+ apps under the operator’s new hybrid linear-DTC video model is going well, but also disclosed some upcoming changes.

And tweaks the cable operator’s making to its inclusion of Disney DTC apps could address some existing shortcomings. That includes giving customers the options to upgrade to the ad-free version of Disney+ Premium as a $6 per month add-on starting later this quarter and to offer Hulu to Spectrum TV Select customers, where they can take advantage of the Disney Duo Bundle at an incremental retail price of $2 in Q4, according to Winfrey.

His comments follow a report from Puck News about low uptake of the ad-supported Disney apps that Charter started including in certain pay TV packages after reaching a landmark carriage deal with Disney last September.  Earlier this month analysts at LightShed Partners noted the July Puck report indicated less than 10% of Charter’s roughly 9.5 million Spectrum TV Select customers had activated their included Disney+ subscription and questioned whether the cable operator’s vision for video is wrong.

And while Winfrey suggested positive traction on the DTC apps, the changes he announced in prepared remarks Friday do look to tackle some of the same reasons pegged by LightShed’s Richard Greenfield as to why customers were potentially not activating Disney+. The firm saw roadblocks in that, previously, there was no option to upgrade to ad-free Disney (and where the ad-supported version might not appeal to consumers with enough income to shell out for pricier pay TV packages in the first place) nor to take advantage of existing Disney Bundle discounted pricing with Hulu and ESPN.

So if customers want ad-free or a discounted bundle “you have to effectively subscribe twice (so you have no need to activate your Charter/Disney+ subscription,” wrote LightShed in July 16 post. More on that here.

While not directly countering the Puck report, Winfrey did remind investors on the call that although the Disney deal was reached last September, the launch of DTC apps in Spectrum TV packages didn’t start until January.

Specifically, he said the launch of Disney+ Basic is “going well and it’s growing every month,” although Winfrey did not quantify uptake.  The added features, he noted, will help “even further accelerate the monthly growth that we see.”

In creating an upgrade path to the ad-free version and letting customers take advantage of discounted bundles with Hulu, Winfrey said it “allows you to have a comprehensive package the same way that exists inside of retail,” which was always the intended design of the carriage deal. He did acknowledge some complexity in implementing, related to authentication credential processes that can vary between different operators, apps and platforms.

In addition to Disney+, the chief executive said ESPN+ - which is included at no extra cost in a smaller subset of premium Spectrum TV Select Plus packages is “also having very good take up.” Charter views ESPN+ as high value into the operator’s RSN packages, and while those represent a small portion of the base, “the penetration’s going well.”

And the cable operator is still confident in its approach to carve out a new path for video offerings. It already has other deals in place, such as with Paramount to include the Paramount+ and BET+ apps in TV packages at no extra cost. Similarly, it added TelevisaUnivision’s Spanish-language streamer ViX and already has Warner Bros. Discovery’s Max (the latter via its TVEverywhere authenticated app). Charter said it is on track and expects the new model to be fully deployed by next year – which in addition to DTC apps includes pushes for lower-cost, flexible packages and integrated search and discovery with the Xumo Stream Box (a joint venture with Comcast).

Still, Charter’s video business reported both revenue and customer declines in Q2, but the company appears committed to keep it in the product mix. 

“Fundamentally, we believe that evolving the video business, even if it isn't growing, helps customer acquisition and retention, still has positive cash flow and provides us with option value,” Winfrey said. “And over time, we believe a high-quality video product gives us the opportunity to reintroduce more value into the converged connectivity relationship.

That said, Charter continued to lose pay TV customers, with video losses accelerating sharply yoy to 408,000 (including 15,000 SMB video losses) in Q2 – compared to the 200,000 it lost in the same period a year ago. The Q2 losses were similar to the 405,000 video customers Charter shed in Q1.  Its total video base now stands at around 13.3 million (including 591K SMB), compared to 14.7 million at the end of June 2023.  In earnings materials the company attributed continued video losses to downgrade churn related to increased programmer rates that the operator passes through to customers as price increases, as well as the end of ACP in Q2, which impacted video downgrades as consumers looked to more affordable packages. Earlier this week cable operator Comcast reported losing 419,000 net residential video customers in Q2.  

Charter's residential video revenue for the three months ending June 30, 2024, totaled $3.8 billion, down 7.7% year over year.

On the call, Winfrey didn’t shy away from the fact that video continues to decline and that including streaming DTC apps won’t make up for linear losses.

“We're not sitting here saying that we're going to arrest completely the loss of video, but I think what we are saying is to the extent we're going to put video on our broadband bill, it better have value,” he commented, adding that if it doesn’t, “then we'd rather they just go take that through the direct-to-consumer applications.”

Winfrey said it sees a path to where it can feel proud of the video product it puts on a broadband bill, even if it’s pricier, with expectations for benefits to its other connectivity services longer-term.

“[Video] may be expensive, but it has a significant amount of value” and Charter will use that to drive relationships for its connectivity services, he commented. “So while [video] may not be growing, it's still really important and I think it can be very valuable to our converged connectivity relationships.”

Charter last year pushed for new models with the Disney deal as it – like the broader traditional pay TV industry  -  continued to face video customer declines alongside rising costs charged to distributors by programmers (which are often passed through to consumers as rate increases) while many of those same programmers simultaneously pursue streaming businesses and offer similar content on their own DTC apps that are often available elsewhere in the market for lower costs. Part of Charter’s rationale for including DTC apps is that its pay TV customers shouldn’t have to pay twice for content.

And Winfrey on Friday cited optimism that its approach is getting adopted, “both from an understanding that the DTCs really do need to be included as part of the full video package, and that’s actually better for programmers because you reduce churn and upsell opportunities into the ad-free versions of these products as well.”

Charter’s total Q2 revenue was $13.6 billion, roughly flat yoy. Its residential broadband business contributed $5.8 billion in revenue, while mobile generated $737 million in the period.  Quarterly Adjusted EBITDA of $5.6 billion was up 2.6% yoy.