Why the Disney-Charter Carriage Dispute Is a ‘Watershed Event’ for All Pay TV

While conflicts between cable networks and the pay-TV providers that carry them are common, the one waging between Disney and Charter Communications has far-reaching implications for the media and pay TV industries, according to Wall Street Analysts.

As the carriage dispute between Disney and Charter Communications stretches into its sixth day, millions of Charter’s Spectrum customers looking to access channels including ABC, ESPN, National Geographic and FX remain in the dark.

“The stark reality is the media and distribution landscape has been building up to this moment for many years,” MoffettNathanson analyst Craig Moffett wrote in a research note. “It’s becoming clearer than ever that there is no going back. The lifeboats have already been burned.”

In July, linear viewing fell below 50% for the first time ever, according to Nielsen. The multichannel video industry has lost 25 million customers over the last five years, or nearly 25% of its total base, Charter wrote in a presentation to investors about the dispute — and its CFO said on a recent earnings call that it’s “not willing to lose money in video.” Now, Charter has suggested it’s prepared to entirely move on from Disney if an agreement cannot be reached.

“We’re on the edge of a precipice. We’re either moving forward in the new collaborative video model or we’re moving on,” Charter CEO Chris Winfrey told analysts on Friday. “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.”

The dispute comes as Disney CEO Bob Iger previously suggested that he would be open to a sale of the company’s linear networks after telling CNBC in July that they “may not be core.” However, he emphasized that the company wants to stay in the sports business and plans to eventually turn ESPN into a fully direct-to-consumer offering. Though a timeline for that plan has not been revealed, many analysts expect ESPN to transition fully to streaming by as early as 2025. In the meantime, Disney is on the hunt for strategic partners who could help with content or distribution.

Where negotiations stand

Charter said Disney “insisted on unsustainable price hikes” and is forcing customers to take their products even when they don’t want or can’t afford them. Additionally, the cable giant said Disney wants to “require customers to pay twice to get content apps with the linear video they have already paid” for.

The company said it offered “lower penetration minimums” to deliver package flexibility for customers, as well as the inclusion of Disney’s ad-supported streaming apps within its linear packages. It also committed to market those streaming products to its broadband-only customers.

“We propose the model to Disney that we believe creates better alignment for the industry and better products for customers, a model that can stabilize linear video and create a clear growth path for direct to consumer video with a more customer friendly and financially attractive end state for programmers,” Winfrey said.

Meanwhile, Disney said Charter refused to enter into a new carriage agreement that “reflects market-based terms” and that it offered “the most favorable terms on rates, distribution, packaging, advertising and more.” It added that it “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.”

“Although Charter claims to value our direct-to-consumer services, they are demanding these services for free as they have stated publicly,” Disney said. “Charter is depriving consumers of that content because they are failing to ascribe any value in exchange for licensing those services.”

While LightShed Partners analyst Rich Greenfield acknowledged the dispute could potentially be a “watershed event” for linear TV, he noted that historically these battles usually end in an agreement.

“If Winfrey-led Charter is ultimately focused on reduced packaging penetration requirements, we suspect a deal will be reached in the next couple of weeks,” he wrote in a Tuesday research note. “If, however, including the streaming services at no extra cost is a must-win for Charter, then we do not expect a deal to be reached anytime soon and the drop could, in fact, be permanent. We simply do not see how Disney would agree to that, even if it is incredibly pro-consumer.”

Broad-ranging impact

According to Charter, 25% of its 14.7 million subscribers engage with Disney content, with half of those “highly engaged.”

Assuming all the highly engaged subs churn, Wells Fargo analyst Steve Cahall estimated in a research note that a permanent blackout would result in Charter losing about 1.8 million subscribers and$3.7 billion in revenue. Charter could take a $400 million to $600 million hit to EBITDA in fiscal year 2024, he added.

Bank of America analyst Jessica Reif Erlich pegged the annual revenue impact to Charter at about $4.3 billion from video losses, $450 million in lost advertising revenue and another $550 million in broadband revenue declines — in total, about $5.4 billion or 10% of revenue, and $1.6 billion in lost EBITDA.

