Despite Disney and Charter Communications’ refusal to budge in their heated carriage dispute, Deutsche Bank remains hopeful that the two parties will ultimately make concessions in order to reach a “mutually beneficial agreement.”
“We expect Disney to concede its (aggressive) demand for increased carriage minimums and potentially its demand for a longer duration agreement,” analysts Brian Kraft and Ben Soff wrote in a note to clients. “In exchange, we expect Charter to pay Disney’s asking price per subscriber and concede its (unrealistic) demand for Disney’s streaming apps to be included for free to Charter customers subscribing to packages that contain Disney’s linear networks.”
Kraft and Soft said they expect an agreement would allow Charter to distribute Disney’s streaming apps through Xumo, the company’s streaming joint venture with Comcast expected to launch later this year.
“We believe a permanent end to Charter’s distribution of Disney’s channels would be a more negative outcome for Disney than for Charter in that it would accelerate Disney’s linear revenue decline and make future distribution renewals even more challenging and critical (shifting leverage to distributors), while leaving the vast majority of Charter’s broadband business intact,” the pair added.
The dispute, which has now left Spectrum customers looking to access Disney’s portfolio of TV networks in the dark for a week, has the potential to be a transformative moment for the pay-TV business, which has long been contending with subscriber declines due to cordcutters’ move to streaming.
Charter estimates that the multichannel video industry has lost 25 million customers over the last five years, or nearly 25% of its total base. In comparison, its own customer base has only declined about 10% over the same period, executives said, which sits at 14.7 million video customers.
The company, which pays $2.2 billion to Disney in annual programming costs, has said that only 25% of its subscribers engage with Disney content, with half of those “highly engaged.”
Charter argues that Disney has “insisted on unsustainable price hikes” and is forcing customers to take their products even when they don’t want or can’t afford them. Additionally, executives said Disney wants to “require customers to pay twice to get content apps with the linear video they have already paid” for.
Charter said it offered “lower penetration minimums” to deliver package flexibility for customers, as well as the inclusion of Disney’s ad-supported streaming apps within its linear packages. It also committed to market those streaming products to its broadband-only customers. Additionally, it offered a shorter extension to its current contract to continue to discuss its proposal, but said Disney declined.
Meanwhile, Disney argues that Charter refuses to enter into an agreement that reflects market-based terms.
The entertainment giant says it offered “the most favorable terms on rates, distribution, packaging, advertising and more” and “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.” It added that it offered Charter an extension to keep its networks up during negotiations, but that they declined.
Shares of Disney, which are trading at around $80 apiece, have fallen 4.9% in the past five days and 9.7% year to date. Meanwhile, Charter stock, which is trading at around $416 apiece, has fallen 5.2% in the past five days but is up 21.9% year to date.
Charter CEO Chris Winfrey will participate in Goldman Sachs’ Communacopia + Technology Conference on Thursday, which Wall Street will be monitoring closely for updates on the negotiations.
In the meantime, Spectrum customers looking to watch Disney content can switch to alternative options including Hulu + Live TV, YouTube TV, Fubo and DirectTV Stream.
