Addressing Thursday night’s carriage impasse with Disney, Charter Communications executives told Wall Street investors on a conference call today that their linear video business is “at the edge of a precipice.”
Charter CEO Chris Winfrey said any resolution to the outage, which left almost 15 million customers in the dark at the start of football season, would need to happen quickly. Otherwise, he said, Charter will take pains to preserve broadband relationships with customers who drop video service. That would reduce “the likelihood that we’re going to be willing to foist those high costs” on consumers, he said. “And so, our likelihood of being willing to do a deal decreases over time as those downgrades to video occur. And our likelihood of heading into a ‘moving on’ scenario with a completely different video product structure goes up significantly.”
“We’re at the edge of a precipice that Disney itself predicted,” CFO Jessica Fischer, perhaps alluding to comments from Disney CEO Bob Iger last September, before he returned to the company’s executive suite. Iger earlier this summer said in a CNBC interview that linear networks “may not be core” to the company, setting off speculation of private equity or other investors taking control of them and removing their troubled financials from Disney’s books.
Winfrey, who succeeded cable industry stalwart Tom Rutledge as CEO last December, said it’s the largest swath of programming to go dark on Spectrum since he joined Charter as CFO in 2010. In all, 18 networks as well as eight ABC stations are now unavailable on Spectrum, which is the No. 2 cable operator in the U.S. with 14.7 million customers. The outage is coinciding with the start of college football and soon the NFL season, two of the few bright spots in an otherwise bleak pay-TV landscape. Charter estimated that it pays $2.2 billion a year to Disney to license its programming. It has not yet determined how it will offer credits to customers affected by the dispute.
Starting the call with a lengthy presentation supported by a slide deck (title: “The Future of Multichannel Video: Moving Forward, Or Moving On”), Charter described a “staggering” 25% drop in subscriber losses for the industry over the past five years. The accelerating downturn has left all stakeholders in the pay-TV bundle at a “crossroads,” the company said.
Given the swiftness of that shift, Charter President of Product and Technology Rich DiGeronimo said the company had proposed a “hybrid” model to Disney, one that would combine streaming and linear services. Execs declined to address any financial specifics, but they identified three key elements to their proposal: lower penetration minimums, designed to give customers “package flexibility”; the inclusion of Disney’s ad-supported direct-to-consumer apps in Spectrum linear packages; and a commitment by Charter to market Disney streaming services to its broadband-only customers.
Separate from the Charter talks, Disney has been taking steps toward offering a stand-alone streaming version of ESPN outside of the pay-TV bundle. It has recently held talks with potential third-party investors and distribution partners, in part because of the onerous costs of sports rights.
Instead of embracing the “transformative partnership we offered,” DiGeronimo said, Disney “reverted to the tired playbook, trying to squeeze every last dollar out of the linear customer, with no regard to the going concern of their video cash flow engine.”
DiGeronimo said another point of irritation has been what he described as Disney increasingly blurring the line between what it offers on linear networks and what goes on streaming services Hulu and Disney+. “It’s a lot of overlap,” he said. “They’ve also siphoned content away from linear TV channels into those direct-to-consumer apps, which are very similar by nature.”