Disney, Charter, Football, Gilligan’s Island

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We begin here with big TV news, local and national.

TV viewers in major U.S. markets eager to watch tennis's U.S. Open and other events on ESPN this week were in for an unpleasant surprise when they saw this instead: a darkened screen with a message that parent company Disney's battle with Charter is being called an existential referendum on the future of the TV bundle.

But do you think this dispute could put the nail in the coffin, so to speak, when we think about the future of linear? New recording initiated. Energy levels rising. Enthusiasm building.

10, 9, 8, 7.

I can't wait. 6. I'm not going to make it.

4, 3, 2, 1.

Did she just say it's an existential bundle referendum? I think she— and then there's nails. There's a nail in the linear coffin. This is getting very serious, what's going on in cable television meta. Hi, I'm Jack Howe. This is the Barron Streetwise podcast. With me is our audio producer, Meta. You're a New York City person. This involves Charter Communications, which has Spectrum. It's the number 2 cable distributor in the US. It has the Spectrum service. It's big in New York and LA. Disney channels are no longer running on Spectrum. That includes ESPN. That means that you will not, if you're a Spectrum subscriber, be able to see Monday Night Football. You won't see the Bills and the Jets this coming Monday. That's got to be hitting you pretty hard, right, Meta?

It's not.

It's not because you don't watch football. I don't watch football or have cable.

I don't have cable either. I feel for all the folks who, you know, are missing the game.

You have high emotional intelligence. And in that regard, it's hurting you because it's hurting others. Yeah, I get you. You're very relevant to this. Well, the fact that you don't have cable, maybe not, but people who don't watch sports but who do have cable are very relevant to this discussion. I'm going to explain. What's going on, why this kind of dispute happens all the time, but this one really is different. And Disney is the much larger company, but I do not think they have the upper hand this time. In fact, I think that Disney is more likely than cable to cave on this one, and I'll explain why. And I'll tell you what's at stake for investors. Let me begin by laying out some of the facts on what's going on. This is called a carriage dispute. I'm going to try not to use cable industry jargon. The cable business is adjacent to the entertainment business, which is the hee hee ha ha, look at me business and should be interesting to talk about. But cable insists on using the most sort of sterile and clinical language possible to describe that business. So I'm going to try not to— I'm going to try not to refer to Disney as a programmer. I'm going to try not to refer to Charter as a a multi-channel video programming distributor, or MVPD. But basically in TV, the traditional way of doing cable is you have the companies that make the shows and stick the shows in the channels, and they make money in two ways. One is to get the cable companies to pay them to put their channels in the cable bundles. That's called carriage. They're carrying the channels, and for that they collect carriage fees. The second way they make money is they sell advertising on those same channels. And the cable companies, they make money obviously by charging subscriptions to their customers for those cable bundles. They also get a small piece of the advertising slots. You ever notice when it— when you get to a commercial break, you'll see like Jif peanut butter or some other national brand, and then you're going to see, you know, Crazy Charlie's Blowout Wholesale Furniture Store down on the corner of whatever and whatever, which is in your town., and then you'll see like an ad for the cable company itself. That's why you see a mix of different ads like that is because some are controlled by the network and some are controlled by your local cable company. Okay. So we all know about cord cutting. We know that viewers have been leaving their cable bundles to sign up for streaming services. In the early days of cord cutting, you had gentle subscriber declines, right? That cuts into those carriage fees. That are earned by companies like Disney. And they were able to offset that by going to the cable companies and saying, we want to charge more per subscriber. That sounds like a weird thing to do, to raise your prices on a declining business, but that's what they did. And Disney had a particularly strong hand when it did this because it would say, we have ESPN and that is the main event on television. The trend on television, if I had to overgeneralize, I would say Old people are still watching cable and middle-aged people are leaving cable for streaming and young people, they don't care. They're watching YouTube or Roblox. You should be so lucky as a parent to get your kid to watch a scripted show on streaming. My boy came home the other day, put on Netflix and he watched something called Captain Underpants. It was like an hour and a half of. Basically booger and fart jokes. And I thought, finally, some quality programming, because the alternative to that is they turn on YouTube and they watch someone you don't know hollering about a video game or some sort of nonsense. So a scripted show with a little bit of quality control, if you want to call it that, feels better. But that's generally not what kids are into. They just want social media videos anyhow. The one thing that's still holding strong in television is sports, because think about it, people watch it live. That means they're watching the commercials too, and the audience skews young, and the rights are still controlled largely by traditional television companies. So if you ask people who still have cable bundles, why do you still have your cable bundle? One of the big answers you're going to get is, hey, you know, I like to watch football during football season or basketball or what have you. So ESPN is the most expensive thing in the cable bundle by far. Disney charges Charter, for example, an estimated $12.50 per subscriber for all of the Disney channels, and ESPN gets about 3/4 of that. So if you didn't have it in there, the cable bundle would be cheaper. And that's just what Charter would like to do. That's a big part of the dispute, but I'm getting ahead of myself. The traditional way that a carriage standoff would go is that a company like Disney would come to Charter and they'd want more money and Charter would say no. And their contract would be up for renewal. And if they weren't able to come to an agreement by the time the contract ran out, then they would take their fight to the viewing public. And the, you know, the company like Disney, they would say, Charter is trying to take away your favorite shows, the shows you love. Charter doesn't want you to watch Monday Night Football. And then Charter would say, Disney's trying to jack up your cable bill. We're trying to hold your cable bill down, and they would fight about it. But under no circumstances would they let you, the viewer, miss something that's important to you, because then they're gonna lose you as a subscriber, and that's important to both of them. That's how it went in the past. Now it's different. Charter cable customers, Spectrum customers, in other words, they haven't had Disney Channels, including ESPN, since the beginning of September. That means they've missed out on The US Open in tennis, which sources tell me is important to some people. I'll take their word for it. They've also missed out on some college football games. And crucially, coming up, they're going to miss that Monday Night Football. Football is a huge draw.

