The Disney-Charter cable TV dispute could cost Disney up to $2.3 billion—it all depends on how many customers ditch cable for good

Disney and Charter Communications are locked in what, at first glance, appears to be a simple negotiation over price. But the dispute over how much cable giant Charter should pay to broadcast Disney’s cable channels, which include ESPN, National Geographic, and FX, is unusual and likely to set a precedent for the media industry.

The dispute is ostensibly over carriage fees, the payments cable providers make to networks to include certain channels in the cable packages they sell to consumers. However, Charter has sought to frame the disagreement as part of a broader debate about the financial viability of cable in the streaming era.

“We’re on the edge of a precipice," Charter CEO Chris Winfrey said about the situation on Friday. “We’re either moving forward with a new collaborative video model, or we’re moving on.”

As of now, the two companies are at an impasse, with Charter on Friday blocking all Disney channels to its subscribers. The decision set off intense criticism from Charter subscribers, who are unable to watch certain NFL games or any U.S. Open tennis matches. On Tuesday, some customers filed a lawsuit seeking class-action status in Florida over the matter.

Charter is refusing to pay what Disney demands for its channels because much of Disney’s best content is exclusive to its streaming services, leaving its cable channels with second-tier programming. As a result, Charter wants Disney to offer free access to its streaming services to Charter customers. Charter also wants to be able to provide Disney-owned channels to a lower minimum number of households. This has also been a major sticking point in negotiations. Disney claims around 70% of Charter customers watch one of its channels a month, while Charter says 25% engage with Disney content. (Both sides have been vague about how they define these metrics.)

Disney and Charter did not respond to a request for comment.

Disney needs consumers to recapture billions in lost revenue for its plan to work 

Disney, in particular, stands to lose billions. A note from a Citibank analyst estimates the company could lose $1.1 billion to $2.3 billion in profits this year depending how many Charter customers switch to other cable or streaming providers that offer Disney’s channels. The higher that number is, the more revenue Disney will be able to recapture. Citibank predicted Disney will recoup 25% to 65% of the revenue it loses.

“The bet they're making is a lot of people will leave Charter, but they're going to sign for YouTube TV or Hulu or DIRECTV or DISH and the recapture rate will be high,” says Jason Bazinet, the Citibank analyst who wrote the note. “That's Disney's argument.”

On Monday, Disney released a statement inviting Charter customers to subscribe to its Hulu + Live TV offering.

Wall Street isn’t counting on Disney salvaging its already dying cable business. Investors are skeptical of Disney's plans to make up for the steady erosion of its cable business, according to Bazinet. “Disney has not yet articulated a credible plan that the Street believes in, where the market is convinced Disney can stand up a profitable streaming business,” he says.

Bazinet also points to the muted investor response to Disney’s stock as evidence that investors have already priced declining cable revenue into Disney’s shares. On Friday, the day Charter blacked out Disney’s channels, Disney’s stock fell only 2%. Usually when these kind of deals spill out into the public view, “stocks become unglued,” Bazinet says.

In his note, Bazinet says the market assumes a 33% to 70% likelihood the dispute between Charter and Disney becomes permanent.

Charter wants to reinvent the cable business or walk away from it

Part of why analysts have characterized the negotiation as “not another carriage dispute” is because Charter has ostensibly agreed to Disney’s asking price of $2.2 billion provided it comes with the free streaming. Charter wants to use Disney to transform its cable business by creating a new type of cable bundle that also includes streaming. If Charter doesn’t prevail it may simply walk away from its cable business, because it says it can’t make the numbers work otherwise.

“We have already reached the point of economic indifference with the current model,” the company said in an investor presentation, using jargon that masks the threat of entirely pulling out of one of its core businesses.

In 2022, Charter’s cable unit brought in $17.5 billion in revenue; however, the business was expensive to maintain and had small profit margins. In the same investor presentation, the company said its video business would be cash-flow-neutral “without structural transformation.” Once content providers like Disney started hiking carriage prices even more, Charter no longer considered running a dying low-margin business to be appealing.

“Charter’s argument is, if we keep going down this path there's no money in it,” Bazinet says. “So you should let the camel's nose under the tent and let us get some of the streaming app economics.”

Disney, on the other hand, is uninterested in sharing the profits from the streaming services it considers essential to its future.

Charter seems willing to continue offering its cable services with no Disney-owned channels, essentially slow-walking its exit from the cable business. In this scenario, Charter could simply wind down its cable operations, offering fewer and fewer channels, bleeding customers until eventually it shuttered operations entirely. If that happens, Bazinet believes, Charter would focus on its internet and cell phone businesses—part of a larger trend in the industry that’s seen a continued separation of the companies that make content, like Disney, and those that provide access to it, like Spectrum. They were once close partners, but their relationships have since turned bitter as cable reaches fewer households and content providers increasingly put exclusive movies and TV shows on their proprietary streaming platforms.

However, the cable business could undergo a wholesale change even if Charter and Disney reach an agreement. That’s partly because Charter has said it would only agree to a deal that upends the status quo. In fact, its whole pitch to Disney was that the two together could spearhead industry-wide change.

Bazinet termed this dispute the “end of the beginning” because he felt it was the first of many such developments that would shake up the industry. “If a big distributor like Charter is coming to this conclusion, you have to imagine a lot of other smaller cable distributors are coming to the same conclusion,” he says. “So it could be sort of the tip of the iceberg.”

This story was originally featured on Fortune.com

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