DirecTV CFO: Disney channel blackout isn’t your typical carriage dispute

Disney channels went dark on DirecTV pay TV systems over the holiday weekend just before the kickoff of college football, impacting millions of customers as the two companies couldn’t reach terms of a new carriage deal. And while disputes and resulting channel blackouts have become a more common occurrence, DirecTV’s finance chief on Tuesday said this is not a typical renewal disagreement solely over rate increases  – but instead represents an existential moment for its business and what it sees as a broken pay TV model.

The comments came during a call with press and analysts Tuesday, where DirecTV CFO Ray Carpenter expressed a willingness of the pay TV provider to hold firm and not cave to Disney terms, even as the start of NFL season quickly approaches.

It follows Disney’s channels – including ESPN, local ABC affiliate, Disney and others – going dark on DirecTV, DirecTV Stream and U-Verse at a particularly inopportune time as fans, as well as business customers like bars and restaurants that weren’t able to show Sunday’s match up of LSU vs USC.

One thing that is pretty typical of these disputes is finger pointing that goes on after. DirecTV blames Disney and Carpenter suggested the timing was not coincidental as DirecTV asked the programmer to keep its signal up for the game as negotiations continued.

“The timing of when they decided to pull the content was absolutely orchestrated to put the most pain and disruption on our customers,” Carpenter said Tuesday.

Disney, meanwhile, contends it’s just seeking a fair marketplace-based agreement that DirecTV declined.

“DirecTV chose to deny millions of subscribers access to our content just as we head into the final week of the US Open and gear up for college football and the opening of the NFL season,” said Dana Walden and Alan Bergman, co-chairmen, Disney Entertainment, and Jimmy Pitaro, chairman, ESPN, in a statement. “While we’re open to offering DirecTV flexibility and terms which we’ve extended to other distributors, we will not enter into an agreement that undervalues our portfolio of television channels and programs. We invest significantly to deliver the No. 1 brands in entertainment, news and sports because that’s what our viewers expect and deserve. We urge DirecTV to do what’s in the best interest of their customers and finalize a deal that would immediately restore our programming.”

Some of this may sound a little familiar as roughly a year ago Disney was in a distinct yet somewhat similar boat when carriage renewal discussions with Charter hit an impasse and channels went dark on the cable operator’s systems for about a week around the start of football season, during which time Charter touted its vision for a new pay TV model. The two did reach a carriage deal, including dropping some linear networks and adding ad-supported versions of Disney’s direct-to-consumer streaming services Disney+, ESPN+ and flagship ESPN when it launches, within pay TV packages.

Similarly, DirecTV has laid out issues it sees with pay TV ecosystem. Whereby programmers like Disney, which are feeling linear network declines themselves, seek increased fees from distributors for key programming (like sports) and use that to reinvest in their own DTC streaming businesses they hope to make profitable. But rate increases aren’t the only issue for DirecTV.

Its challenge and issue also relates to the industry practices by programmers of requiring a portfolio of channels be packaged or bundled together (like sports with potentially less-watched entertainment networks) and minimum subscriber penetration guarantees that mean distributors need to deliver channels to a certain proportion of their base for the right to carry, regardless of if consumers want them or not. As carriage fees increase, distributors often pass those costs onto consumers via bill rate hikes –  and assert this further fuels the trend of cord cutting as consumers tire of expensive and bloated cable bundles filled with channels they may not want and when they can often find content through typically cheaper streaming alternatives. DirecTV also accuses programmers like Disney as devaluing content within the cable bundle they’re seeking higher fees for, by making premium content exclusive or available at lower cost on their own DTC apps, where consumer would need to pay twice.

At its core, DirecTV wants to see a relaxing of those channel bundling and minimum penetration requirements. Tied to that, it’s seeking the ability to offer consumers flexible packages, lower-priced alternatives and aggregated experience that’s able to serve consumers linear live TV and on-demand content, including from third parties, within one user experience.

