What the Disney-Charter Deal Means for Future Carriage Negotiations

Charter and Disney’s heated carriage dispute reached a resolution just in time for Monday Night Football.

It could have gotten ugly if fans missed the Buffalo Bills taking on the New York Jets on ABC and ESPN, with Charter CEO Chris Winfrey saying he was prepared to move on if Disney wouldn’t play ball. But this is merely the first quarter in an increasingly rough game that will play out in the months and years to come, as media companies and their cable and satellite contributors grapple with the slow unwinding of a once-lucrative business.

The deal the companies struck would help “stabilize the linear video ecosystem and provide a glide path that gets us to the new direct to consumer environment,” Charter chief financial officer Jessica Fischer told an investor conference hosted by Bank of America Wednesday.

“I think it’s a win for everyone,” Fischer added. “We’re really excited to be moving forward.”

But Wall Street analysts were quick to debate that notion, with some saying Disney appeared to come out ahead.

The ‘next step’ for pay TV

The basic structure of the deal involves Charter including Disney streaming services in some of its Spectrum cable packages while dropping some of Disney’s second-tier cable networks. It mostly preserves the lucrative affiliate fees Disney earns from cable companies carrying its networks, while offering Disney some upside in digital-video ad revenue and upselling other streaming services like Hulu, which Disney CEO Bob Iger has been pushing to combine with Disney+.

It’s a notable reversal of the trend toward media companies leveraging their size to demand carriage of an ever-wider range of channels. But it also sets up the possibility of rebundling a range of streaming services into a single pay-TV subscription. Charter will pay a “robust wholesale rate” for Disney+, a Disney spokesperson said.

Deutsche Bank analysts Bryan Kraft and Ben Soff said the agreement, which they called a “logical next step in the evolution of the pay-TV/DTC ecosystem,” was a more positive outcome for Disney.

“We see minimal risk of revenue cannibalization from down-tiering, but we see upside to subscriber volumes,” the pair wrote in a research note.

MoffetNathanson analysts said the deal would provide an “immediate boost” to Disney’s streaming ad business, with an estimated 9 million t0 10 million Spectrum subscribers on the TV Select tier which will soon include Disney+. As of June, Disney’s ad tier had 3.3 million subscribers.

Macquarie Research analyst Tim Nollen estimated that Disney stands to gain between $400 million and $500 million in additional revenue. He added that ESPN will see a rise in its viewer base and that the new ESPN direct-to-consumer service will have a “built-in starting point” on subscribers when it launches.

The deal also presents an opportunity to upsell Hulu to Charter subscribers with Disney+, Disney’s spokesperson said.

While Disney is “giving up full control on pricing” under Charter’s model, LightShed Partners analyst Rich Greenfield argued the wholesale arrangement means Disney will ultimately gain more subscribers with lower churn rates and marketing costs. Disney also gets more streaming ad inventory to sell, he noted.

“This appears to be a very logical way for Disney to eliminate streaming losses and at least attempt to mitigate the cord-cutting pressure,” he wrote in a research note.

The game to come

All eyes will be on the next round of negotiations between content producers and distributors, Third Bridge analyst Jamie Lumley told TheWrap.

“Cord-cutting is not going away and this will likely increase the willingness of cable companies to play hardball as they look to maintain the cash flow from their video businesses,” he added.

While Spectrum will continue to carry ABC-owned stations, Disney Channel, FX, the Nat Geo Channel and the full suite of ESPN networks, Charter will drop Baby TV, Disney Junior, Disney XD, Freeform, FXM, FXX, Nat Geo Wild and Nat Geo Mundo from its Spectrum TV video packages. That’s a significant narrowing of Disney’s cable portfolio.

A Disney spokesperson said that the company “remains committed” to those networks, noting they will still be distributed by other partners who represent over 80% of their reach. Future renewals will be approached on a “case-by-case basis,” the spokesperson said.

MoffettNathanson estimated in a research note that the channel removals from Spectrum will cost Disney “in the range of $300 million per year in high-margin lost affiliate fees.” The firm’s analysts expect other distributors to factor the Charter agreement into their own negotiations and that the move will set a precedent for “similar surgical culling in all future renegotiations across the industry.”

Wells Fargo analyst Steve Cahall believes that Warner Bros. Discovery and Paramount have “sizeable exposure,” noting they have the most linear networks — 27 and 26, respectively.

“We think half of their networks could be subject to drops,” Cahall wrote in a research note. Warner Bros. Discovery has some $1.3 billion in revenue at risk, while Paramount could lose as much s $860 million.

Those with the least risk would be Comcast and Fox, he added. Comcast has the advantage of being on both sides of the cable table, while Fox has exclusive live sports and news.

The impact to other media companies is not “clear-cut,” MoffettNathanson analysts wrote, citing Warner’s unique arrangements related to HBO and Paramount having Paramount+ with Showtime as a new tool in future negotiations.

“What is clear to us is other longer-tail cable networks should face even more pressure going forward,” the analysts added. “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 rebundling.”

Charter’s Fischer said the deal would allow the company to “moderate the growth in content costs for consumers” in their carriage negotiations moving forward.

But Greenfield argued that Charter will likely have to raise rates to offset the increased cost of the Disney deal, resulting in a “more expensive bundle but a more valuable multichannel video package” over the next few years.

“It is not entirely clear to us that this meaningfully lowers the pace of cord-cutting,” he continued. “Ultimately, unless you are a diehard sports fan, cutting the cord is still likely a better option than taking the new bundle with streaming included.”

While it wasn’t as revolutionary a deal as Charter seemed poised to hold out for, it does move the sticks down the field toward a fully streaming future, Nollen said.

“We’d call it a first down for both companies, but well short of a touchdown,” he added. “At least it does set a higher bar for the next carriage renewal to come.”

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