So are viewers upset? And if they are, who are they upset with?

I think a lot of them are upset, and I think they're wondering who they should be upset with.

I've gotten text messages from people who are missing some of their sports. And they're asking me who they should be upset with.

They ask me what they should do. The short answer to what you should do is get yourself a trial subscription to a virtual cable bundle that's fed to you over the internet, like YouTube TV or Hulu Live TV or something like that. And that would hold you over until these two sides come to an agreement. But I, you know, they might not come to an agreement and I'll get to why. You know, traditionally it's really easy to be upset with a cable company because I mean, who's really in love with their cable company? I used to sit on hold and this chipper voice would come on like every 2 minutes and they'd say, we're committed to being the best. And it was like a cable monopoly.

So I would just think all the time, you're committed to being the only, that's like, that's like your main thing. That's why I'm here.

And I was just sit there and hold and that voice would come on over and over and over again. It would drive me bonkers. But anyhow, that same company, you know, that's, that's now part of Charter, and they brought out a big slide deck for investors. And in the first line of the slide deck, it says the multi-channel video product is too expensive and packages don't meet consumer needs. If you think about that, that's Charter saying right up front, the main thing we're known for selling stinks. It's a lousy deal for our customers, which That's your, that's your first signal that this dispute is a little bit different, that, that Charter really might be fed up. Charter is, is saying that it's willing to walk away from TV altogether, and I think that there's reason to believe that they might do that. I'll give you a couple of reasons. First of all, this is no longer the early days of cable cord cutting. Subscribers are leaving quickly. 25 million cable subscribers have canceled over the past 5 years. If you go back to 2010, more than 90% of people had some sort of pay TV. Now it's about 50%, so there's not as much left to try to protect. Also, profit margins on the TV business have been falling. A cable company like Spectrum can sell you just broadband service, or it can sell you TV service. Its margins on just broadband service are 3 times those of the TV business. So if you're a Spectrum customer and you're saying, I'm going to cancel my TV business, I'm going to keep you for broadband, but I'm going to go over to YouTube TV and I'm going to get my cable bundle there, they're saying, hey, be my guest. We make good money on that proposition. The main claim for Charter in all of this is that Being tied to ESPN makes them less competitive. Charter would like to have the freedom to sell people more of what are called skinny bundles, stripped-down cable packages where you take out the stuff that not everyone wants, take out sports, which is expensive. Not everyone watches sports, and you end up with a cheaper bundle. And it said if it could do that, it could slow the declines in TV subscribers. It also would like to take Disney's streaming offerings, the, especially the ad-supported ones, and it would like to bundle those. It's saying bring those over here and make those part of the cable bundle. It's hard to imagine Disney doing that because that's where Disney is supposed to go once cable television dies ultimately, right? I mean, that's the whole idea of Disney creating these streaming offerings is looking at the trend and what's going on in TV and having somewhere else to go. So to now bring that into the cable fold, That would seem an extreme step. So this dispute between the two companies, it's not just about one saying, I want more money and the other saying, we don't want to pay you more money. It's, it's Charter saying, we want the freedom to not have to offer ESPN because it's keeping us from offering cheaper packages. Matter how skinny of a bundle would I have to make for you before I could bring it back to being a cable subscriber. Tell me what, what are the must-haves in your skinny bundle and how much would you pay?