Charter has pursued carriage agreements similar to its deal with Disney’s with other programmers – including reaching one early today, Wednesday, with AMC Networks that involves inclusion of ad-supported AMC+. There were some reports of little activation of the ad-supported version of Disney+ among Charter’s base, but DirecTV doesn’t seem as concerned as getting that as part of the carriage deal. Instead, it’s interested in the ability to incorporate the DTC apps consumers want at their choosing but not forced on a majority of subscribers.

Some but not all of the concerns are similar to those Charter raised in its own dispute with Disney.

However, DirecTV is in a bit more of a dire boat than Charter. As Carpenter noted on the call, unlike Charter and other large pay TV operators, DirecTV doesn’t have multiple lines of business. As margins in the pay TV model started to erode many deemphasized video offerings to instead focus on services like broadband and mobile, where video or entertainment is just part of the picture.

But for DirecTV, pay TV is its sole business, including through U-Verse and DirecTV Stream. So how things shake out with Disney could represent a longer-term make or break it moment for the provider. To that point, Carpenter said the situation with Disney is “not a run of the mill dispute” where the two sides are not “haggling over a percentage point on a rate.”

“This is really about changing the model in a way that gives everyone confidence that this industry can survive and finally serve customers and live up to the promise that has been out there,” Carpenter commented.

Skinner, flexible packages

Top of mind, DirecTV wants to be able to offer skinnier channel lineups, based on consumer interest or genre.  Such as non-sports fans not having to pay for a large expensive TV package if they only wanted entertainment channels, and the option to pair DTC services as well. DirecTV said it would like to be able opt offer lower-cost, flexible packages that include both channels and direct-to-consumer services, grouped by genres or categories like entertainment, kids, family content, or others.

On the call, Carpenter clarified that the company doesn’t want to offer a la carte packages where consumers pick and choose networks, as that would be too cumbersome.

Disney, meanwhile, has rebuffed DirecTV’s claims that it refused to engage in exploring more flexible, skinner bundles, calling it “blatantly false.”

“Disney has been negotiating with them in good faith for weeks and has proposed a variety of flexible options, in addition to innovative ways to work together in making Disney’s direct-to-consumer streaming services available to DirecTV’s customers,” Disney stated.

Carpenter did acknowledge that Disney offered some sort of skinny bundling or flexibility during ongoing negotiations but indicated they were still tied to minimum penetration guarantees and other terms that DirecTV felt had too many negative implications for its business to agree to.

DirecTV in public statements disclosed that on average, only two-thirds of its customers watch a combined three hours or more across Disney’s portfolio of 16 channels, yet the agreement requires nearly all of its customers to pay for the full slate.

The CFO also pointed Disney’s recent decision to shutter TV Everywhere apps (which provide free streaming access using pay TV provider login credentials) for apps like Watch ABC, DisneyNow, Freeform, FXNow and Nat GeoTV as further restricting options for pay TV consumers and hurting the value proposition, while bolstering its own DTC apps.

Venu lawsuit

Another thing to keep in mind is the separate but ongoing antitrust lawsuit against Disney, Fox, and Warner Bros. Discovery and their Venu Sports joint venture.

The planned Venu Sports app u would combine the companies’ respective linear sports and DTC assets, but has been temporarily blocked after a U.S. New York District judge granted a preliminary injunction sought in the antitrust lawsuit brought on by virtual MVPD FuboTV.

While not weighing in on the legality of so-called forced bundling and minimum penetration requirements sought by distributors, the judge’s order and opinion did acknowledge that evidence showed it’s a long-held and common industry practice – and indicated the issue could come up at a later date. The decision indicated Venu intended to unbundle the linear networks of the entities in a way that programmers don’t currently let other distributors do. While competing against Fubo in the pay TV space, DirecTV, as well as Dish, submitted supporting declarations in the case, backing Fubo’s claims against the joint venture and entities.

