After being absent for just one day, cable TV channels managed by Walt Disney (DIS -1.83%) are available again at YouTube TV, owned by Alphabet (GOOG -0.19%) (GOOG -0.19%). The two companies came to a carriage fee both could live with on Sunday, after channels including Disney's ESPN, The Disney Channel, and broadcast network ABC were removed from YouTube TV's lineup early Saturday.
It's a story that cable customers and investors have seen play out plenty of times now, always with the same ending. One of these days, however, the ending is going to change. Eventually, a cable television platform is going to be satisfied to simply a offer slimmer, cheaper cable package that doesn't include Disney's content.
And, that time may be coming sooner rather than later.
An all-too-familiar chorus
If the saga seems familiar, there's a reason. AT&T's (T 0.81%) DirecTV and streaming cable platform AT&T Now cautioned their customers in September 2019 that they could be losing Disney's cable content if a distribution agreement couldn't be made. Altice (ATUS) warned of the same back in 2017. Dish Network did the same dance back in 2010, and then again in 2013. In fact, it's not a stretch to say these carriage fee standoffs are reliably recurring, each with the same result -- an agreement that quickly restores Disney's programming to a cable company's lineup.
The environment is changing, though. Chief among these changes is the ongoing slow implosion of the cable television business. In the U.S., cable TV's customer count of around 100.5 million households as recently as 2014 has since been whittled down to 74.0 million -- a pace that hasn't slowed and won't likely slow anytime soon.
Yes, you can blame the advent of streaming alternatives like Netflix (NFLX 2.50%) and Disney's Hulu and Disney+. As it turns out, people don't need quite as much live cable TV as once suspected.
There's another more nuanced change in place, however, that's a bigger potential problem for cable TV content providers like Disney. Cable companies have lost interest in fighting and losing an expensive battle. They'd rather turn a profit on their cable businesses, even if that means shrinking their top-line revenues.
Take comments made by Comcast (CMCSA -0.14%) cable chief Dave Watson back in early 2019, for instance. He plainly stated in that year's third-quarter conference call that Comcast's Xfinity cable operation is "not chasing unprofitable subs" ... a sentiment CFO Mike Cavanagh reiterated early last year.
And it's not just Comcast, either. AT&T's now-retired CEO Randall Stephenson acknowledged all the way back in 2019 -- before divesting a big piece of DirecTV -- that his company was serving many low-revenue customers despite not having "any line of sight to getting them to a profitable level." Ergo, DirecTV may as well move forward with price increases that would cause these customers to cancel their subscription (which the company did).
This story, though, is near a tipping point if it's not there already.
Pricing itself right out of the market
We don't know exactly how much cable TV companies are paying Walt Disney for the rights to air its content. But, S&P Global's market research arm Kagan estimates that Disney charges providers $7.64 per month per cable subscriber just to offer ESPN. For perspective, the second-most expensive sports channel is likely to be TNT -- which isn't a dedicated sports channel -- and it only costs carriers an estimated $2.20 per month. The NFL Network's monthly carriage fee is reportedly only $1.79 per month. To offer all of Disney's content would cost a cable company around an estimated $16 per month, per cable subscriber, lining up with the $15 monthly price reduction that YouTube was planning if Disney's content wasn't reinstated for YouTube TV subscribers.
The math, however, still doesn't make long-term sense.
The cost of carrying ESPN continues to rise because Disney needs to offset the impact of a shrinking cable customer base. Cable companies are upping their prices, too, for the same reason. There comes a point, however, when the cost of cable or just the cost of carrying ESPN becomes too great for the remaining paying customers to bear.
We're likely near that point, where cable platforms just decide to remove ESPN and other Disney content for good. After all, cable customers are canceling their service in droves anyway, despite the industry's best efforts to give them the programming they want at a price they can afford.
Sooner or later, and sooner rather than later
The argument against this premise is obvious -- YouTube clearly struck a deal with Disney.
Keep this chapter of the story in its proper context, though. Alphabet's interested in keeping its nascent YouTube TV endeavor afloat, so much so that for the time being it may be willing to operate it at a loss. YouTube TV needs ESPN more than ESPN needs YouTube TV.
That's not necessarily the case for bigger and older cable names like Comcast's Xfinity or Altice, however, the latter of which only offers cable, broadband, and phone service. Comcast is more diversified, owning Universal as well as NBC. Even so, cable television still accounts for about one-fifth of the company's top line. Although that proportion is shrinking, there's little interest from management in letting it bleed the bottom line. Indeed, Comcast is already struggling due to the rise of Disney+ and Hulu. The last thing it wants to do is subsidize its competition -- as long as it doesn't have to.
For investors, just consider what Disney seemingly hasn't accepted yet: Plenty of cable companies are reaching the point where they'd be better off breaking up their cable plans into more of an a la carte menu, even if that means sans Disney. Once one cable name does it, it becomes easier for the rest to do the same.