I don't think I can even answer that because my answer is I want HBO and, you know, like I am a third, I'm such a streamer. I don't even know.

Yeah.

You don't know what's out there.

No. And I hate if it's not on demand.

I have a hard time finding Gilligan's Island.

What can someone out there tell me what happened to Gilligan's Island?

Is that somewhere in the streaming ecosystem? Why can't I watch? What else can I find?

I think that's pretty much it. I'll pay you about 10 cents a month. Yeah.

I was going to ask you, how much are you going to pay?

I'm going to cancel after 6 months though.

If Charter wants more flexibility, I think the main thing Disney wants is to preserve its free cash flow until the profitability of streaming Theoretically improves. I mean, we haven't really seen it happen yet, but if it's going to happen over the next several years, Disney's free cash flow today is greatly diminished. It would like to hang on to that and sort of bridge this gap until streaming really takes off and starts making a lot of money.

So does Disney make a lot of money on this arrangement from cable television?

Yeah, not just Disney, but this is the cash cow of the television industry. The tired old cable bundle is the main way they make their money. They use the free cash flow from that to fund making new shows and things like that, to, to stock up on their streaming services to try to bring in more streaming subscribers. But it hasn't been clear to me that the profitability of streaming will ultimately match the profitability of legacy TV. I have a hard time believing that it will. I guess the one thing in favor of streaming is that it has theoretically global scale so you can bring in more people for the same stuff, but it's just going to take a long time. I mean, that, that traditional cable business is a goldmine. Think about it. Your customers pay you for the stuff they want and also the stuff they don't want, which is an economic miracle to begin with. And then you make them sit through advertising so that they pay you again. With their attention. Oh, and by the way, absolutely everyone signs up for it because like it's the thing you have to do to get certain stuff that everyone wants and everyone talks about it. That's what it was like, you know, 15 years ago in cable. That's pretty hard to reproduce with any business. For Disney, it needs to find some answers fast on ESPN. It is reportedly preparing to launch an ESPN streaming service as soon as 2025. I know what you're thinking. What about ESPN Plus? It already has an ESPN streaming service. That is not ESPN. That is— remember like when CNN said they're going to start CNN Plus, a streaming service, and they hired a bunch of people for it, and then different managers said almost immediately, like, no, we're— that's a bad idea. We're shutting that down. We're canceling the whole thing. And all those people who went over there were out of work. I mean, that was a rotten thing to do to those people, but it was also a terrible idea from the start. And the reason it was a terrible idea is Who are the only people who would be interested in CNN Plus? I'll tell you who— CNN fans. What didn't CNN Plus have? It didn't have CNN. What is CNN? It's a news channel that's always on. In other words, there's never a moment during the day where you, the CNN fan, can't go watch CNN instead of watching CNN Plus, this thing that doesn't have this live CNN feed. It just has add-on content, the documentaries. When are you going to watch that stuff? I don't know. Presumably, if you're such a huge CNN fan, you're busy watching CNN. So not at whatever moment we're talking about. You see what I'm saying? I think that product had a natural audience of zero or an audience that rounds to zero.

Now, that's skinny.

That was— that was real. That was too skinny.

