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Disney, Charter spectrum avoided breaking pay TV. is that good?

If you squint, you can see a new type of pay TV bundle beginning to form.

The landmark carriage deal between The Walt Disney Co. and Charter Spectrum not only ended the blackout of Disney channels like ESPN and ABC for Spectrum customers, but it also created a new template for pay TV, one that other providers will surely seek to emulate.

As an executive at another media company with cable channels said, the industry was watching the dispute with “bated breath,” hoping that the worst-case scenario (Charter exiting the pay TV business) wouldn’t come to pass.

In the end, there was a deal to be cut. And while the worst-case scenario didn’t happen, everyone else in the TV business is reckoning with the fact that they will be next.

“Simply put, this agreement (at least for now), removes the worst-case scenario from the table — a potential dramatic decline in the linear subscriber universe that would also have had a significant earnings impact on the broader ecosystem,” wrote Bank of America’s Jessica Reif Ehrlich.

Charter CEO Chris Winfrey told Wall Street analysts that the stance his company was taking with Disney is the stance the company will be taking with all of its carriage talks moving forward, and a Charter source confirmed that the Disney deal will serve in many ways as a template for the types of deals Charter is seeking.

So what does it mean for the industry? Analysts and industry sources point to two key pieces of the deal that will likely be felt across the industry: Including ad-supported streaming in the bundle, and a “re-sizing” of the linear business.

In the end, Disney agreed to let Charter Spectrum include the basic ad tier of Disney+ in its cable TV package, with the cable company paying a “wholesale” price on behalf of its customers.

It’s a deal that companies like NBCUniversal (which owns Peacock), Paramount (which owns Paramount+) and Warner Bros. Discovery (which owns Max) are surely looking at closely.

Charter executives argued that the big entertainment companies devalued their linear assets by producing less programming and moving much of their content to streaming, while bragging publicly about how the cash from linear TV is helping to subsidize their streaming ambitions.

“Disney has been forced to give up its attempt at double-dipping: no longer can the company get paid by Charter for channels and charge subscribers directly for what is generally the same general entertainment content,” wrote Stratechery’s Ben Thompson. “That was what Charter wanted, and Disney, lacking leverage and the reality of massive sports rights fees that presumed the presence of Charter’s millions of TV subscribers, gave in.”

And that, ultimately, is the key point of the streaming push: If the bulk of new content investment is on streaming, and if the linear channels are just serving as windows to a streamer, then maybe that’s where there are changes to be made.

“We’re on the sidelines of this,” WBD CEO David Zaslav said at a conference earlier this month, noting that his company’s deal with Charter isn’t up until 2025. “I think we’re one of the good actors in the industry that’s spending a lot of money still in linear because we believe in it.”

Of course, WBD, like every other company in the space, has also cut back on the number of programs on its linear channels and has increased its investment in streaming.

There are complicating factors. Both Max and Paramount+ have the bones of HBO and Showtime within them, premium channels that used to be add-ons for pay TV. The addition of content that in the past would have been in the traditional bundle (like all those Yellowstone spinoffs, or HGTV content), as well as the launch of cheaper ad tiers (something legacy HBO and Showtime never had), could make them fair game for Charter to demand including in their bundle.

But amid questions of new forms of bundles, Charter (and perhaps other distributors) may be the ones to offer the first meaningful bundle of entertainment content.

“Monday’s renewal also is a precedent for Disney to get full penetration of Disney+ across the linear video ecosystem over time; we expect more distributors would be willing to support this transition,” wrote JPMorgan’s Phil Cusick.

And then there is the resizing of the cable TV business. For years, entertainment companies padded their balance sheets by seeking higher fees for their channels, and by demanding the inclusion of newer, smaller channels into the core-TV bundle.

Disney’s deal with Charter suggests those days are over. The fees for core channels (like ESPN) may continue to rise, but the padding of the bundle is now in the past. As part of the Spectrum deal, Disney agreed to drop Freeform, Nat Geo Wild, FXX, Disney Junior, Disney XD and other channels from Spectrum lineups.

Dana Walden, the co-chairman of Disney Entertainment, noted to The Hollywood Reporter in an interview that those channels were already being used to funnel content to larger cable channels, and to Disney’s streaming services.

“The digital networks are for the most part targeted and they super-serve an audience in the linear ecosystem, but they are also windowed onto what we are calling our primary channels,” Walden said. “So you know the Nat Geo suite, ultimately that programming also airs on Nat Geo and then it is windowed over to Disney+, similarly with Disney Junior and Disney XD, and then FXX has been a valuable source of programming for Hulu.”

But these moves were no small give. Freeform and FXX were in more than 70 million homes, according to Nielsen. And Freeform can trace its origins to the very beginning of cable TV, when it launched as the Christian Broadcasting Network in 1977 (as part of a 1990 for-profit spinoff, the channel agreed to continue carrying Pat Robertson’s The 700 Club, which it still airs to this day).

If Freeform is on the chopping block, there are other major cable channels at other companies that could end up being cut as well.

“Like much of this deal, we anticipate this setting a precedent for similar surgical culling in all future renegotiations across the industry,” MoffettNathanson’s Michael Nathanson wrote in a note after the deal was announced.

“We expect that Disney will re-evaluate these networks and the amount spent to operate them as other distribution agreements come up,” added Guggeinheim’s Michael Morris.

In other words, the long-term future of these channels is now firmly in doubt.

Of course, not every cable company has the scale or leverage that Charter has. But every company has expressed a desire to reevaluate their video offerings, which have become less lucrative year after year. A new model that proves to be stabilizing — or even proves to be a good value for consumers by bundling streaming services and linear programming — could end up being a boon to the entertainment business at large. Even if it means sacrificing a few cable channels to get there.

“I think this particular deal is unique to Charter — or a distributor like Charter — and recognizes their needs, their goals and getting to their consumers, and it syncs up now with what our goals and priorities are,” Walden said. “I think that there isn’t a set model.”

Or as Michael Nathanson wrote: “While perhaps not the end of the pay TV world as we know it, we very much can look back at this Disney/Charter deal as an opening salvo of a broader rebundling and a step in giving customers smaller linear bundles with increased SVOD functionality.” Hollywood Reporter

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