If you're a Spectrum cable customer, then you've likely noticed a few channels are missing from your cable lineup. Walt Disney (DIS -0.04%) stopped delivering ESPN, The Disney Channel, and ABC programming to Spectrum subscribers on Friday, as it was unable to reach acceptable pricing terms with Spectrum parent Charter Communications (CHTR -1.73%).
Such blackouts are nothing new, of course. Disney stopped feeding content to Alphabet's nascent streaming-cable platform YouTube TV in late 2021 and did the same again in October 2022 with Dish Network. These blackouts usually end within a few days, with both parties coming to an accord after some predictable and well-publicized jawboning.
Yet this particular impasse is different. Charter's CEO Chris Winfrey bluntly explains, "We've reached the point of indifference" as to whether it continues carrying Disney's content.
The funny thing is, for the first time ever it may actually be true.
Also for the first time ever, Disney isn't holding all the cards.
The rhetoric has moved beyond predictable to concerning
At first blush, none of the rhetoric seems out of the ordinary. Charter says it negotiated in good faith, planning to pay Disney more than $2.2 billion this year to offer Disney programming to its cable customers. Disney says Charter is still undervaluing its network broadcast and cable content. The truth is probably somewhere in the middle.
There is some new verbiage being tossed about, however, that raises eyebrows. For instance, Winfrey also stated in his comment on the matter, "We are either moving forward together with a collaborative business model, or we're moving on."
What does that mean, exactly? He didn't say. It sounds like, however, Charter's ready to slim down its cable plans without ABC, ESPN, and other Disney-provided content included.
Walt Disney itself is throwing out some new suggestions, too. Namely, its answer to Charter's response reads more like a sales pitch for its own streaming-cable service Hulu+Live than it does an assurance to any cable customers missing out on Disney programming. The public statement's parting line explains, "Despite the ongoing dispute, consumers have many other choices -- such as Hulu + Live TV -- that allow them to enjoy the great programming for which Disney Entertainment is known," echoing a message delivered several times before in the same response.
And perhaps that's one of the end goals. After all, following several quarters of slowing, Hulu+Live's subscriber base once again contracted for a couple of consecutive quarters as of the quarter ending in early July.
Data source: Walt Disney. Chart by author. All figures are in millions.
More than anything, though, investors need to understand that Disney's hardball approach may ultimately indicate clear weakness from its linear (cable) TV arm that the company's trying to offset.
Not a bet Walt Disney can afford to lose
It's not a premise pulled out of a hat -- the numbers are there if you're willing to do enough digging. Disney's linear TV revenue has been more down than up since 2021, with its cable profits actually peaking in mid-2020 when the COVID-19 pandemic had much of the world locked down at home. It's been steadily inching lower ever since, even though worldwide advertising spending has been steadily trending higher that whole time.
Data source: Walt Disney. Chart by author. All figures are in millions.
The cause? Fewer people are watching cable. Charter says the United States' linear cable television business has shed nearly 25 million paying customers in the past five years alone. No degree of carriage fee increase -- the amount of money a cable company pays a TV network or cable channel for access to its programming -- could feasibly and sustainably offset that degree of customer attrition. Disney is trying to do so anyway, demanding more money than cable companies can afford to pay.
Now Charter isn't (or at least doesn't appear to be) interested in doing so any longer. In addition to his "moving on" comment, Charter's CEO is also now mulling a "pivot to other models to drive value for our connectivity relationships."
Again, he didn't detail what that means; it may be too soon to say. If Disney's plan was to bluff Charter into keeping Disney's struggling linear cable business afloat for a few more years, though, the media giant's gamble could soon blow up in its face. Disney now needs Charter as least as much as Charter needs Disney, if not more so. Charter still serves 14.7 million cable customers, which is about 20% of the nation's cable TV market according to numbers from telco market research outfit Leichtman Research Group.
Investors should be wary of both
Walt Disney is as much the cause of its cable operation's demise as it is a victim. With 105.7 million subscribers (international plus domestic), Disney+ is the world's single most popular streaming platform. Hulu's no slouch, either. Meanwhile, although it's not even close to being a full replacement for cable TV's ESPN, ESPN+ is growing a respectable subscriber base with a healthy dose of exclusive content.
Disney may want to tread lightly, however, for a couple of reasons.
One of these reasons is that Disney can't simply launch a stand-alone version of ESPN without alienating other cable companies like Comcast's Xfinity or Dish Network, who pay dearly for being able to add the popular sports channel to their lineups. Moreover, not every remaining cable customer will want to pay for a stand-alone streaming version of ESPN.
And the other reason? While Walt Disney's certainly done well with its streaming services, they're not collectively shaping up as a revenue and profit replacement for its linear/cable TV business now that consumers have so many streaming choices. Their customer growth is slowing as well, if not already falling.
Data source: Walt Disney. Chart by author. All figures are in millions.
Bottom line? Out of necessity, cable companies are finally pushing back in a way they never have before. As Winfrey put it, "We are at the edge of the precipice." This may even include outright dropping Disney content. Since cable television accounts for roughly one-third of Disney's revenue, the dynamic makes both of these stocks tough to own until it's clear how either company can handle what looks like a major sea change.
