Some media executives have long warned of the day when a real war would break out between Big Cable and Hollywood – and change the future of pay TV as we know it.
On Friday, after years of escalating tensions, the battle between the second-largest U.S. cable company Charter Communications Inc. and media giant Walt Disney Co. began at midnight when both sides were unable to reach a new, multi-year programming deal with Charter on March 14 .7 million television subscribers lost access to ABC, ESPN and other Disney-owned channels, including coverage of this weekend’s US Open tennis tournament.
Neither side seems willing to give in. ESPN used social media to alert charter customers that the channel was being removed from their lineup and offered a link to more information. Charter, which offers TV services under the Spectrum brand in cities including New York and Los Angeles, sent out its own notices to customers and held an impromptu call with investors early Friday.
“We are on the edge of an abyss,” Chris Winfrey, Charter’s chief executive officer, said on the call. “Either we move forward with a new collaborative video model, or we move on.”
Entertainment and cable stocks plunged. Disney, whose businesses include theme parks and cruise ships, fell 2.4% as of Friday’s close in New York. Warner Bros. Discovery Inc. fell 12% and Paramount Global, the parent company of CBS, slipped 10%. Charter fell 3.6% and Comcast Corp., the No. 1 cable provider, fell 2.2%.
An estimated $4 billion in revenue, including distribution fees and advertising, is at stake for Disney, according to Bloomberg Intelligence. The broader media and pay-TV industry may have even more at stake, according to analysts at Lightshed Partners LLC, who are calling it a “watershed moment.”
Winfrey saw this coming. Seven years ago, Charter’s CEO warned of a growing consumer rebellion against rising pay-TV fees, particularly the high prices for sports that many consumers never see. According to Bloomberg Intelligence, monthly cable bills today average about $126. Winfrey called on major media companies like Disney to give Charter the ability to combine channels in a way that slows the loss of viewers to streaming.
“It’s still not easy to put together compelling small packages, and it’s not in the interest of big programmers to allow that to happen,” Winfrey said.
Financial disputes between media companies and their cable partners are nothing new, and consumers have experienced regular blackouts. DirecTV customers, for example, have been unable to watch Nexstar Media Group Inc. channels and missed programming from Fox, CBS and NBC for the past two months.
But the battle between Charter and Disney appears to be bigger. The loss of cable TV customers has accelerated in recent years, with the industry declining from a peak of over 100 million to about 70 million customers.
This has led Disney and its CEO Bob Iger to rethink the company’s long-term commitment to traditional cable and broadcast programming.
Iger made that clear at a conference of media and technology executives in Sun Valley, Idaho, in July. He said Disney is exploring ways to bypass cable providers and sell ESPN directly to consumers, possibly through a partnership. He also said traditional television networks may not be a core asset and raised the prospect of selling ABC and the company’s non-sports cable channels.
Disney has invested heavily in its own direct-to-consumer streaming services – Disney+, ESPN+ and Hulu – turning them into an alternative outlet for its extensive entertainment library.
Winfrey, who earlier in his career worked in Europe, where customers more often pay for separate sports programming packages, appears to have been preparing for a showdown with Disney. Both Charter and industry leader Comcast Corp. have recently introduced lower-cost cable TV packages that include fewer channels than standard subscriptions and are among the first in the industry to exclude Disney’s ESPN.
Starting this month, Charter will offer two tiers of TV packages. One of them is called Spectrum Select Plus and offers an extensive range of sports, including local regional sports networks. The other, called Spectrum Select Signature, excludes sports. Charter also plans to launch a streaming service for its customers that includes regional sports channels as an alternative to cable TV.
Disney is demanding an increase in the roughly $2.2 billion in subscriber fees it receives annually from Charter. Charter wants Disney to lower the minimum number of paid subscribers to offer more non-sports packages.
Charter is also calling on Disney to make streaming services like Disney+ and Hulu free to its premium cable customers, arguing that much of that content was created for traditional TV viewers, according to people familiar with the discussions who asked , not to be named. For consumers who only use Charter for internet access, the company wants to offer Disney’s streaming services through a revenue-sharing agreement.
The clock is ticking. On one hand, Disney is considering a new video strategy that could include offering ESPN through an online subscription service. It is also about a standstill in film and television production due to the strike by Hollywood actors and writers.
On the charter side, TV subscribers were unable to watch popular channels like ABC or ESPN on Friday. Football games could soon be suspended as the college and NFL seasons begin.
“The stark reality is that the media and distribution landscape to date has been building up over many years,” MoffettNathanson Research analyst Craig Moffett wrote in a research note. “It is becoming clearer than ever that there is no turning back. The lifeboats have already burned.”
— With assistance from Gerry Smith