Disney (DIS -0.04%) shareholders seemed to get some good news on Monday, ending a standoff with Charter Communications (CHTR -1.73%) that had led Disney to pull its programming from Charter's Spectrum cable, the nation's No. 2 cable service.
Disney shares ticked higher on the news, up 0.9% in early afternoon trading on Monday, while Charter jumped 4%.
The dispute, which lasted more than a week, spanned the opening of the college football season and centered around Charter's demand to include ad-supported versions of Disney's streaming services like Disney+, ESPN+, and Hulu as part of its cable package.
Disney had initially balked at the demands, pulling its content off of Spectrum after Charter declined to continue negotiations, but the agreement seems to have given Charter most of what it wanted and will restore Disney's ESPN, ABC, and other popular Disney channels to the 15 million Spectrum customers that had lost them.
Image source: Getty Images.
What's in the agreement
Several of Disney's streaming services will now be offered as part of Spectrum's bundled cable packages. Disney+ will be included in the Spectrum TV Select package. ESPN+ will be provided to Spectrum TV Select Plus customers, and the soon-to-come streaming version of the ESPN cable channel will be available to Spectrum cable subscribers as well.
Charter also said it would offer Disney's streaming services to its broadband-only customers.
In a joint statement, Disney CEO Bob Iger and Charter CEO Chris Winfrey said,
Our collective goal has always been to build an innovative model for the future. This deal recognizes both the continued value of linear television and the growing popularity of streaming services, while addressing the evolving needs of our consumers.
The financial arrangements in the deal are unclear, but Charter has agreed to pay higher carriage rates to Disney. Charter will also no longer carry lesser-watched Disney-owned networks such as Baby TV, Disney Junior, FXM, FXX, National Geographic Wild, and others.
Presumably, Charter will capture some revenue share from Disney streaming services, either from subscriptions, advertising, or both, though the press release did not discuss those terms.
When direct-to-consumer isn't so direct
Cable providers like Charter have their backs up against a wall as cord-cutting has accelerated with nearly every major legacy media company launching its own streaming service.
With audiences dwindling, the move to include streaming services on its platform is a smart one for Charter and a reminder that cable providers still have leverage with networks and audiences as they have millions of subscribers.
Cable providers also know they can negotiate with Disney and other legacy media companies because cable remains a highly profitable, but shrinking, channel for Disney, while Disney and its peers are still burning cash on streaming.
In its most recent quarter, Disney brought in $6.7 billion in revenue from linear networks, meaning broadcast and cable programming, while direct-to-consumer revenue reached $5.5 billion. However, the linear-networks segment was much more profitable, bringing in $1.9 billion in operating income, compared to a $512 million loss in direct-to-consumer.
While linear TV revenue is shrinking, down 7%, and streaming revenue was up 9%, Disney can't afford to ignore a business bringing in that much profit. That's why it had to play ball with Charter.
It's unclear how this will impact its bottom line, but it does seem to conflict with Iger's original wish that its streaming services eschew the cable companies and go directly to the consumer.
Who the real winner here is
The resolution with Charter makes it clear that cable providers aren't simply going to let go of that cash cow, and that presents yet another challenge to Disney as it attempts to build out its own profitable streaming business.
The news shows that the balance of power in the entertainment industry continues to shift toward tech companies like Netflix, Amazon, Apple, and Alphabet (through YouTube) that don't have any baggage from the legacy media industry and don't have to deal with stakeholders like Charter as they push into streaming.
ESPN, meanwhile, finds itself even more challenged as big tech companies step up to buy sports broadcasting rights that had long been the domain of ESPN. As more sports content shifts to the tech-based streamers, Disney's sports empire seems likely to lose its primacy in sports media.
For Disney, a deal with Charter is probably better than continuing the blackout, but the news is just the latest evidence that building a successful streaming business is going to be a long slog for the entertainment giant despite its attractive flywheel business model and unrivaled library of intellectual property.