As for Disney, UBS analyst John Hodulik estimated the dispute could result in an incremental 14% hit to the company’s domestic affiliate revenue, or 12% of total affiliate revenue. Charter has said its pays roughly $2.2 billion a year to Disney for programming.

Charter subscribers account for 20% of ESPN’s linear subscriber base of 74 million, Macquarie senior media tech analyst Tim Nollen estimated. That equates to roughly $5 billion in linear revenue losses on a full-year basis, or 6% of overall revenue.

“We expect the two sides to resolve their disagreement in some form
before long as the stakes are too high for both,” Nollen wrote. “But this is another
example of the complexities Disney faces in the near term as it plots a
future TV landscape, for itself and the industry as a whole.”

Moving past cable

If the impasse between the two parties persists, Charter said it would look to services like Apple TV, Roku and Xumo, a joint venture with Comcast whose product is in field trials, to create new packages for general entertainment with more flexibility and the ability for consumers to add direct-to-consumer services a la carte.

While acknowledging that that the pay TV ecosystem is “broken with bundles and fee structures that aren’t consumer friendly,” Cahall is not convinced that the dispute is a “pivotal moment” for Disney.

“If there’s a persistent [Charter] blackout or perpetuity drop of [Disney] content, then subs will likely reappear on other TV services including [Disney’s] streaming services, Hulu Live TV, YouTube TV, etc.,” he said.

In a blog post Monday evening, Disney urged frustrated Spectrum customers to switch to Hulu + Live TV. It also noted that its portfolio of networks are available through YouTube TV, Fubo, Sling and DirecTV Stream.

“Charter has already established a referral capability for customers to switch them to YouTube TV or FuboTV,” Moffett wrote. “To handle a potential rush of customers anxious about missing the game, Charter is preparing a one-touch QR code that would not only create a new YouTube TV or Fubo subscription but would also downgrade from a Spectrum video bundle with a single click. To minimize any impact on broadband subscribership, they’ll lean more
heavily than ever into their Spectrum One wireless/broadband bundle.”

Assuming that the half of highly engaged Charter subscribers seek an alternative solution, Stephens analyst Nicholas Zangler estimates that a 25% win rate would lift Fubo’s year-end subscriber count from 1.575 million to 2 million, enabling it to achieve its fiscal year 2025 subscriber goal two years ahead of schedule.

If Fubo is able to scale through subscriber growth, aided by Charter pay-TV subscriber migrations, Zangler believes there may be an opportunity for the company to renegotiate with Warner Bros. Discovery to add sports content from TNT, TBS and TruTV to its content lineup.

Other winners could include players in the OTT ecosystem and fixed wireless, such as T-Mobile and Verizon, Oppenheimer analyst Timothy Horan predicted.

During the call with analysts, Charter executives suggested that its carriage negotiations with Disney are just the start of how it plans to conduct business with the major media companies moving forward.

“We see this as a negative read for media networks with sizeable dual revenue streams from linear and streaming today (Warner Bros. Discovery, Paramount, AMC),” Hodulik said. “If Charter’s approach is adopted and the pace of cord-cutting moderates, we see this as a relative positive for [Fox Corp.], which has kept its content exclusive to the bundle.”

Cahall sees Paramount, Warner and Fox as the companies at the most risk, with the three generating most if not all of their EBITDA from linear networks.

“We see less equity risk at [Disney] and [Comcast] given combos of streaming scale, sports and other” businesses, he added.

Rosenblatt Securities analyst Barton Crockett believes that the impasse bolsters the firm’s argument that entertainment conglomerates should move quickly to break up.

“Waiting risks further erosion of pay TV value,” he wrote in a note to clients. “In a breakup, we see a northward value bias for Disney, driven by theme park and content value. We see risk for those that derive nearly all of their cash flow from TV networks, such as [Warner Bros. Discovery and Paramount].”

Those with less exposure include Nexstar and Sinclair Broadcast Group, he added, noting that their TV stations could anchor the “skinny bundles” Charter is seeking.

In the past five days, WBD, Paramount and Comcast stock have fallen 9.2%, 7.7% and 3.2% respectively. Shares of Disney, which are trading at a nine-year low, have fallen 3% over the same period, while Charter stock has tumbled 5%.

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