ESPN+ is not like that. ESPN+ has many subscribers. But it has those subscribers because it's bundled with Disney's other streaming services. It bundles together Disney+ and Hulu and ESPN+. And so it sells ESPN+ for next to nothing as part of that bundle. And, um, you know, like I say, it doesn't include the same full suite of sports rights that ESPN, the cable channel, has now to duplicate that in a true streaming service to take, to take ESPN. Out of the cable bundle and turn it into a true streaming service where you could watch any of the games you like live, all the same sports rights, that would be expensive. And here's one clue. The cable companies have already taken a hard line with some of the regional sports networks. They carry programming for certain teams. And the cable company said, we want to offer bundles that don't include these channels. These channels are expensive and not everyone watches sports., and those channels don't have the heft of Disney to defend themselves. So they've been sort of cast out on their own. And what they've said is we're going to launch streaming services and take it direct to customers. And those services cost $25 or $30 a month for a very narrow set of games and a narrow set of teams. So if you had this full array of ESPN content, what would that cost? I think $30 a month sounds low for that. So the thing is sports fans are not used to paying paying their full TV bill. They're just not. They've been subsidized all along by people who don't watch sports. That's why the ESPN portion of your cable bill today is, let's say, close to $10 and not closer to $40. It's because you're charging it to everyone. You're not just charging it to the people who watch ESPN. So while it seems like an easy fix for Disney to take ESPN out of the cable bundle and just sell it as a streaming service, it is not an easy fix because when you're only selling it to the people who watch ESPN, it turns out you have to charge quite a lot for it. And there's no way of getting around that because sports rights are expensive. It's kind of some circular logic here. There's been like runaway inflation in sports TV rights, partly because of this cable system we've had where everyone shares the costs. Right. And so, so sports are very expensive to show on TV. And so what Disney is trying to do is they're trying to partner with someone for their ESPN streaming service. There's talk of them partnering with sports leagues, right? You can go to the leagues and you could say, hey, these sports rights are really expensive. How about you come in with us as partners on this thing and we'll share the TV, the streaming money together? So, you know, they could try that. Maybe that can hold down the cost for viewers. It's unclear to me how successful that's going to be. I certainly wouldn't count them out, but it's not an easy walk to get from where we are today to replacing those economics in the future.

It's so interesting to me that sports, even though it's so popular, is basically subsidized.

Yes. If you're a big football fan, then you should go and find someone who doesn't watch and who pays for cable, and you should hug them and you should say, you say, Thank you for the many years of Monday Night Football. I appreciate you. I mean, it should probably be someone you know, right?

That doesn't watch sports. You know, don't hug a stranger.

You know, don't go knocking on doors is what I'm saying.

Yeah. Don't like say I'm doing this because Jack Howe told me to on the Barron Streetwise podcast.

Yeah. Hey, you know Barron's Magazine?

Well, they told me hug a stranger.

No, that's not what I'm saying. And so the last thing to talk about are the relative losers in this. Who loses what? Should we, Meta, take a break before the loser part?

Yeah, that's an upbeat place to take a break.

Losers coming right up.

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.

