Charter Wants to Blow Up the Pay TV Bundle in Disney Fight: “This Is Not a Typical Carriage Dispute”

The carriage dispute between Charter Spectrum and The Walt Disney Co. has been a long time coming.

According to executives at the cable company, which has just shy of 15 million video customers, the two sides had been talking about a “transformative” deal for months, one that, in their mind, could help reinvigorate the pay TV bundle and provide a “glide path” away from the rapid erosion enveloping the industry.

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But if Disney and Charter can’t cut a deal, the cable company says it is prepared to abandon its video business altogether.

“We’re on the edge of a precipice. We’re either moving forward with a new collaborative video model, or we’re moving on,” Charter CEO Chris Winfrey said on a conference call with Wall Street analysts Friday morning. “This is not a typical carriage dispute. It’s significant for Charter, and we think it’s even more significant for programmers and the broader video ecosystem.”

It was a message reinforced by other executives, who warned that the entire pay TV system needs a reset, particularly with programmers like Disney continuing to pursue direct-to-consumer options. Perhaps most notably, Disney has indicated that it plans to take its flagship ESPN channel — the most valuable property in the pay TV bundle — DTC in the coming years. Charter argues that move would justify a substantial rethink of traditional carriage deals.

“When I talk about a glide path for Disney, it clears the way for ESPN to go direct-to-consumer in a way that’s friendly, and doesn’t completely cannibalize their larger linear video revenues that they have,” Winfrey said. “It also works for us because it creates a glide path for us to create new marketing channels for new types of video products.

“We respect the quality product that Disney produces and its management team. But the video ecosystem is broken,” Winfrey added.

“For us, we are at a crossroads, economic indifference really, with our video product offering and Disney is at a crossroads with its DTC apps and traditional linear TV strategy,” added Rich DiGeronimo, Charter’s president of product and technology.

Disney, meanwhile, released a statement responding to Charter, claiming that “contrary to their claims, we have offered Charter the most favorable terms on rates, distribution, packaging, advertising and more,” and that “we have proposed creative ways to make Disney’s direct-to-consumer services available to their Spectrum TV subscribers, including opportunities for new and flexible packages where those services become a focal point of what the consumer might choose.”

Winfrey said that, while he believes Disney is the right content company to forge a new TV business model, the carriage fight currently underway over a broader “transformation” will soon apply to other programmers as well.

But the company’s CFO Jessica Fischer also laid out the financial risks to Charter, and warned that the company is preparing for the possibility that the loss of Disney channels is “permanent.”

“Approximately 25 percent of our total video customers are regularly engaged with Disney content, and about half of those customers are highly engaged with Disney content,” Fischer said. “We’re currently working with the most engaged of those viewers to find alternative video solutions while Disney content is not available in our packages. And if the lock becomes permanent, Charter will pivot to alternative video solutions.”

What would those solutions be?

“It’d be looking to our existing distribution platforms of Roku, Apple TV, and then eventually Xumo to be able to create new packages for general entertainment with more flexibility and the ability for consumers to add on a la carte direct-to-consumer packages as they see fit,” Winfrey said.

A possible model also comes from the small regional provider Frontier Communications, which dropped its TV offering and pushed its video users to YouTube TV. Earlier this year, a high-level TV executive told THR that by the end of the year a major cable provider would abandon the TV business, though they added they did not think it would be Charter or Comcast. But if Charter is thinking about it, most likely every other provider is, too.

“Our linear channels and direct-to-consumer services are not one and the same, per Charter’s assertions, but rather complementary products,” Disney’s statement added. “We continue to invest in original content that premieres exclusively on our linear networks, including live sports, news and appointment viewing programming.”

Still, Charter is hoping its pressure campaign will be able to lead to a new deal with Disney: “We’re hoping that our shareholders will weigh in and support a better path forward for the video ecosystem,” Fischer said.

Disney, for its part, says it offered an extension, which Charter declined. The company says it wants to return to the negotiating table “as quickly as possible.”

“If we’re unable to come to a deal, and ultimately move on from the traditional video business, the margin profile of our business should improve and its capital needs should decline,” Fischer added, noting that the stakes may be much higher for programmers.

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