Disney (DIS) and Charter (CHTR)’s deal that ended their historic carriage dispute did not break up the traditional cable bundle as some had anticipated. In fact, it was a win for both sides, according to Wall Street analysts.
In late August, Disney had pulled its owned and operated channels including ESPN and ABC off Charter Spectrum cable systems after the two hit a stalemate over whether Disney should give Charter subscribers free access to its ad-supported streaming services as part of the telecom giant’s cable packages.
The blackout had impacted a slew of high-profile sporting events including the US Open and arrived on the heels of the NFL’s debut — upping the pressure for both sides to make a deal.
On Monday, the companies announced they had reached an agreement to end the media blackout. As part of the deal, Charter will offer some Disney streaming services — the ad-supported version of Disney+, ESPN+, and ESPN’s yet-to-be launched direct-to-consumer offering — as part of select cable packages at no additional cost to the consumer.
“Disney and Charter finally reached a settlement that looks like a win-win for both,” Macquarie’s Tim Nollen wrote in a note on Tuesday. “In the end this wasn’t as revolutionary a deal as Charter seemed poised to hold out for, but it does move the sticks down the field toward a fully streaming future.”
MoffettNathanson analyst Michael Nathanson agreed, writing in a note released late Monday: “While perhaps not the end of the Pay TV world as we know it, we very much can look back at this Disney/Charter deal as an opening salvo of a broader re-bundling and a step in giving customers smaller linear bundles with increased streaming video-on-demand functionality.”
Charter has focused on offering more bundles amid the cord-cutting phenomenon, hence its desire to include more streaming plans in packages. On top of that, Disney plans to take ESPN fully over the top as a direct-to-consumer streaming service — another incentive for Charter to lean into streaming.
As part of the deal, the Disney+ Basic ad-supported offering will be provided to Charter customers who purchase the Spectrum TV Select package at no additional cost, “as part of a wholesale arrangement.”
Nollen said Disney stands to gain additional revenue of about $400 million to $500 million annually as a result of this arrangement, assuming the addition of roughly 12 million subscribers through Charter.
That’s welcome news for Disney as its ad-supported tier has struggled to scale, with only 3.3 million subscribers as of June, according to an estimate from MoffettNathanson.
On top of the Disney+ offering, ESPN+ will be provided to Spectrum TV Select Plus subscribers at no additional cost. The ESPN flagship direct-to-consumer service will also be made available at no extra cost to Spectrum TV Select subscribers when it launches.
“For Charter — this might be the biggest win but at the same time likely something Disney knew was inevitable as part of future affiliate deals,” Nathanson wrote.
But Nollen said it’s also a win for Disney considering ESPN+ will likewise see a rise in its viewer base — even if that means no subscriber revenue.
“The new ESPN OTT service will have a built-in starting point on subs from Charter when it launches, and Disney can benefit from Charter marketing its DTC offerings to its broadband subscriber base, which totals 28.5 million residential households,” he said.
‘Setting a precedent’
Spectrum will continue to carry the ABC Owned Television Stations, Disney Channel, FX, and the Nat Geo Channel, in addition to the full suite of ESPN networks.
In an interview with The Hollywood Reporter, ESPN Chairman Jimmy Pitaro indicated Disney was able to secure “very strong” rate increases for ESPN — a “critical” element to the deal, according to Nathanson.
“Without any real change to minimums, Disney securing ‘very strong’ rate increases at ESPN over a multi-year deal is critical to improve the trajectory of the US linear network business,” he said.
“Disney needs to see higher rate inflation to offset the acceleration in industry cord-cutting now reaching about 7%, without any real sign of slowing down. Importantly, the extent of the higher ESPN rates will be a big driver in what future sports rights deals ESPN/Disney is able or willing to afford,” the analyst continued.
Still, Disney did give up a host of networks in exchange for the strong rates. Networks that will no longer be included in Spectrum TV video packages are Baby TV, Disney Junior, Disney XD, Freeform, FXM, FXX, Nat Geo Wild, and Nat Geo Mundo.
“Without knowing the specifics of the deal, it is hard to say whether price increases Disney won for its remaining networks will be enough to fully offset this loss, pegging this as a win for Charter,” Nathanson noted. “Based on rough estimates of what Charter had been paying for coverage, we believe the removal of these networks will cost Disney in the range of $300 million per year in high margin lost affiliate fees.”
“Like much of this deal, we anticipate this setting a precedent for similar surgical culling in all future renegotiations across the industry,” he added.
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