Disney is set to renew its multiyear carriage agreement with Charter, the second-largest U.S. pay TV provider, at the beginning of August, according to people familiar with the matter.
So far, there are no signs the two sides will have a testy public renegotiation. That is par for the course for Disney, which usually hammers out a deal without fanfare. After all, pay-TV providers have never had the stomach to black out ESPN, Disney's most valuable cable channel and by far the most expensive network in the pay-TV bundle.
But this particular Disney deal has widespread implications for how future TV carriage deals will be crafted. The outcome could lead to more contentious battles between TV providers and content creators, and perhaps stem the tide of rising cable TV bills.
That's because Disney is about to transition to a new era of direct-to-consumer streaming. AT&T's WarnerMedia and Comcast's NBC Universal, the next largest media companies, will follow in its footsteps in early 2020.
In the past, carriage disagreements almost always stemmed over the same thing: the network that makes or licenses the content wants the pay-TV operator -- your cable or satellite company -- to pay more money for that programming.
The fee negotiations sometimes result in networks being blacked out on a pay-TV service for a period of time. Viacom has had a few extended carriage conflicts in recent years. Univision recently settled one with Dish. Jeremy Lin's insane three-week stretch of National Basketball Association games while on the New York Knicks helped convince Time Warner Cable to reach a deal with MSG Network a few years ago.
The distributor and the content company usually reach an agreement, because the traditional pay-TV ecosystem has long been symbiotic -- operators need material for customers to watch, and the programmers need people to see their programs.
But the advent of direct-to-consumer streaming products could lead to blowout public fights over the declining value of linear TV networks.
Content providers who have long pushed for higher carriage fees could face severe pushback from pay-TV providers who say that linear networks aren't as valuable because so much content is available online -- not only at Netflix and Amazon, but now within the content companies' own streaming products. Moreover, if customers do flee the pay-TV bundle for streaming services, pay-TV providers may want to cut content spending even more to keep costs down.
In November, Disney will start selling Disney+, a family-friend entertainment product, for $6.99 a month. This will include Disney movies and TV shows from Disney, Pixar, Marvel Studios, Lucasfilm, National Geographic and 20th Century Fox.
Disney is also planning on bundling Disney+ with Hulu and ESPN+, its direct-to-consumer streaming service focused on sports, to make the suite of products more appealing to consumers. no current season
As Disney makes its content available outside of the pay-TV ecosystem, the value of its pay-TV channels should decrease. In other words, if the only way your child can watch "The Lion Guard" is on the Disney Channel, which requires a pay-TV subscription, the Disney Channel is a valuable asset to the pay-TV bundle.
But if your child can now get that show on Disney+, which doesn't require a pay-TV subscription, the value of the Disney Channel should decrease. The more stuff that's available outside the network, the less that network is worth. Disney is trying to store some of the value of Disney Channel by prohibiting current seasons of all Disney Channel shows from being available on Disney+, according to a person familiar with the matter.
The Disney-Charter negotiations probably won't get too contentious because more than any other programmer, Disney wants to protect the pay-TV ecosystem.
ESPN is the most important cable network in the cable bundle. It earns more than $9 for its suite of networks for every single customer that signs up for pay-TV, regardless of who is actually watching the networks. A lot of people watch "Monday Night Football" — it was the most-watched series on cable in 2018 for the second straight year. Pay TV customers would revolt if ESPN weren't included in a standard cable package.
So far, ESPN+ has only been an add-on product to ESPN. It hasn't touched the network's most valuable sports assets, which include "Monday Night Football," NBA games, prime time college football, several tennis and golf grand slams and so on.
There's no impetus for Disney to change this arrangement because ESPN has successfully kept raising its carriage fee, unlike, say, Viacom's cable networks. Still, Disney will almost certainly push for more flexibility in its renewal deal with Charter. Disney will want the option to make certain sports or games available for ESPN+ if consumers drastically change their viewing habits in the next few years, or if Wall Street starts valuing legacy media companies based on streaming customer growth, as they do with Netflix.
Moreover, Disney wants pay-TV providers to integrate ESPN+ into their user interfaces, just as Comcast has done for Amazon and Netflix content, according to a person familiar with the matter. Then, a pay-TV operator could sell ESPN and ESPN+ together for an additional fee, and a consumer could watch all ESPN+ content as a network, just like ESPN.
At this point, Disney isn't asking to remove valuable assets from ESPN and shift them to ESPN+, two of the people said. That's key. Charter isn't going to want to lock in a rate increase for ESPN if the linear network could lose its exclusivity value in the coming years as Disney makes some events available to ESPN+.
But Disney will likely want the ability to place particular games on ESPN+ and add other sweeteners to entice more consumers to sign up for the digital service. And those games probably would have lived on ESPN or one of its companion networks.
Spokespeople for Disney and Charter declined to comment on specifics of the carriage talks between the companies.
Terms in carriage fees are often applicable across pay-TV platforms thanks to so-called "most favored nation" clauses. So the word will get out in the media ecosystem how Disney has structured its deal, and it will be held as a standard when WarnerMedia's and NBC Universal's big contracts come up for renewal.
And while Disney may not want to rock the pay-TV bundle, WarnerMedia doesn't have nearly the same incentive, because it doesn't own particularly valuable linear networks (TBS, TNT and CNN are its strongest).
Then again, AT&T owns DirecTV and WarnerMedia, and Comcast owns NBC Universal. So both media companies may decide to hedge their asks for the benefit of their parent companies, keeping the bundle alive and (relatively) well.
Of course, it's also possible cable operators that also offer broadband internet might not care enough about their traditional video business to even care that much about TV carriage fees. Instead, they may just accept the higher fees and pass the costs to consumers' cable bills. If customers cancel because of the higher price, then so be it.
As MoffettNathanson analyst Craig Moffett wrote in a note to clients this week, cable providers are coming around to the idea that it's OK to lose TV subscribers as long as they keep paying for internet access.
"In conversation after conversation, investors talk of faster subscriber losses as a clear positive," Moffett wrote. "Just a few years ago, video subscriber losses were the foundation of the cable bear case. Gradually, that fear faded. Video subscriber losses became something that investors were willing to ignore."
Since broadband has a higher gross margin than video, for every customer that cuts the cord on TV but keeps buying home internet, margins rise.
If that's the attitude among cable providers with big broadband businesses, such as Charter and Comcast, the operators may be totally fine living in a world where customers flee the bundle and use their Internet to watch Disney+ and ESPN+. This would likely to lead to status quo deals with Disney and others where carriage rates keep rising, even if the pace is slower.
But even if Charter doesn't care about losing pay-TV customers, AT&T's DirecTV and Dish don't offer high-speed Internet to the home. Chances are they'll care a lot more.
No one said the fragmentation of media would be easy.
Disclosure: Comcast owns NBCUniversal, the parent company of NBC and CNBC.