How The Charter-Disney Deal Is Scrambling The TV Industry

Executives and analysts across the TV streaming industry expressed relief, excitement and some dismay over the just-announced landmark deal that settles Disney’s historic standoff with cable TV provider Charter.

The deal likely sets a template for the future of the fading cable bundle, providing an approach for Charter’s industry colleagues (they’re really not competitors given the monopolies they enjoy in each service region), while putting media companies with both streaming and legacy cable and broadcast operations on notice that a new set of expectations are in place. But the ripple effects are likely to be wide across an industry already dealing with broken economic models, two grinding strikes, and other challenges.

Most Favored Nation clauses in most contracts almost guarantee that other cable providers will get the same considerations in their own rights renewal talks, said several executives at the NextTV Summit NYC on Tuesday.

Indeed, Charter CEO Chris Winfrey said as much in announcing the deal Monday: “This deal sets the framework for what should be developed throughout the entire industry.”

“I think it’s the first (such deal) of what we’re going to see,” said Evan Adlman, EVP Commercial Sales & Revenue Operations at AMC Networks
AMCX
, which operates several cable and streaming networks. “I don’t have a strong viewpoint about how it affects AMC. It will be interesting to see how this one unfolds for all of us in the industry. When I think about what we thought about the last 23 hours (since the deal was announced), we’ve asked ourselves a lot of questions. Relationships between content providers and distributors will be different than it was 20 years ago, or two years ago.”

On a monetization panel I moderated at the conference, SVP of Commercial Strategy and Analytics Tejas Shah of indie video distributor FilmRise said “the inclusion of the ad-supported versions of Disney+ and ESPN+ are what we’re thinking about the most. When we talk about monetization and streaming, I think the prevailing thesis has been trying to capture the ad budgets coming over from linear television or other digital formats. And I think this is a catalyst to really speed that up. But what does that exactly mean for the rest of the ecosystem? I’m thinking about what does that mean for going beyond the Big Five studios?”

Katy Loria, the Chief Revenue Officer of Comcast
CMCSA
-owned video ad services giant Freewheel, said the deal may be “a new prototype. We had an untenable situation that Disney’s not going to walk away from a couple of billion dollars from one distributor. For Charter to be able to carry the shows that it wants to show, for Disney to be able to retain the revenue and keep making great content, hopefully, the consumer ultimately wins.”

But regardless, Loria said, the deal represents a significant break after Charter said it no longer was going to keep paying Disney billions of dollars while Disney used those revenues to finance streaming services that compete and undermine the cable bundle. Now, Charter has ways to make money from Disney’s ad-supported streaming services, including the inevitable shift of much of ESPN’s live sports content to a streaming offering.

“I don’t know if it’s a brand new frontier, but I think it creates more opportunity,” Loria said. “There’ll be new revenue streams, or at least access in a different way to revenue streams. So we’d like to think that that’s encouraging for (Freewheel).”

Veteran broadcast and cable executive Patrick Crakes, now with Crakes Media, said the deal represents an inflection point, especially on the sports side: “I view the Charter-Disney deal as the end of the natural monopoly era. It doesn’t mean things are going away, but they’re getting a hell of a lot more complicated.”

The deal, which was substantially driven by access to ESPN’s networks, could further shift the way live sports in particular is distributed to fans, and has big implications for not just cable providers and media companies, but also the leagues and teams largely financed by fat TV contracts, Crakes said.

“The big challenge is how do you pay the teams,” Crakes said. “How do you pay the leagues? Every dollar of sports leagues depends on (cable carriage fees generated by) the natural monopolies continuing for another decade. I believe we have new models here. Sports are a great place to start. It’s super expensive. That NFL deal is all retransmission fees, all retransmission, nine years from now.”

That will require rethinking how sports is delivered to, and paid for, by fans, said Wim Sweldens, co-founder and CMO of Kiswe, which provides interactive tools to better monetize their fan bases.

“The current model is no longer sustainable,” Sweldens said. “The world is changing. the whole idea of bundling, forcing people to buy things they no longer want, is not sustainable. The MVPDs need to be paid.”

Several conference speakers suggested that sports leagues may want to take over running their video services, certainly at the local level as regional sports networks collapse left and right, rather than relying on middlemen.

“There’s been change in the ecosystem itself,” said ViewLift CEO Rick Allen, who has worked with teams such as the NHL’s Vegas Golden Knights and Washington Capitals among much else. “The (cable) operators will grind down fees, and services will attract fewer and fewer subscribers because of cord-cutters. This will have major impacts for the entire sports world, and I think also abroad.”

Figuring out who won the Charter-Disney negotiation is a bit tricky. Disney will receive more money, but less than it was demanding from Charter when talks broke down two weeks ago.

Needham & Co. senior analyst Laura Martin added up the deal’s components in a research note late Monday that suggested it adds “about $420 million to DIS’s revs in 2024, a 0.04% revenue lift. In total, CHTR will pay DIS $2.6 billion in 2024, plus DIS earns about $1 billion of ad revs from CHTR’s customers, implying that CHTR will represent nearly 4% of DIS’s total revs of $94 billion in 2024, by our estimate.”

That $1 billion in extra advertising revenue was particularly notable to many executives, a benefit that should only grow with Charter now selling ad-supported tiers of Disney+ and ESPN+ to its 30 million customers on cable and broadband. Increased reach for the ad-supported versions of those streaming services is vital for revenue growth.

Charter got another big win in no longer having to take on, and pay for, eight lesser Disney cable networks with much lower viewership while providing what the two companies called in a joint release “a more curated lineup of 19 networks.”

Analysts estimated that curation will save Charter $300 million a year in carriage fees for the excluded networks. But it almost certainly signs a death warrant for the networks, which include Baby TV, Disney Junior, Disney XD, Freeform, FXM, FXX, Nat Geo Wild and Nat Geo Mundo.

“We’re dead,” said one publicist whose company represents one of the Disney channels left off the “lifeboat” that continued Charter carriage represents. While his company has plenty of other big clients, the same can’t be said for the people working at Disney’s eight endangered channels and their various program suppliers and contractors.

During the cable bundle’s heyday the past 30 years, media companies carved off such lesser channels from their name-brand networks as a way to milk further carriage fees from cable providers. If providers wanted the must-have networks, they had to take the spinoffs too. Such stuffing the set-top box provided a way to harvest more fees and a bit of ad revenue, for little additional marginal cost. But it also helped to send cable subscriber fees to unsustainable heights, fueling the cord-cutting now killing the industry.

Now the stuffing strategy is likely in tatters. Cable providers will be able to aggressively shrink the package of networks they provide customers, saving some fees without losing the big-name channels that receive most viewership.

“While perhaps not the end of the Pay TV world as we know it, we very much can look back at this Disney/Charter deal as an opening salvo of a broader re-bundling and a step in giving customers smaller linear bundles with increased SVOD functionality,” wrote MoffettNathanson analyst Michael Nathanson in a Monday note. “Given this framework, by almost any means, this agreement is better than most of the alternatives we had considered.”

That’s bad news for those lesser networks across the industry, Nathanson wrote: “What is clear to us is other longer-tail cable networks should face even more pressure going forward.”

For all the potential ramifications of the Charter-Disney agreement, that doesn’t mean spirited deal-making won’t continue, as the rules of engagement continue to shift between cable, streaming platform, and broadband operators on one side and broadcast, cable and streaming media companies on the other.

“Negotiations will continue to be negotiations,” said Vizio executive Seta Goldstein. “I’d love for it to be ‘Just send over the DocuSign (to sign the finished deal),’ but that’s not how it is.”