After the channel blackout on Sunday, DirecTV said one of Disney’s last-minute demands was that “DirecTV must agree to waive all claims that Disney’s behavior is anti-competitive” and any future lawsuits would need to be heard in California rather than New York as Disney’s counsel doesn’t believe the SDNY Judge overseeing the Venu case understood the issues in granting the preliminary injunction.

Disney’s weight, DirecTV playing long-term game

Disney itself is accustomed to generating lucrative carriage fees, and with its media size, ESPN and other sports channels, potentially has more heft in negotiations than certain other programmers.

Details from the Venu decision showed the monthly cost per subscriber to distributors to carry is most expensive for ESPN at $9.42 per subscriber per month  - which compares to an average of $1.30 for sports networks, $0.71 for non-sports networks and $3 per sub per month for WBD’s TNT network. 

Carpenter on the call claimed Disney has always been “one of the most inflexible” programmers as it relates to penetration rates and cited internal data that only 6% of DirecTV customers would be willing to pay more than $11 for ESPN. 

DirecTV showed third-party data that programming costs related to Disney equates to about $270 or so per subscriber, with Carpenter saying Disney’s seeking rates “north of that.”

In total DirecTV’s content costs for Disney alone amount to roughly $2 billion annually, according to the finance chief. 

Even if it means short-term pressure, DirecTV appears favors a new model instead of the existing one, which, over a longer period the MVPD believes guts the consumer value proposition from its services. Without other arms of business to prop it up but plenty of content options on the market for consumers to choose from, DirecTV expressed a desire to find a sustainable way forward. And flexible, lower-priced channel bundles are key to that vision.

“We’re very happy and would be pleased to offer our customers a lower price point, even if that puts some compression on our margins,” Carpenter said. “I’m telling you as a CFO, we see that as much better… future for this industry than the current model.”

Whether Disney has incentive to reach terms remains to be seen, but analysts on the call questioned whether DirecTV might talk a big talk but be willing to concede to Disney demands as Monday Night Football rolls around.

Carpenter suggested that won’t be the case, saying the company isn’t playing a short-term game.

“This is more existential for us,” he commented. “Video is all we have, video is what we’re focused on and video is what makes up our future.”

DirecTV needs something that will work long-term, sustainably, Carpenter said, adding “the resolve is there” and that the company is “prepared to take this as long as it needs to for us to get what is most important for us.”

DirecTV has been in other long-running disputes before, including with broadcaster Tegna which reached a new retrans agreement earlier this year after a months-long blackout.

Benefits of de-bundling?

In a September 4 note, analysts at LightShed Partners led by Richard Greenfield noted that the multichannel video bundles worked great for decades but suggested it might be time to disrupt a status quo that’s no longer working for many.

“Programmers are trying to have their cake and eat it too, pushing distributors to pay more for their linear networks, even as the amount of high-value content on those networks declines, while simultaneously building out their direct-to-consumer streaming platforms that do not require a subscription to a bundle,” wrote Greenfield.

That said, after details emerged from the aforementioned Venu trial, the firm thinks it’s likley there’s a good deal of consumer demand for both sports-focused and smaller bundles in general.

“While it is beyond scary to give up the bundle that has been so successful and profitable, it would enable all types of new packaging. And that packaging would not just have to span linear networks, it could be a combination of linear channels and DTC streaming platforms,” wrote LightShed. “For example, imagine a kids/family bundle with a variety of linear networks, along with Disney+ and Paramount+ (for Nick content), entertainment bundles with linear networks along with Hulu, Paramount+, Peacock and Max, sports bundles such as Venu (but ideally with CBS and NBC or at least Peacock and Paramount+), etc.”

The firm sees Fox as the legacy media company best positioned in the event unbundling took hold, with Disney and Comcast/NBCUniversal “better-positioned”, Warner Bros. Discovery and Paramount in weaker positions and AMC Networks poorly positioned.