The Walt Disney Co. and Charter Communications spent the first 10 days of September locked in a staring contest. On Monday, both blinked, as the most famous company in making TV struck an awkward, mutually beneficial deal with one of the biggest companies distributing it. Now 15 million households will be able to watch Monday Night Football in peace.
Disney’s linear TV channels, including ESPN, went off the air for Charter’s Spectrum cable customers at the start of the month. The two companies had different problems, each brought on by cord-cutting. A decadelong bleed of cable subscribers has hobbled Charter because, well, it is a cable company. But it has been an existential issue for Disney, too. Having tens of millions fewer cable subscribers has meant billions of dollars less in carriage fees, a cost that Disney charges cable companies and that those telecoms pass on to us all. What cable fees Disney has still been getting, it has largely thrown into its streaming products, a move that in turn only loses many more millions of dollars for Disney and draws subscribers away from pay-TV providers like Spectrum. Everyone was losing as the companies looked out at the abyss.
But the standoff ended on Monday. Disney’s channels were on their way back to Spectrum customers’ screens a few hours before ESPN aired its first NFL game of the year, and the fees from those customers were set to flow to Disney’s bank accounts again. After days of posturing that might have been pretty serious, neither company committed to a future without the other. The fight between Disney and Charter previewed a breaking point in the way Americans consume video. The deal they announced on Monday means that they’ll walk toward the cliff together. The best hope is that they will break each other’s fall.
The press release about the agreement left out one big piece of information: the per-subscriber fee that Charter will pay Disney for each of its millions of customers. ESPN is the most expensive channel on pay TV; Disney gets just short of $10 for it, per subscriber per month, on industry average. Evaluating the whole deal is impossible without knowing who won the financial tug of war over that, and by how much. But some context clues suggest that Disney will get some increase in fees for its channels including ESPN, and in return, Charter will get a bag of goodies that make it harder for Disney’s money-losing streaming products to eat into Charter’s business.
Charter’s Spectrum cable customers will get access to an ad-supported Disney+ tier and to ESPN+, the sports streaming platform where ESPN puts a ton of games, but not usually its biggest ones. Spectrum customers will also get ESPN’s eventual standalone streaming offering, the forthcoming platform that will cost a ton of money because it will include everything that’s now on ESPN’s linear TV channels. From Charter’s perspective, those are all nice carrots to deter someone from cutting the cord altogether. Losing ESPN on linear TV, on the other hand, would’ve pushed huge numbers of subscribers out the door. Charter also preserved at least some flexibility to price Disney’s channels how it wants, in different packages, rather than Disney dictating the pricing and packaging of all its channels on cable.
For its part, Disney turns the cable-fee spigot back on, and billions of dollars can flow from it. (The most basic, roughest napkin math: 15 million Spectrum households paying $10 a month for ESPN alone means $1.8 billion a year in carriage fees for Disney.) Bob Iger was not chipper about splitting with one of the biggest pay-TV providers in the country, because those subscriber fees are still how Disney’s TV business makes money. His company just lost $512 million in one quarter on direct-to-consumer streaming, and that was actually pretty good. Disney did not want to walk away from even one big cable operator any more than that cable operator wanted to be a test case for pay TV without Disney channels. (Charter’s CEO put up a good show of being willing to try it, and maybe he will one day—but it won’t be tomorrow.)
The deal solves short-term problems for both companies. Spectrum avoids hemorrhaging more subscribers at the start of the football season, and Disney avoids cutting into the part of its TV operation that prints cash instead of incinerating it. But it doesn’t solve the long-term problems, at least not on its own. Cord-cutting has accelerated, and the days of 100 million American houses having pay-TV bundles are very likely done forever. In addition to cutting into Charter’s pool of potential subscribers, that trend will continue to lessen the number of fee-paying customers for Disney’s channels. And now, to preserve its access to Charter’s customers, Disney will let them have its streaming products for free. A Charter cable subscriber who gets ESPN’s future flagship streaming offering for free is one who won’t also pay Disney $20 or $40 or $65 per month for it (unless they get extremely confused). Disney and its peers are already subsidizing lagging streaming operations with money from their traditional businesses.
A deal like this one with Charter crystallizes Disney’s lack of confidence that streaming can stand on its own. Other pay-TV providers were watching with bated breath as Charter stepped into the arena, and they will take lessons from the outcome. Other cable behemoths’ negotiations with Disney might be complicated by the existence of their own streaming services, which are direct competitors with Disney’s. (Would Comcast ever demand that its Xfinity cable subscribers get Hulu with their subscriptions, given that Comcast owns Peacock?) But those cable companies don’t want to lose subscribers any more than Spectrum did, and Disney doesn’t want to lose the fees those customers generate. The traditional TV business is losing customers until it hits a bottom that it may take a while to find. Streaming is losing money without any end in sight. It’s ascending, but it’s still underwater. Disney and Charter avoided a breakup. Now they can set about finding a way to change math.