Charter sees Disney carriage dispute as tipping point for video model

Disney channels have been pulled from Charter Communications cable systems after the two were unable to reach new deal terms, but Charter executives say this is no typical carriage dispute.

Instead, it’s a tipping point, where Charter proposed a new video programming distribution model it claims would aid the challenged traditional linear pay TV business alongside media companies’ direct-to-consumer streaming ambitions – and one that has Disney rejected so far. Charter has never lost Disney programming before or seen a carriage dispute of this size and significance.

According to Charter President and CEO Chris Winfrey, in negotiations that have been ongoing for months, Disney has insisted on higher prices, forcing customers to take channels they don’t want and incurring carriage fees Charter passes on to consumers that ultimately Disney uses to help pay for its own DTC apps like Disney+ and Hulu.

“We know there’s a better path. We also believe that Disney and Charter are uniquely capable to lead the way,” Winfrey said on a Friday morning call for investors. “So we’re on the edge of a precipice. We’re either moving forward with a new collaborative video model, or we’re moving on.”

Behind Charter’s issue, which is not just about one programmer, is what it sees as a broken video model – one it’s outlined before, where programmers continued to raise prices on linear TV, forcing minimum penetration rates and fees for channels that consumers maybe don’t want to be included in TV bundles, driving higher prices and less package flexibility for Charter to offer customers. This is happening while Charter says media companies are simultaneously devaluing content by making it available on their own direct-to-consumer platforms for free or cheaply. Rising costs of pay TV packages for less valuable content has in turn contributed to the trend of cord cutting (with Charter citing a nearly 25% decline, or loss of 25 million customers in the pay TV industry, including MVPD and vMVPDs over the last five years), further hurting traditional distributors and ultimately programmers.

Charter has put value on video longer than others in the business, and as a result alongside more flexible packages, seen slower losses with its base only contracting 10% over the same period – but recently acknowledged it had reached the point of indifference on video.

Charter’s proposed model

Charter proposed a new model to Disney, which it claims would “stabilize linear video and create a clear growth path for DTC video.”

A key component of which is Disney’s direct-to-consumer apps being included as part of a linear pay TV package. Without disclosing specifics, Charter said it would agree to Disney’s proposed market rate hikes in exchange for:

  • Lower penetration minimums to deliver more flexible packaging (meaning a lower threshold for the number of Charter subscribers that need to take a channel, so fewer packages it needs to be included in)
  • Inclusion of Disney ad-supported direct-to-consumer apps within Charter’s linear TV packages so customers don’t have to pay twice for similar content
  • Notably, Charter commits to put its significant marketing power behind Disney’s DTC products, including ESPN DTC, promoting them to its broadband-only customers

On the call for investors, Charter’s Winfrey said there would be some revenue share for subscriptions and advertising on DTC sold to broadband only customers, but no additional revenue or cost to Charter for including the apps in pay TV packages.

Charter, the second largest cable operator in the U.S., at the end of Q2 had a video base of around 14.1 million customers and around 28.5 million residential internet customers.

To Charter the model provides benefits threefold across customers, Disney and the cable operator. 

For customers it says it provides flexibility. For Disney, Charter thinks the model provides “a glide path” for the company’s larger DTC business, allowing Disney to curb linear subscriber and ad revenue losses, reduce DTC churn, increase advertiser revenue and help drive more upgrades to streaming apps. And for Charter, the company said it renews its own incentive to grow linear video customers, keep price sensitive customers, and creates new incentives to sell Disney streaming subscriptions to broadband-only customers.

“We believe that if a programmer’s linear content and or similar exclusive content is available in its direct-to-consumer app then that app should be included with the associated linear package,” said Rich DiGeronimo, president of product and Technology, on the call.

He added that Disney acknowledged the most sensible financial outcome for Disney content, and specifically ESPN is a hybrid approach “whereby it is able to retain a sizable portion of today’s linear television revenue from the cable bundle, including Charter’s business, while incrementally growing in the DTC streaming space.”

However, Disney rejected an offer by Charter for a shorter-term contract extension with new minimum penetration thresholds.

“Disney simply revered to the tired playbook of trying to squeeze every last dollar out of the linear customer with no regard to the going concern of their video cashflow engine,” DiGeronimo commented.

During the investor call Charter’s Winfrey indicated Disney didn’t outright reject the proposed model altogether, noting “constructive’ discussions ongoing with Disney for months. However, ultimately, he said it came down to short-term cash flows and precedence, with Disney unwilling to lean into the benefits Charter laid out.

“The natural tendency and uncertainty is to model in all the potential negatives and not to consider any of the positives,” Winfrey said, adding that’s the problem it’s had with Charter’s proposals.  

ESPN DTC looming

Another important part of the picture is Disney’s ESPN asset, for which content has largely remained on linear but that Disney has been publicly vocal that a shift to direct-to-consumer is “not a matter of if, but when.”

Sports are one piece of programming that’s seen as holding up the remaining linear cable bundle, with ESPN in particular largely seen as linchpin for the video ecosystem. Charter executives made clear it wasn’t trying to get ESPN included in one of its new regional sports networks or a la carte video package models. While Winfrey said they would love that, Charter knew “that was a stretch too far” and not something it put on the table, instead trying to enhance the value of its expanded basic TV video package called Select.

Still, Winfrey did say Charter couldn’t agree to a multi-year deal that included high priced fees for ESPN programming and requirements to deliver to a large number of customers who might not want it, when they know DTC is in the network’s future – “that’s untenable.” ESPN carriage also drags “along with a bunch of channels that aren’t watched that are high cost…that are fully available and then some in alternative forms at a cheaper price.”

“There’s no way you can enter into a multi-year agreement that forces that type of cost on all of your customers, knowing that an a la carte model is effectively coming and that would be probably better served for almost all the customers if they wanted to go there over time,” Winfrey said.

As for losing Disney channels, the programming loss comes just as the fall season is about to get underway, but it noted a large number of its customers take packages without sports or Disney programming.

That said, a significant part of its base does. Charter CFO Jessica Fischer said around 25% of Charter video subscribers are regularly engaged with Disney content, and of those about half are highly engaged.  Ultimately, the CFO said that if a dispute is prolonged, those engaged customers will drop off, lowering Charter’s incentive to carry Disney content and increasing the likeness of a permeant channel drop. In that case Charter would pivot and look to offer alternate video solutions, including to package programmers DTC services through platforms such as Xumo or Apple TV. She said the impact to video and internet additions is hard to predict but expects a portion of Disney video customers might cancel service as time goes on.

In the face of a long dispute, Charter would anticipate some video and advertising revenue loss, but also see cost savings. For 2023 it expected to pay Disney $2.2 billion in programming costs, not including advertising impact on either party.

Charter is still optimistic that it can find a path forward with Disney, but as Charter is now indifferent on video, it has the wherewithal to stand firm.

Asked by analysts on the call if Charter’s stance and approach to the negotiations with Disney is indicative of what it would do in the face of other programming negotiations, Winfrey said, “simply put, yes.”