Disney-Charter Deal: Wall Street Dissects Wins, Losses and Impact on Disney+, ESPN and Pay TV

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Two industry giants collided in showdown that led to a blackout for millions of pay TV customers — but then still managed to strike a deal. With the Walt Disney Co. and Charter Communications unveiling a new carriage agreement on Monday, both sides could argue success. But Disney executives also acknowledged that the entertainment powerhouse had to give and take to reach the new pact.

Overnight, Wall Street experts started sharing their analysis of where Disney and Charter won, and lost, in the new deal. Here is a closer look at some of their thoughts.

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Macquarie analyst Tim Nollen, who has a “neutral” rating on Disney shares with a $94 price target: “a first down for both companies.” Nollen, like many of his peers, expects this arrangement to affect future carriage deals for Disney and other entertainment giants. “In the end this wasn’t as revolutionary a deal as Charter seemed poised to hold out for, but it does move the sticks down the field toward a fully streaming future,” he argued in his report, suggesting that both companies can walk away feeling good about themselves. “This agreement advances hybrid linear/direct-to-consumer bundles that better match customer demands, but doesn’t upend the ecosystem.”

Looking at key wins, the expert assessed what’s in it for Disney in this deal. “While it may at first seem like Charter had its way, this settlement has several positives for Disney,” Nollen wrote. “On top of the increased linear bundle price, Disney now gains new distribution of Disney+ with ads to a majority of the 14 million-plus Charter pay TV subscribers — so assuming this means about 12 million additional subs, Disney stands to gain additional revenue of around $400-500 million annually, plus it keeps 100 percent of the advertising sales.”

ESPN will also see a gain in its viewer base. “Even if that means no sub revenue, it gains more eyeballs to serve ads to,” Nollen explained. And the upcoming new ESPN streaming service will have “a built-in starting point on subs from Charter when it launches,” with Disney benefiting from Charter marketing.

What’s in the deal for Charter? Its Spectrum Select pay TV customers will now have access to the Disney+ basic ad tier plan, “for which Disney receives a wholesale price from Charter (roughly half the retail rate of $7.99), and Spectrum TV Select Plus subscribers will now get ESPN+ in their bundle; Charter will not pay Disney for this service,” the Macquarie analyst wrote. And “eight long-tail networks [are] now removed,” he noted. “Charter does maintain some flexibility in its video offerings, meaning it may not have the same prior minimum penetration thresholds, so won’t have to force channels onto users who don’t want them.”

The expert’s takeaway: “Put together we’d consider this a win for Charter, saving a bit on some unwanted linear networks, and avoiding extra payments for Disney+.”

Guggenheim Securities analyst Michael Morris, who has a “buy” rating and $125 stock price target on Disney: the deal “positions both … to drive value amid the shift toward streaming.” In a report, Morris argued that the new carriage deal should have “an overall positive result across Disney’s total company economics” and “reflects a trade-off from linear economics, but positions both Disney and Charter to drive value amid the shift toward streaming in a digital future.”

One example of this trade-off: Charter will no longer carry eight Disney networks, including Disney Junior, Freeform, FXM, FXX and Nat Geo Wild. Morris estimated, based on SNL Kagan data, that these networks combined represent around 11 percent of Disney’s affiliate revenue per subscriber fees. And he highlighted that the news will likely raise questions about the future of these channels. “We expect that Disney will reevaluate these networks and the amount spent to operate them as other distribution agreements come up,” Morris explained.

The Guggenheim expert also dissected the wholesale arrangement under which Charter will offer Disney’s streaming services, including the Disney Bundle, to all its broadband customers at retail rates. In addition, the Disney+ Basic advertising-supported service will be provided to subscribers of Charter’s Spectrum TV Select pay-TV package with the ESPN flagship streaming service to be made available upon launch, while ESPN+ will be provided to Spectrum TV Select Plus subscribers. “We believe that this new agreement reflects the value of these direct-to-consumer (DTC) services in this wholesale arrangement, with Disney taking a lower wholesale subscription rate for Disney+ but retaining 100 percent of the advertising revenue for the Disney+ and ESPN+ subscribers,” Morris argued.

MoffettNathanson analysts Michael Nathanson and Robert Fishman, who have an “outperform” rating and $115 stock price target on Disney: “Who blinked? … It depends on which part of the deal you want to focus on.”

The team analyzed the financials behind the carriage pact. “Depending on the discount to the retail rate, we should see some revenue per user impact from the addition of these lower-priced subscribers once the deal kicks in,” they explained. “At an estimated 9-10 million Spectrum subscribers on the TV Select tier, adding these subscribers to the Disney+ ad tier should provide an immediate boost in helping Disney grow their DTC advertising business, and we would expect some cannibalization from existing Spectrum subscribers that spin down for free to Disney+.”

For Charter, possibly “the biggest win” under the deal is that ESPN+ will be provided to Spectrum TV Select Plus subscribers, while the ESPN flagship streaming service will be made available to Spectrum TV Select subscribers when it launches, the MoffettNathanson analysts suggested. But they also highlighted that this was “at the same time likely something Disney knew was inevitable as part of future affiliate deals.”

