Charter Communications, with popular programming from The Walt Disney Co. blacked out from its 14.7 million subscribers, sees its talks with Disney as a chance to fix a broken TV model.
“Disney and Charter have the opportunity to work together on transforming the industry for the long-term benefit of both companies and consumers — but we are either moving forward together, or moving on,” Charter said in a presentation for investors and analysts released Friday.
Part of that plan is an agreement that lets people who don’t like sports buy a bundle of programming that doesn’t force them to pay for expensive networks like Disney’s ESPN.
Without a new type of agreement Charter execs said they could see moving ahead without Disney content, including not paying retransmission fees for Disney's ABC broadcast stations.
On a call with analysts and investors Friday morning, Charter CEO Chris Winfrey apologized to Charter subscribers for the blackout.
“I'm sorry that Disney has removed its programming from your lineup and for the majority who don't actively watch Disney content, I'm sorry Disney has made you pay for channels you don't watch,” Winfrey said.
“We've almost always avoided these kinds of disputes and disruption to your service. We had to draw a line in the sand on your behalf. We haven't been able to stop programmers from increasing the cost of their channels and your packages, but we think that making sure you get value and flexibility and the programming you pay for well, that's worth fighting for.”
In terms of financial impact, Charter said it is currently paying about $2.2 billion in annual programming costs to Disney, not including the impact of advertising revenue for both parties
It said only about 25% of Charter video subscribers regularly engage with Disney content.
“Disney pulled its content which will impact our operations and financials,” Charter said.
In the short term, the blackout means a reduction in programming costs, but there will be other costs, including more calls from customers and customer credits.
Over the longer term, Charter said its concerns include maintaining its long-term relationships with subscribers, finding alternative video solutions for its connectivity customers.
“Cash flow from video has already declined significantly and video ultimately cash flow neutral without structural changes,” Charter said.
On the other hand, agreeing to what Disney is willing would not turn out well. “Forcing customers to pay for Disney content they opted out of, or don’t view and pay even higher rates, would negatively impact our connectivity relationships,” Chater said.
Charter states that the “multichannel video product is too expensive and packages don’t meet consumer needs” and notes that “customers are leaving the traditional video ecosystem and losses have accelerated.”
According to Charter’s presentation, the cable video ecosystem is broken because of a chain of events that started with the failure of TV Everywhere.
That led to the proliferation of unauthenticated proliferation. Netflix rose and programmers started to withhold their VOD libraries from multichannel video programming distributors (MVPDs) like Charter.
Content moved to SVOD and programmers launched unprofitable direct-to-consumer products. In the pursuit of profitability, the programmers are raising the price of their streaming products, selling ads, and reselling their content to other SVOD services.
“Programmers are caught in a self-imposed dilemma as they have moved content to their DTC products for short-term profit maximization and their management teams are not incentivized to drive business for the long-term,” Charter said, describing the vicious cycle that erodes the value of pay-TV for nonsports viewers and encourages them to leave pay TV for SVOD.
At this point in the cycle, “renewing a traditional distribution agreement with higher costs, limited packaging flexibility and no additional value ignores the realities of the changing marketplace and will simply accelerate the decline of video subscription and advertising revenue,” Charter said.
Charter said it still believes that “a compelling Charter-branded video product offering can be a captivating part of our portfolio of connectivity services and appealing to customers,” and laid out what it called its “vision for the future of video.”
To get to that future, “distributors and programmers need to work together to entice and reward customers to utilize bundled subscription products – most programmers simply will not be able to profit/survive solely on a-la-carte streaming revenue and need a hybrid, customer centric model,” Charter said.
This approach will benefit programmers, MVPDs and customers, Charter said.
Charter said that right now, it and Disney are the right parties to start moving down the road toward this new customer-centric video model.
It notes that both companies are at a “crossroads with their video strategy” with Disney looking at a hybrid approach for ESPN that embraces streaming options.
“A new model creates the pathway for Disney to stabilize its linear losses and grow its DTC business, ultimately preserving cash flows,” Charter said.
But at this point, Disney is sticking to the traditional approach in its negotiations with Charter.
“Disney offered a traditional long-term deal and has not seriously engaged on Charter’s transformational partnership proposal,” Charter said. Disney is insisting on high penetration payment minimums despite its own a la carte offerings, forcing Disney channels into packages where they are not included today, against consumer will and requiring additional large rate increases by forcing DTC service inclusion and additional payment to existing linear customers. That offers little incentive to sell DTC apps to broadband customers, Charter said.
“Disney’s traditional approach would result in a dramatic increase of cost to consumers — many of whom don’t view, want or even subscribe to Disney/ESPN content,” Charter said.
Charter said offered to accept Disney market rate increases in exchange for bundling ad-supported DTC apps with packaged linear products, and lower penetration payment minimums to provide packaging flexibility to customers.
Charter has also offered to market the Disney DTC apps to its broadband customers. Disney declined, Charter said.
Charter said it also offered a shorter extension of the current contract to further discuss the benefits of Charter’s proposal, which Disney declined.
Responding to the Charter presentation, Disney offered its view of the negotiations, saying that Charter has refused to enter into a new agreement with us that reflects market-based terms” and that “contrary to [Charter’s] claims, we have offered Charter the most favorable terms on rates, distribution, packaging, advertising and more.”
Disney added that it has proposed creative ways to make Disney’s direct-to-consumer service available to Spectrum TV subscribers. But Disney emphasized that its linear and direct-to-consumer services are not the same, meaning that a subscriber to one ought not be entitled to both.
“We value our relationship with Charter and we are ready to get back to the negotiation table to restore access to our unrivaled content to their customers as quickly as possible,” Disney said.
Bottom line: To many seasoned observers this Charter-Disney dispute does not seem to be the typical fee negotiation between a distributor and a programmer.
“It's a big deal: a Cable MVPD is pushing to undo norms for linear networks/stations,” said analyst Steven Cahall of Wells Fargo.
“Charter has drawn a line in the sand and is either prepared to drop major content sources to protect earnings, or rewrite the linear script. With some MVPD contagion, none of this is constructive to media. Long term, this could mitigate cord cutting, but the uncertainty for now is incremental,” he said.
Looking ahead as this situation evolves, most at risk are companies that generate a larger share of revenue from traditional distribution, Cahall said. Those include Paramount, Warner Bros. Discovery and Fox. Those also have sports rights that have to be parsed between exclusivity with pay-TV and streaming.
