Disney vs Charter: will cable operators drop Pay TV?

"The Walt Disney Company, the owner of this channel, has removed their programming from Spectrum which creates hardship for our customers." Late August 2023, Charter’s 14.1M Pay TV subscribers could see this message appearing on their TV screens. One of the biggest operators missing channels from Disney, an entertainment mastodon, is a sign that the dispute has reached an unprecedented level. Especially during the broadcasting of the Tennis US Open. Although both companies shook hands on a new distribution deal in mid-September, let’s analyze the context and the nature of the agreement. We’ll ultimately address the point of which player got the most out of the deal, and how other historic Pay TV actors adapt to this evolving landscape.

Charter prioritizes Internet & Mobile over Video

Looking at Charter’s revenue mix, the Connecticut-based company increased its Internet revenue by almost 40% between Q219 and Q223. Mobile service revenues skyrocketed from 158M to 539M. Both services can be combined via the Spectrum One Bundle, for $49.99. These positive figures seem to offset the growing loss of video revenues. Indeed, between Q219 - Q223, Charter’s video revenues weakened by almost 5%. This loss is without a doubt due to cord-cutting, which is the ultimate step of a self-perpetuating circle. Indeed, actors such as Disney recently moved their best content from Pay TV to put it on their own new streaming services. Less premium content available on linear leads to subscribers churning, as consumers rather subscribe to a streaming service. The result is that the remaining Pay TV subscribers have to pay more each month, because of the increasing affiliate fees asked by companies such as Disney to offset increasing sports rights. Those price spikes make more subscribers leave Charter, which keeps the cord-cutting circle going.

Charter’s rival, Comcast, also focuses on connectivity

As far as Comcast is concerned, “Connectivity is also King”: broadband operations seem far more promising with the upcoming rollout of Docsis 4.0 and expansion projects, especially in the context of BEAD allocations - a $42.5B Broadband, Equity & Access Development Fund aimed at connecting all Americans to high-speed Internet before 2030. Regarding Pay TV, Comcast recorded its worst quarter ever in terms of Pay TV subscriber losses in Q2 2023 (more than 7% QoQ). The ever-diminishing weight of Pay TV urged Comcast to partner with its rival Charter to operate Xumo, a FAST service, in late 2022. Comcast already owns several OTT assets: as well as a third of Hulu, alongside… Disney. To compensate for its declining linear video business, Comcast also took measures to push consumers towards Peacock’s Premium tier: the Peacock free option won’t be available for new consumers, while the Premium tier won't be included free of charge for Cox & Xfinity subscribers anymore, respectively since January and June. We could reasonably think this contributed to the significant increase in Peacock’s Premium subscribers (+19% more SVOD subscribers since Q422). Eventually, Comcast also deployed - for its broadband-only customers - a hybrid streaming service called Now TV. The latter bundles Peacock Premium, 40 linear Pay TV channels & 20 FAST Channels, allowing Comcast to leverage its broadband offer with entertainment while remaining involved in the streaming war. Those strategic refocusings highlight the historic cable operators’ willingness to move from the legacy Pay TV business model. However, this trend doesn’t only apply to the two aforementioned cable mastodons, but also to the smallest regional operators: WOW! for instance, ditched its Pay TV offer in favor of YouTube TV in early August 2023.

Disney: Streaming Future vs. Pay TV Cash

This carriage dispute also happens when Disney is reshaping its streaming future. With an estimated 41.4M US subscribers, Disney + also rolled out its ad tier in late 2022. On top of offering hybrid subscriptions, Disney is also likely to widen the content portfolio available through streaming, first with the valuable asset that live sports is: ESPN will be entirely switched from a linear channel to a flagship direct-to-consumer service, which will be different from ESPN+. The decline of regional sports networks (RSN) could also be an opportunity for Disney to acquire cheaper sports rights. Transforming linear channels in streaming assets isn’t the only option: Disney has been reported to start talks with Nexstar about the potential sale of its television asset, ABC. Eventually, along with Comcast, Disney is expected to decide soon on the future of Hulu. The Walt Disney Company owns two-thirds of the streaming asset, and Comcast the remaining third: both companies can trigger a sale or a purchase of those 33% next January 2024.

Charter vs. Disney: Which company got the most out of the deal?

The outcome of the dispute resulted in higher fees received from Charter for the Mickey Mouse company. Although the transaction amount remains undisclosed, this carriage resolution is unprecedented as trade-offs now include streaming options for Charter subscribers.

In the short run, Charter will leverage its broadband offer

Indeed, Charter will be able to bundle Disney’s ad tier as well as ESPN Plus within its Spectrum TV Select package. The aforementioned ESPN DTC platform will also be available once it launches to Spectrum TV Select subscribers. This means that, although Disney will charge Charter more, the cable operator managed to get Premium content (Disney+ ad tier) as well as Sports (ESPN) back for its subscribers. Eventually, Charter will no longer have to pay for 8 linear channels - including Disney Junior and Nat Geo Wild - as their content will be included in the bundle.

A deal that will strengthen Disney’s pivot to streaming strategy for the years to come

All of those partnerships are likely to drag Disney+’s ARPU down, as Charter managed to get those plans at wholesale pricing. However, in the long run, the first thing that’s interesting for Disney is to root its streaming service within Charter’s footprint: the deal will enable the Mickey Mouse company to enter the households of more than 14M TV subscribers. This is likely to drive brand awareness and then service adoption. Then, consumers are less likely to churn if the streaming option is bundled with other services. The reason is that viewers crave new content, which is gradually more expensive for content providers. Sharing the weight of offering new content with other content providers is a great advantage for Disney. Eventually, this deal represents a massive growth opportunity in terms of advertising, as Disney+’s ad tier won’t be limited to its estimated 3M D2C subscribers.

Cable Operators, Content Providers & TV Station Owners: refocusing on their core business?

As aforementioned, historic cable operators seem to focus on broadband, transforming their Pay TV offer by either bundling linear channels with streaming services, or by directly giving access to streaming platforms - for linear only, or with on-demand along - at wholesale prices. Studios and content owners are more likely to pursue a streaming-first strategy. What’s worth mentioning is the resilience of major TV Station groups, that reinvent themselves at a time when streaming is king. Nexstar has been reportedly interested in purchasing Disney’s ABC network: the company, which has a deep footprint of local TV stations across the US, already acquired The CW Network in late 2022. Its competitor Sinclair has also reportedly shown interest in a potential acquisition. Both Nexstar & Sinclair have been active in the FAST segment: what if the combination of legacy Pay TV assets - acquired for an interesting price to streaming-oriented actors - and FAST, was a promising emergency lane for TV Station owners? This research highlight is based on our data coverage of OTT and Video  and Telecom in North America. Please contact us to get a demo and see the depth of our service. Discover CTV Ad Days New York, the event about with CTV, FAST, AVOD, hybrid SVOD/ad-supported, addressable and programmatic advertising in North America.

Josselin Gautier


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Published on: Tuesday, 10 October, 2023

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