6 SEP 2023

USA: Is the Pay TV business model on the verge of collapse?

Walt Disney Co. has pulled its channels from Charter Communications’ Spectrum pay-TV service in a festering fee dispute that could portend significant changes for consumers.

6 SEP 2023

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The financial dispute between Disney and Charter Communications, one of the nation's biggest cable TV companies, shows how cord-cutting threatens to unravel the cable business permanently. Walt Disney Co. has pulled its channels, including ESPN and ABC stations, from Charter Communications’ Spectrum pay-TV service that reaches nearly 15 million subscriber homes nationwide in a festering fee dispute that could portend major changes for consumers.

If this fight isn't resolved, the entire business model for the traditional cable TV industry could be on the verge of collapsing. With the NFL season about to kick off, Disney channels, including ABC, ESPN, and FX, have been blacked out since Thursday for Charter's Spectrum nearly 15 million pay-TV customers. Charter Spectrum is the country's second-largest cable TV operator, second only to Comcast. Its footprint is heavily weighted toward Los Angeles (where it's the largest pay-TV provider, with 5 million subscribers) and New York City.

Charter told investors it needs to either rethink the cable bundle or leave that business entirely. During a morning conference call, Charter Chief Executive Christopher Winfrey told analysts that a deal must be hammered out soon, and the Burbank entertainment giant must give Charter greater leeway in how it offers Disney's channels on Spectrum. "We're either moving forward with a new collaborative video model or moving on. We're on the edge of a precipice. The video ecosystem is broken," Winfrey said.

“We’ve been in ongoing negotiations with Charter Communications for some time and have not yet agreed to a new market-based agreement,” Disney said in a statement. “As a result, their Spectrum TV subscribers no longer have access to our unrivaled portfolio of live sporting events and news coverage plus kids, family and general entertainment programming. Our linear channels and direct-to-consumer services are not one and the same, per Charter’s assertions, but rather complementary products. We continue to invest in original content that premieres exclusively on our linear networks, including live sports, news and appointment viewing programming. Likewise, on our direct-to-consumer services, we make multi-billion-dollar investments in exclusive content, which is incremental to our linear networks.”

The financial foundation of traditional entertainment companies, including Disney, is the revenue from monthly programming fees that Charter and other distributors pay to carry their channels. Charter said it had planned to pay Disney $2.2 billion for its programming this year. Disney has long used the power of its ESPN networks to secure premium rates from pay-TV providers. ESPN networks are considered “must-have” channels, so providers have grudgingly agreed to pay top dollar, an estimated $9 a month per subscriber home for the ESPN channels, to continue to carry them. Rates for most entertainment channels are less than $1 a month per home. But over the last five years, 25 million U.S. subscribers have ditched cable, representing nearly a quarter of all subscribers.

It’s unclear precisely when the matter could be resolved. Disney chief Bob Iger has been personally involved in the matter, engaging with Charter boss Chris Winfrey about how the two parties can work to resolve the matter. But when, or if, the two sides can strike an agreement is unclear. Disney is now directing people to switch to its Hulu + Live TV service as an alternative and Charter is urging its customers to sign up for FuboTV at a discounted rate, suggests that negotiations aren’t on the brink of producing a resolution. “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,” Charter said. “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.”

Moreover, today Brian Roberts, the CEO of Comcast, said he isn’t completely surprised by the ongoing cable dispute between Charter Communications and Disney. The executive addressed the ongoing story at the top of his session at the Goldman Sachs Communacopia and Technology Conference. “At some level, I guess I’m not completely surprised. When you have many distributors of the same product, you’re going to have disputes between the content and distribution. It’s not the first dispute, and probably won’t be the last dispute,” he said.