Given that Disney has been “much more vocal on the inevitability of taking its ESPN flagship over-the-top, we think including ESPN+ in all new deals will likely be a central deal point for future renewals,” Nathanson and Fishman wrote. “Having a template with ESPN+ bundled together with ESPN, Disney should be able to have more leeway on putting more of its premium sports rights on ESPN+ going forward and avoid the perception of cheating its linear partners.”

With Charter committing to using its distribution capabilities to offer Disney’s streaming services to all its customers, including its big broadband-only user base, for purchase at retail rates, the analysts see a natural next step taken in the cooperation between content and distribution giants. “We believe this will help formalize the relationship Disney (along with most other media companies) have with distributors to sell its DTC services across its footprint,” they wrote, adding: “We would expect Charter to receive a cut of these new sign-ups.”

The MoffettNathanson analysts also highlighted Charter’s success in getting its pay-TV packages not to have to carry various Disney networks anymore. “Without knowing the specifics of the deal, it is hard to say whether price increases Disney won for its remaining networks will be enough to fully offset this loss, pegging this as a win for Charter,” they concluded.

Based on rough estimates of what Charter has been paying so far, the experts guessed that the removal of these networks “will cost Disney in the range of $300 million per year in high-margin lost affiliate fees.” And they emphasized: “Like much of this deal, we anticipate this setting a precedent for similar surgical culling in all future renegotiations across the industry.”

A key question they raised is whether Disney had to give up anything else as it relates to its ESPN flagship network, “by far the biggest piece of economic value the company receives today, generating the vast majority of linear networks affiliate fees.” A reduction in ESPN minimum guarantees would likely trigger changes of deals with other distributors “that would be a much more significant financial impact to the company,” Nathanson and Fishman wrote. With ESPN chair Jimmy Pitaro telling The Hollywood Reporter that “we secured commitments that were very strong in terms of rates and minimum penetration,” it sounded like Disney had gotten what it needed on that front.

“So ultimately who won these very visible negotiations?” the MoffettNathanson analysts asked. “If the framework to make the call is an evolution of prior deals to include DTC as part of a new way to provide value to subscribers along with cutting down on long-tail cable network payments, then we can see how Charter can claim victory,” they concluded. “However, from an economic standpoint, as long as Disney gets the ‘very strong’ rate increases on its core cable networks and ABC retrans, plus the wholesale arrangement for Disney+ ad tier, we would expect the $2.2 billion Charter is set to pay Disney this year to keep going up nicely over the multiyear agreement. We would call this a win for Disney.”

UBS analyst John Hodulik, who has a “buy” rating and $122 stock price target on Disney: “greater flexibility and better content” for Charter and “net positive” for Disney as “streaming offsets linear pressure.”

For Charter, the new Disney deal means better content and greater flexibility, Hodulik wrote in his report. “Charter is dropping long-tail cable networks while still preserving the most popular linear programming and getting access to more attractive DTC content,” he explained. “We believe this will reduce linear fees but drive net upside to the total payment to Disney previously, although within historical renewal trends.” He also sees the pact allowing Charter “to offer an increasing range of video products on the low end while improving the quality of the product with a linear/streaming hybrid on the high end.”

For Disney, the agreement allows for streaming upside to offset linear pressures, Hodulik argued. “We estimate dropping of long-tail cable networks will provide a roughly 1-2 percent headwind to linear affiliate revenues, partly offset by rate increases on the remaining networks,” he wrote. “That said, downside in linear should be more than offset by the benefits in DTC, including Disney receiving a wholesale rate for the majority of Charter’s 15 million video subscribers now receiving access to Disney+; Charter promoting Disney’s DTC services to its broadband-only customers; and potentially greater advertising revenues.”

Hodulik also warned of the impact on the broader entertainment industry. “We believe dropping the long-tail entertainment networks and Charter’s tougher stance on the inclusion of DTC apps, especially where the content is the same, could create more difficult negotiations for other media networks (Warner Bros. Discovery, Paramount Global, AMC Networks),” he concluded. “Charter’s ability to continue offering more flexible packaging while including DTC apps could help the pace of cord cutting (but lowers the ability for media nets to ‘double-dip’ on DTC and linear revenue streams).”

Bank of America analyst Jessica Reif Ehrlich, who has a “buy” rating on Disney with a $135 price objective, wrote: “live to fight another day.”

For Disney, the expert sees one key benefit in the deal helping to drive the Disney+ ad-supported streaming service’s growth. “Disney+ is in the very early days on their ad-supported streaming launch, so there is limited subscriber overlap within both customer bases,” she explained. “Therefore, this wholesale agreement with Charter can be an effective way to scale Disney+ distribution. Disney will receive wholesale payments from Charter (with built-in escalators) but will retain all of the advertising revenue. Net net, we expect this deal would be additive to total DTC revenue.”

Reif Ehrlich concluded: “We view this deal as better for the broader media universe than market expectations. There were concerns about the industry’s ability to extract additional affiliate rate increases and changes to minimum penetration rates.”

She also noted that shares of both companies, along with other media and entertainment stocks, “outperformed” following the deal news. “Simply put, this agreement (at least for now), removes the worst-case scenario from the table — a potential dramatic decline in the linear subscriber universe that would also have had a significant earnings impact on the broader ecosystem,” Reif Ehrlich explained. “However, we do not expect this new agreement ultimately to change the current trajectory of the linear ecosystem, which continues to face secular challenges.”

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