Spectrum Cable Owners Want Disney+ & Hulu Access For Their Customers
Overnight, Disney’s television channels, including ESPN, FX, ABC and National Geographic, have gone dark on the Spectrum Cable networks, impacting over 15 million people across multiple markets, including Los Angeles and New York.
Carriage disputes between cable networks and studios aren’t uncommon, nor are blackouts over coverage as the two companies come to an agreement. But this latest dispute is perhaps much more complicated than before, as more and more people leave traditional cable television and move to streaming services, fewer people are willing to pay for cable. Earlier this year, Disney CEO Bob Iger said that linear television is no longer core to Disney and is actively looking for a potential buyer for these channels.
Following the news of Disney’s channels becoming unavailable to Spectrum customers, Charter Communication, has provided an update on its contract negotiation dispute with The Walt Disney Company. Here are some of key highlights from the meeting:
Overview
We respect the quality video products that The Walt Disney Company produces as well as the experience of its management team. But the current video ecosystem is broken, and we know there is a better path that will deliver video products with the choice consumers want.
The Walt Disney Company and Charter are uniquely capable to lead the way, which is why we are disappointed that thus far they have insisted on unsustainable price hikes and forcing customers to take their products, even when they don’t want or can’t afford them.
They also want to require customers to pay twice to get content apps with the linear video they have already paid for. This is not a typical carriage dispute. It is significant for Charter, and we think it is even more significant for programmers and the broader video ecosystem.
We have proposed a model to The Walt Disney Company that we believe creates better alignment for the industry and better products for customers. It is a model that could both stabilize linear video and create a clear growth path for direct-to-consumer (DTC) video, with a more customer-friendly and financially attractive end-state for programmers.
Background
This situation didn’t come about overnight, and it isn’t one programmer’s fault. For the last decade, linear video subscription services have been in decline, fueled by the migration of valuable programming to DTC options coupled with a vicious cycle of programming cost increases and subscriber losses.
- Over the last five years alone, the linear video industry, including both traditional and virtual multichannel video programming distributors (MVPDs), has lost nearly 25 million customers, almost 25% of total industry customers. It is staggering.
- At the same time, programmers have moved content out of their linear channels to a la carte direct-to-consumer offerings, with limited advertising and permissive password rules.
- Over the past four years, The Walt Disney Company’s cable portfolio has seen significant viewership declines – across sports, general entertainment, and most dramatically in children’s programming, where they have created a DTC substitute for children’s content – Disney+.
Nonetheless, as we entered negotiations, The Walt Disney Company proposed a long-term deal that continues to ignore the realities of a shifting marketplace with:
- Higher license fees
- Demanding we pay for customers that do not receive its services, leading to more price increases
- Even less packaging flexibility than we have today
We believe that renewing a traditional distribution deal in line with The Walt Disney Company’s current offer would ignore the realities of today’s video business and accelerate its decline. We do not take this decision lightly. For 2023, we had expected to pay The Walt Disney Company more than $2.2 billion for just the right to carry that content, not including the impact of advertising on either party. But we have reached a precipice and must chart a path to change.
Charter’s Offer
Charter has offered The Walt Disney Company the opportunity to create a partnership that we believe could transform the industry and help restore our mutual video business to growth. As part of the solution, Charter would accept The Walt Disney Company’s “market” rates in exchange for:
- Lower penetration minimums to deliver package flexibility for our customers
- Inclusion of their ad-supported DTC apps within our packaged linear products so the customer does not have to pay twice for similar programming
- Charter’s commitment to market their DTC products to our broadband-only customers
For our Customers, this model creates the compelling video product we all want as consumers: flexibility to choose from a variety of high-quality packages with varying content and pricing to meet their viewing and budgetary needs.
For The Walt Disney Company, we believe this model provides a glidepath to manage its migration pace to a larger DTC business, including the ability to stem linear subscription and advertising revenue losses, reduce DTC churn, increase advertising revenue and likely drive more upgrades within their digital television apps. Ultimately, it provides a more sustainable revenue stream, in our view.
For Charter, it renews our incentive to grow linear video relationships, enhances our flexibility to retain price-sensitive linear customers, and provides new incentives to sell DTC subscriptions to broadband-only customers.
We offered The Walt Disney Company a shorter-term contract extension, with penetration minimums that would allow us to continue to provide flexible options to consumers. However, The Walt Disney Company has informed us that they would not be willing to accept a contract extension.
Conclusion
With The Walt Disney Company, we have proposed a model that we believe creates better alignment for the industry and better options for our customers. We are at the edge of the precipice, which The Walt Disney Company itself forecasted. For more than a decade, executives and analysts have acknowledged that the path of linear video is unsustainable, and the business model must evolve. Analyst Craig Moffett has stated that “linear TV is hanging by a thread” and that “[i]t all comes down to Disney.”
We think the opportunity for customers and all of us as market participants is too big, too important, and too timely to pass up. The Walt Disney Company and Charter have the opportunity to work together on transforming the industry for the long-term benefit of both companies and their customers. Without them, we need to pivot to other models to drive value for our connectivity relationships. We are either moving forward together with a collaborative business model, or we’re moving on.
Unfortunately for cable providers, one of the key aspects of cord-cutting is the ability to remove the middle person from the situation, with the studio offering content directly to the consumer. Trying to get the ad-supported versions of Hulu and Disney+ included in the cable bundle is an interesting solution. However, this would also likely cause issues with other studios like Paramount, Comcast and Warner Brothers Discovery, which also have linear television. With streaming continuing to grow and the linear business shrinking yearly, are major studios willing to make a “new” cable bundle with all the different streaming services? Unlikely. Forcing customers to buy bundles of packages they may not want.
Most of Disney’s content from channels like ABC, Freeform and FX are available the next day on Hulu, with Disney Channel and National Geographic content often premiering on linear before arriving on Disney+ at a later date. But it’s going to be years until ESPN offers a full direct-to-consumer platform, so Spectrum customers may be without access to the sports they want to watch, without subscribing to another Live TV bundle like Hulu+Live TV or YouTube TV.
Does Disney need to address the prices it charges cable platforms for its linear networks, as there are fewer and fewer customers,? Continuing to increase the price of cable television is only going to force more customers to streaming.
Cable television is going through some major changes, as the traditional system is broken, which the head of Charter Communications is right about and while Disney needs the income from these providers, if it makes a bad deal to end the blackout, it could cause many more issues down the line for not just Disney and the cable providers, but also consumers, who could easily end up paying for streaming platforms they don’t want. Right now, if you don’t want ESPN+, Disney+ or Hulu, you don’t need to subscribe, but Charter’s option, forces every Spectrum customer to have it. And if Spectrum is successful in this, other cable providers will want the same deal when they go for negotiation.
Outside of the US, Disney has already closed many of its traditional linear television channels and focused on streaming. It’s also spoken out about how linear is changing, and it’s no longer core to their business. So this situation is going to get very interesting in the days and weeks ahead. As it looks like the cable providers are no longer willing to just go along with whatever is offered.
Disney’s response to the blackout was:
“Disney Entertainment has successful deals in place with pay TV providers of all types and sizes across the country, and the rates and terms we are seeking in this renewal are driven by the marketplace,. We’re committed to reaching a mutually agreed upon resolution with Charter and we urge them to work with us to minimize the disruption to their customers.”
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