Charter Communications Proposes New Video Paradigm : Disney Says No

Cable network stocks tanked yesterday on the news that the Walt Disney
DIS
Company was unable to reach a carriage agreement with the nation’s number 2 cable operator Charter Communications
CHTR
. Shares in Warner Bros Discovery were hit much worse than Disney, down 12.0% to $11.56 while Disney fell 2.44% to $81.64.

The irony is that the man who was behind many of the cable network start ups when the cable industry began and also was a big investor in cable systems, John Malone, has been on the board of Charter since 2013 and became Director Emeritus in 2018.

Surely Malone had some input an this radical strategy to potentially start exiting the video business, something which could hurt some of his other investments such as Warner Bros. Discovery where he is a major investor and is on the Board of Directors.

But Malone has always had vision—In 1992, John Malone, then president of Tele-Communications Inc. said at a news conference in Anaheim, California, “Television will never be the same,” describing how fiber optics and other new technologies could soon bring consumers an offering of 500 channels.

He was right on that count and he is likely right on this call that eventually popular cable channels are going to migrate to direct-to-consumer DTC options and the video businesses of most multichannel businesses will go away.

But as Charter Communications CFO
CFO
Jessica Fisher said on a conference call with investors yesterday, margins have become so bad on video compared to broadband and their other business lines that they are prepared to pivot. “If we’re unable to come to a deal, and ultimately move on from the traditional video business, the margin profile of our business should improve and its capital needs should decline,” she said.

The company offered up a presentation to back up their view entitled “The Future of Multichannel Video: Moving Forward, Or Moving On.’ Some key points of the preso:

· The multichannel video product is too expensive and packages don’t meet consumer needs

· Customers are leaving the traditional video ecosystem and losses have accelerated

· We still believe video is an important part of our connectivity offering, but the video product has been devalued and the ecosystem is broken

· Disney—so far—has insisted on a traditional long-term deal with higher rates and limited packaging flexibility

· Charter proposed a model that creates a better value for consumers and the industry

· Disney declined our proposal and pulled its video channels from Charter’s video customers on August 31.

· Programmers continue to force MVPDs (Multichannel Video Program Distributors) and consumers to pay higher rates with the same packaging restrictions with no additional customer value,, despite destruction of the multichannel video marketplace

· Programmers are caught in a self-imposed dilemma as they have moved content to their DTC product for short-term profit maximization and their management teams are not incentivized to drive business for the long term.

Charter suggests a new paradigm where the ad-supported streaming apps from cable network brands are packaged into linear products at an affordable price-point. This would pave the way for an ESPN DTC product to debut initially on Charter Communications.

There is a lot on the line for Disney at this point—Charter is currently paying $2.2 billion in annual programming costs to Disney, roughly 14%. However, given the language in the Charter Presentation and on the conference call yesterday, Charter seems ready to cut ties with Disney and start this new programming delivery paradigm without it.

AN UPDATE FROM DISNEY ENTERTAINMENT

REGARDING CHARTER’S RECENT COMMENTS

1. Charter has refused to enter into a new agreement with us that reflects market-based terms.

2. Contrary to their claims, we have offered Charter the most favorable terms on rates, distribution, packaging, advertising and more.

3. 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.

4. Although Charter claims to value our direct-to-consumer services, they are demanding these services for free as they have stated publicly.

5. Charter is depriving consumers of that content because they are failing to ascribe any value in exchange for licensing those services.

6. 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.

7. Likewise, on our direct-to-consumer services, we make multi-billion-dollar investments in exclusive content, which is incremental to our linear networks.

8. 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 US Open.

9. Charter’s actions are a disservice to consumers ahead of the kickoff for the college football season on ABC and ESPN’s networks.

10. 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.