Welcome back. We're talking about losers. As I recall, it's the, uh, the Disney standoff with Charter and who's going to make out worse. And I think the clear answer in this is Disney. Charter has said that 25% of its video subscribers, as it puts it, regularly engage with Disney content. I don't really know what it is to regularly engage with content, but I've got to believe that some figure north of that casually engages or semi-regularly engages with Disney content, including ESPN. So I'm not sure if 25% is the exact number.. But think of it this way, more than 20% of its content costs also come from Disney. So it stands to lose some TV subscribers from this standoff, but it also stands to lose a significant amount of its costs. And the effect on free cash flow in the near term could be fairly benign, fairly neutral. What matters really is where these people go to get their sports fix. Let's say that they cancel their Spectrum TV and they replace it with YouTube TV, but they keep Spectrum for broadband. I think Spectrum is going to be just fine with that outcome because it makes great money on broadband. The margins are good. I think Disney probably wouldn't mind that either because it also gets paid on those virtual channel bundles. The people who sign up for them, they're not, not quite as sticky as customers They don't hang around quite the same way that traditional cable customers once did. But as we've just talked about, the entire industry is in decline. So I'm not sure how relevant sticky is these days. So the big loss for Charter could come in the form of people who say, I'm going to cancel my TV and I don't want Charter anymore for my broadband. I'm going to Fios or I'm going to some other, you know, broadband-only competitor. It's tough to say how many people that could be. JPMorgan estimates maybe around 10% of the people who are big ESPN fans, which isn't really a number that's going to be that harmful to the company. It figures that because it says there's 45% overlap. If you look at Charter's broadband footprint, there's 45% of it where there's another fiber alternative. And so it just tries to figure, you know, what portion of the people who could do that, that It's a guess, but Charter, it's worth noting, still says that its goal is to grow broadband subscribers this year. So that brings us to the cost for Disney. How about $4 billion in yearly free cash flow? That's according to Oppenheimer. That's for this dispute alone, and it includes the advertising. And that is, even for Disney, a massive amount of money. That would dominate the free cash flow that it has remaining. In fact, I think it would really cut into what Disney could do with dividends. Its plan is to reinstate its dividend before the end of this year, and I think they talked about having a modest dividend and growing it from there. It sure would be modest if the company got hit with a $4 billion decline in yearly free cash flow. I'm not sure what kind of money they would have left to pay out with shareholders. I think that would probably Hurt their ability to fund content for a while. So Disney is not looking for that kind of hit in the near term, which is why I say even though Disney is the much larger company and you think of it as having the upper hand in this, I think that Disney could well cave. I don't know what that caving, what form that would take. Concessions on price, concessions on letting Charter do more bundles that don't include ESPN. The part about bringing streaming services over, making those part of the cable bundle, that seems like a significant overhaul to the business plan at Disney that I don't know that they would welcome. But Charter's position is, look, come on in and we'll help you sell upgraded subscriptions to these people. We'll see what happens. So I think the bottom line is that if someone is to give in in this dispute, I'm guessing it would be Disney, but I don't think anyone is really going to be celebrating the outcome. B of A Securities recently compared the state of TV to the transition that happened in the music business, where we saw cassettes and CDs. Meta CDs were these things, they were sort of round and flat and you stored— I know what CDs are.

You do? Okay.

Yeah, they were in the Walkman. No, they had roundy things that were much bigger called, um, records, and they had something like cassettes that was bigger called 8-track tapes. And I had the soundtrack to Star Wars on an 8-track cassette. Soundtrack today means just the songs from the movie, but it used to mean the whole dialogue to the movie. So I saw Star Wars once as a kid, but I listened to it about 700 times. I used to have 2 8-track tapes, but one was Mother Goose and I played it too much.

My brother threw it in the fireplace so that I, that I only had Star Wars. Anyhow, where was I? Right.

The music business. Physical media went to downloads and piracy, frankly, and then it transitioned to the streaming business that we have today. Well, music revenue peaked in 1999. And it fell after that by 40%, and it didn't start growing again until 2014. So if you ask B of A Securities, where is the TV business on that timeline, they say somewhere in the late 2000s, 2008, 2009, or whatever. In other words, we have to go all the way to 2014. There are several years left of paying for the television business before all this gets sorted out and we get to what is supposed to be this coming age of greater profitability in streaming. So I guess if there's any encouragement for investors in these companies, it's that your stocks have already been hammered and maybe they look cheap, but things are going to be rocky for a while.

What do you think about it? Sounds kind of depressing, but it is a wrap.

It's a depressing wrap. Uh, would you say that it's, is it like that show Lost where the writers did like season after season and people were way into it and they said, we can't wait to see where this is all leading, and then when it ended, uh, the writers were basically like, we don't really know either.

We didn't really have a plan. We were making it up as we went along and everyone was dissatisfied.

Or would you say that it's just a regular, you know, is it an okay ending?

I think we need like a little bit of a positive beat. How about this? I found Gilligan's Island, the complete series collection on DVD.

Really?

DVD, you say? And it's $42.

That's pretty skinny. That is a find. I don't have a DVD player, so I'll send it to you and then you do a Zoom and then you, you play it on your thing and you point the Zoom at the thing. And then that way you'll be streaming it to me. I'll be streaming Gilligan's Island, right?

Is that, uh, what do you think? I think that's like more of a premium service on my end and I'll have to charge a little bit extra.

I sense a carriage dispute coming up. Thank you for listening. Meta Lutzhaft is our producer. You can subscribe to the podcast if you're into that sort of thing on Apple, Spotify, or wherever you listen to podcasts, and see you next week.

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