The Charter Communications leadership team during a Sept. 1 investor meeting laid out the company’s vision for a cable-TV business model it they said is in a serious state of disrepair.
The presentation was framed by the company’s ongoing carriage fee dispute with the Walt Disney Co., and comes the day after Disney pulled its programming from Charter Communications’ Spectrum cable packages as negotiations hit an impasse.
“We’ve generally been able to manage relationships with our programming partners behind the scenes,” said Charter president and CEO Chris Winfrey. “We respect the quality product that Disney produces and its management team, but the video ecosystem is broken.”
In its presentation notes, Charter expressed disappointment that Disney has “insisted on unsustainable price hikes and forcing customers to take their products, even when they don’t want or can’t afford them. They also want to require customers to pay twice to get content apps with the linear video they have already paid for.”
“This is not a typical carriage dispute,” Winfrey said. “It’s significant for Charter, and we think it’s even more significant to programmers in the broader video ecosystem.”
The CEO indicted that Charter and Disney together are in a unique position to lead the way.
According to the presentation, Disney’s cable portfolio has seen significant viewership declines across sports, general entertainment and children’s programming over the past four years, as Disney has focused on growing SVOD substitutes such as Disney+. According to Charter’s leadership team, “as we entered negotiations, The Walt Disney Co. proposed a long-term deal that continues to ignore the realities of a shifting marketplace.
They said Disney wanted higher license fees, less packaging flexibility, and for Charter to pay for customers that do not receive its services. For 2023, Charter had expected to pay Disney more than $2.2 billion for carriage rights, “not including the impact of advertising on either party.”
“We’re on the edge of a precipice,” Winfrey said, echoing a quote Bob Iger made a year ago before returning as Disney CEO. “We’re either moving forward with a new collaborative video model, or we’re moving on.”
Winfrey summarized the tug-of-war between MVPD (multichannel video programming distributors, or traditional cable companies), and SVOD (streaming services, including studio direct-to-consumer options). As the proliferation of streaming services devalued content and cannibalized MVPD services, content providers continued to increase fees to linear services in order to finance their direct-to-consumer efforts, while enforcing carriage restrictions requiring cable providers to carry lesser-watched channels alongside the popular ones, ultimately leading to higher cable bills for customers. After years of growing content creation costs and billions of dollars in losses from chasing subscribers, DTC services are now turning toward raising rates, advertising, bundling options and password-sharing crackdowns, all the while “asking linear video customers to fund their mistakes.”
“Without a coherent DTC strategy and with programmers constantly chasing the winds of the capital markets, we believe the time for a more-coherent strategy is now,” Winfrey said.
Over the last five years, the linear video industry has lost nearly 25 million customers, almost 25% of total industry customers, according to Charter. On the other hand, Charter’s video customer base has declined only about 10%, according to Rich DiGeronimo, Charter’s president of product and technology, who credited Charter’s commitment to linear video, and flexibility in pricing and packaging.
“We’ve proposed a model to Disney that we believe creates better alignment for the industry and better products for customers, a model that can both stabilize linear video and create a clear growth path for direct-to-consumer video with a more customer-friendly and financially attractive end state for programmers,” Winfrey said. “Given how much of the expense is tied up in sports, Disney has to lead instead of pursuing the same playbook that drives the vicious cycle of customer declines. Ultimately Disney gave us a choice, to either carry on with the bad path for consumers, or to look to completely new video models for our customers. Because we’ve reached the point of indifference under the current industry model, we have a unique ability to stand firm for a deal where Disney and Charter cooperate for video products that are valuable and relevant to consumers.”
Charter’s team said it would accept Disney’s market rates in exchange for
- Lower penetration minimums to deliver package flexibility for our customers;
- Inclusion of Disney’s ad-supported DTC apps within Charter’s packaged linear products so the customer does not have to pay twice for similar programming;
- Charter’s commitment to market Disney’s DTC products to its broadband-only customers.
This, according to Charter, would give customers “flexibility to choose from a variety of high-quality packages with varying content and pricing to meet their viewing and budgetary needs.”
For Disney, Charter indicated, “this model provides a glidepath to manage its migration pace to a larger DTC business, including the ability to stem linear subscription and advertising revenue losses, reduce DTC churn, increase advertising revenue and likely drive more upgrades within their digital television apps. Ultimately, it provides a more sustainable revenue stream, in our view.”
According to the presentation, Charter “offered The Walt Disney Company a shorter-term contract extension, with penetration minimums that would allow us to continue to provide flexible options to consumers. However, The Walt Disney Co. has informed us that they would not be willing to accept a contract extension.”
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In a statement released to the press on Friday, Sept. 1, The Walt Disney Co. stated that “Charter has refused to enter into a new agreement with us that reflects market-based terms. Contrary to their claims, we have offered Charter the most favorable terms on rates, distribution, packaging, advertising and more. We have proposed creative ways to make Disney’s direct-to-consumer services available to their Spectrum TV subscribers, including opportunities for new and flexible packages where those services become a focal point of what the consumer might choose.
“Although Charter claims to value our direct-to-consumer services, they are demanding these services for free as they have stated publicly. Charter is depriving consumers of that content because they are failing to ascribe any value in exchange for licensing those services. Our linear channels and direct-to-consumer services are not one and the same, per Charter’s assertions, but rather complementary products. We continue to invest in original content that premieres exclusively on our linear networks, including live sports, news and appointment viewing programming.
“Likewise, on our direct-to-consumer services, we make multi-billion-dollar investments in exclusive content, which is incremental to our linear networks.
“We offered Charter an extension in the negotiations to keep our networks up and they declined in the middle of programming that is important to their subscribers, including the U.S. Open. Charter’s actions are a disservice to consumers ahead of the kickoff for the college football season on ABC and ESPN’s networks. We value our relationship with Charter and we are ready to get back to the negotiation table to restore access to our unrivaled content to their customers as quickly as possible.”