Disney Is in a Fight That Might Change TV Forever

The country’s cable providers and pay TV bundlers have found a champion to go to war against the Walt Disney Company. That is Charter Communications, which this month stopped airing Disney’s TV channels—most notably ESPN, right at the start of football season—over a dispute with the House of Mouse. The fee Disney charges cable providers for ESPN’s linear channels is comfortably the biggest on TV, penciling out to around $10 a month per subscriber, which the providers then pass on to their customers. Charter has had enough, and now it’s playing a game of chicken that could change American TV forever.

Spectrum, Charter’s cable and internet brand, is a well-suited gladiator for this fight. Unlike, say, Comcast, Charter going to war over carriage fees does not amount to defecating where it eats. Spectrum doesn’t operate a big fleet of national TV channels like Comcast does through NBCUniversal, for example, so Disney cannot counter a demand for lower fees by saying, “You first.” But Disney has no interest in getting less in carriage fees while the number of people paying for TV at all continues to drop. So everyone is digging in, gifting us a good, old-fashioned carriage ruckus that’s a political fight as much as anything. Disney has had its partner sports leagues, like the Southeastern Conference, remind their audiences that they can still watch football games on ESPN channels this fall on any number of non-Spectrum services. Charter, in turn, has blamed Disney for not making a “transformative deal.”

There is an elephant in the room, though. Maybe it’s more accurate to call it a bazooka in Disney’s pocket, one that could cause problems for both Disney and its distribution partners. Since he returned as the company’s CEO, Bob Iger has spoken of it frequently, describing it on multiple earnings calls as an inevitability. Sometime as soon as in the next handful of years, Disney will break out ESPN’s TV channels and begin selling them on their own, outside the cable packages that have always been required in order to watch them. Iger has likely spoken about it for two reasons: 1) to ward off shareholder complaints that he didn’t tell them it was coming, and 2) to remind disgruntled pay TV providers of what is on deck. When American sports fans no longer need a bundle to watch the biggest American sports channel, that bundle will take a massive blow (though not an immediately fatal one). ESPN’s fight with Charter could push forward a big reorganization in how we all watch TV.

ESPN and Charter are in this position because of cord-cutting. Something like 100 million American households paid for a cable or similar bundle at the product’s peak, around 2010. That number has fallen off around 40 percent already, according to market research firm SVB MoffettNathanson, and is not poised to reverse in a positive direction. For some very rough napkin math, 40 million fewer people paying $10 a month for ESPN channels is $400 million a month in carriage fees, or $4.8 billion a year, that Disney isn’t getting. Add in that ESPN’s programming costs are very high, and that airing Monday Night Football is much more expensive than it used to be, and you see the problem. Ad revenue is a much smaller piece of ESPN’s business than affiliate fees are. While cable subscriptions bleed out, the prices Disney can charge for advertising cannot rise in proportion with the prices it pays sports leagues to air their games. The money that pays for those broadcast rights comes overwhelmingly from fees, not ads.

“Just because you’re losing some subscribers as it relates to affiliate fees doesn’t mean you can just upset the whole advertising apple cart by trying to jack up” what you charge for running commercials, Bob Thompson, a former Fox Sports Networks president, tells me. “The advertisers won’t accept it. They have too many other outlets.” So ESPN needs higher fees, from either your cable provider or just you. Patrick Crakes, a media consultant who covers the sports industry, believes that Disney would like to wind up getting something like $11 per subscriber per month from Charter. More napkin math: Charter paying Disney $11 a month per each of its 15 million subscribers would be worth $165 million a month to Disney, or $2 billion a year. You can see why Disney is so insistent on getting the number up.

But Charter is fed up with paying outlier-sized fees for ESPN, and its CEO sounds shockingly serious about being a guinea pig for a cable bundle that isn’t built around live sports. As the dispute drags on, Charter’s Chris Winfrey said this week, “the average customer who remains isn’t going to be a sports customer.” And indeed, plenty of people will keep channel-surfing without caring about ESPN. Not every household is sports-obsessed, and some, maybe plenty, will stick even if they can’t get ESPN channels. “If you want to make that assumption that it spells doom,” Thompson says, “you’re kind of making the assumption that the only people who are watching the bundle are sports fans, and I just don’t think that’s the case.”

But Disney’s bet is that a lot of people are sports-obsessed enough to pay out the nose for a stand-alone ESPN product that includes its current linear channels, and that many of them will part with cable to do so. (This eventual package is different from the current streaming service ESPN+, which costs a few bucks a month, depending on the offer, and includes a mix of sports products like the NHL, mostly smaller-conference college football, and European soccer.) Industry types struggle to hazard a guess at how many households will ditch cable when they don’t need ESPN as a part of it. But the simplest answer is a lot, and that’s where Disney vs. Charter dovetails so critically with ESPN’s streaming future.

Say the sides go their separate ways. In that event, Spectrum (one of the biggest cable providers in the country, with 15 million subscribers) could gradually fade away from TV and focus more on selling internet while offering a leaner, less expensive TV package. Disney would lose out on billions of dollars in carriage fees, and it would turn to saving money on what it airs. “They’ll have more holes on the balance sheet because of that, but they can fix some of that the same way they’re fixing Disney+,” Crakes says. “Don’t spend money on content.” Maybe that means, eventually, less money for leagues’ rights fees, and then the sports industry joins the TV industry in a world of hurt. All of that accelerates if ESPN splits with even one major pay TV provider, and it really accelerates if Spectrum sets a precedent that others follow.

“The [direct-to-consumer] ESPN launch is tied up in this,” Crakes says. “They just can’t walk away from pay TV. They really can’t. And if they try, or if they decide to, it will be such a radical rethink. Because they’ll basically say, ‘Right now, we’ve got 10 expensive things. We’re gonna keep, like, two or three, and we’re gonna have to choose what we do.’ ” The NFL will keep getting its money, but who else will?

The economics will depend partly on whether Disney yanks ESPN from pay TV altogether (unlikely, given how critical pay TV subscriber fees still are to ESPN) or runs it on two tracks, one with its traditional carriers and the other as a direct-to-consumer offering. How much the service will cost is also hard to pin down. Wells Fargo researchers estimated in the spring that it would debut at $20 a month once it exists separate from a bundle. People I’ve talked to have more commonly ballparked it at $40 or $50, anticipating that Disney might not get more than 20 million subscribing households (out of a peak of around 100 million TV homes) and would need a big price point to make the economics work. Crakes believes that if Disney renews its agreement to show NBA games on ESPN, the price could be $65 a month.

However it shakes out, Americans are going to keep fleeing cable, and the Spectrum-ESPN fight is a chance for American TV to hurry a little faster over the edge. If Charter and Disney don’t kiss and make up, the rest of the pay TV industry will get a look at exactly what happens when a publicly traded cable company loses the channels that have become synonymous with U.S. sports. If Charter manages to negotiate Disney down to a relatively low fee, its peers will be emboldened, and if it walks away altogether but keeps doing fine, those peers will be emboldened all the same. In that case, Disney will be giving up more in per-subscriber carriage fees in the middle of an especially acute cord-cutting moment as it builds its plans for a direct-to-consumer move. And if Disney wins the staring contest outright, something it hoped to do when it made a deal that expired just as football season began, then the Mouse will still take ESPN out of the exclusive grip of the companies that have always delivered it to the rest of us. Watching sports is about to be different. This time, there will not be any industry pretense about how it will be cheaper.