The standoff between Walt Disney (DIS -0.04%) and cable company Charter Communications (CHTR -1.73%) is finally over! On Monday, the two organizations came to a pricing agreement that both could live with, restoring Spectrum Cable's programming from Disney's television network ABC, The Disney Channel, and perhaps most notably, from sports-focused ESPN.
Usually, when Disney gets into a rumble with a pay-TV provider that makes it to the programming blackout stage, the eventual deal that ends it firmly favors the House of Mouse. Not so, this time. Charter got everything it wanted for its Spectrum cable service, and Disney made several surprising concessions.
The implications of those concessions make Disney stock look like a tougher one to own from here on out.
Details of the deal
On the off chance you're reading this and weren't aware, two weekends ago, Disney stopped supplying its programming to Charter's Spectrum cable customers. The move impacted several cable channels, but most notably, it removed ESPN, ABC, and The Disney Channel from Spectrum's lineup.
Disney, of course, blamed Charter for making this year's Labor Day weekend "a stressful one for its customers." And Charter blamed Disney for insisting on "unsustainable price hikes and forcing customers to take their products, even when they don't want or can't afford them."
The truth probably lies somewhere in the middle.
The resolution, however, appears to lopsidedly favor Charter.
How so? Charter wanted the "inclusion of [Disney's] ad-supported DTC [direct-to-consumer] apps within our packaged linear [cable] products so the customer does not have to pay twice for similar programming." It got it. Subscribers to Spectrum's TV Select package will soon be provided access to the basic ad-supported version of Disney+. Spectrum TV Select Plus customers will also be provided access to the ESPN+ streaming service.
Meanwhile, Spectrum won't be paying for or airing less-watched Disney-owned cable channels like Baby TV, Disney Junior, Disney XD, Freeform, FXM, FXX, Nat Geo Wild, and Nat Geo Mundo.
Perhaps most notably, Monday's joint press release notes: "The ESPN flagship direct-to-consumer service will be made available to Spectrum TV Select subscribers when it launches." The slight change in wording -- from "provided" to "made available" – could imply this streaming service will be purchased rather than provided as part of a cable package. More importantly, it confirms that the ESPN channel will eventually be removed from most of Spectrum's cable plans once it finally goes live and becomes a strictly streaming product.
Charter is also being allowed to promote Disney's streaming services like Disney+, Hulu, and ESPN+ to its non-cable, broadband-only customers. Although its retail prices for these platforms will merely match those of other promoters, Charter will still earn some money for selling these DTC services ... which are in some regards competing with Spectrum's cable services.
Something is better than nothing ... probably ... maybe
At a passing glance, the terms of the agreement don't look all that remarkable. Take a closer look, though. They really are.
Consider the addition of Disney+ to Spectrum's relatively low-tier TV Select package as an example.
This had been a point of contention. Charter argued that much of the same programming available via The Disney Channel could also be viewed through Disney+, prodding customers to view the two venues as an either/or matter. Now, these customers can enjoy any overlapping programming plus non-overlapping content at no additional cost.
Disney, of course, doesn't entirely mind giving away what it's selling to other consumers, since these are viewers that might not have otherwise signed up for Disney+. The undisclosed details of the newly reached agreement may even include some degree of compensation from Charter anyway. Either way, Disney will now be monetizing new Disney+ customers via the commercials appearing within its ad-supported streaming programming.
Charter doesn't mind this either, of course, because the inclusion of Disney+ to Spectrum's cable plans ultimately adds value to them.
The addition of ESPN+ to Spectrum's TV Select Plus plan isn't quite as problematic, in that the most important sports programming airing on the ESPN cable channel was never also made available to ESPN+ subscribers, and vice versa. Nevertheless, Disney is now giving away sports programming that it has been selling through a stand-alone streaming app.
It's also telling that Disney is now letting Charter promote its flagship streaming platforms directly to Charter's non-cable customers rather than working to win these would-be customers over on its own. It's a hint that the media giant recognizes it needs help if it wants to continue growing its DTC user base on its own.
In this vein, note that Disney+ actually posted a net loss of U.S. subscribers last quarter, and the subscriber count for ESPN+ dropped marginally too. For that matter, Disney's total streaming headcount has been stagnant to outright weak in recent quarters.
Data source: Walt Disney. Chart by author. All figures are in millions.
Connecting the dots
For investors, there are three key takeaways from the Charter/Disney deal.
1. Now that Charter has gotten a honey of a deal from Disney, look for other cable powerhouses to ask for -- and receive -- similar ones. This will help Disney bolster its streaming headcount. But it remains to be seen how much it will boost its streaming revenue.
See, we don't know how much (if anything) Disney is receiving from Charter for adding streaming services to its cable packages. It's not a stretch to suggest, however, that Disney's primary goal is to monetize these customers via ads rather than with subscription fees.
2. Disney's cable TV arm is still on the defensive, as the cord-cutting trend is still going strong. Although most cable companies' subscription packages are now likely to be sweetened with a couple of new ad-supported streaming services from Disney, don't look for this to completely stem the ongoing contraction of the U.S. cable TV market. Another 1.7 million paying customers cut the cord last quarter, matching the pace of customer attrition seen since 2018.
And that's a problem.
As I explained in an article last week, Disney's cable TV revenue has been stagnant since 2019, while its operating income has been shrinking since 2020.
Data source: Walt Disney. Chart by author. All figures are in millions of dollars.
This new deal with Charter -- and the deals it will eventually strike with other cable companies -- might slow the cord-cutting trend, but they are unlikely to outright stop the ongoing demise of the cable industry that is ultimately responsible for Disney's linear TV headwind.
3. The removal of channels like Baby TV, Disney Junior, Freeform, FXM, FXX, and Nat Geo Wild from Spectrum's lineup likely marks the beginning of an unbundling movement. One of the long-standing complaints the cable industry had about Disney was that it strong-armed cable companies into making subscribers purchase all of its channels (as Charter put it) "even when they don't want or can't afford them." Disney's decision to allow Spectrum to drop some of its lower-draw channels -- while not a major financial blow -- suggests the company knows its all-or-nothing pricing approach is no longer tenable. The intended creation of a stand-alone streaming version of ESPN, of course, underscores the idea that cable is moving toward becoming an a la carte kind of business.
Then there's the overarching, bigger-picture message quietly buried in the details of the new Charter/Disney deal. That is, it hints that Disney's negotiating power is waning, perhaps because the marketability of its television-based entertainment is waning.
That certainly makes Disney stock a tougher one to own here ... at least until investors can determine how much actual revenue, operating profit, and growth all of these concessions will end up costing the company.
