Over the weekend, college football fans received an ominous message from the Walt Disney Company: If they subscribe to DirecTV, their favorite Disney-owned channels like ESPN, FX and National Geographic might disappear.
The message was not unexpected for some. Financial news outlets and trade publications, including The Desk, have reported for more than a week that Disney’s distribution agreement with DirecTV was set to expire during the Labor Day holiday and, in the absence of a new carriage deal, Disney-owned channels were set to go dark on DirecTV’s satellite and streaming pay TV platforms as well as co-owned U-Verse.
The situation is not an anomaly — for much of the past decade, programmers like Disney have engaged in numerous carriage disputes with fed-up pay TV platforms like DirecTV over the fees that must be paid by cable and satellite distributors in exchange for the rights to retransmit broadcast channels and cable networks to their subscribers.
Until recently, one could easily predict how things would happen: Both sides would spend a few weeks leading up to the dispute, warning viewers and subscribers that they may lose access to channels. Once the dispute started, the cable or satellite company would argue that the programmer was demanding higher fees than what the channels were worth, while the broadcaster argued that they were simply seeking fair compensation for their sports, entertainment and local news programming. Distributors would argue that, if they paid higher fees to broadcasters, they’d have to raise rates on subscribers. Eventually, the dispute would be settled behind closed doors, with virtually no terms of those contracts released publicly, and it almost always led to a rate increase for pay TV customers within a few months.
Over the past year, something interesting has happened. Cable and satellite companies have apparently waived the white flag when it comes to how much they’ve been asked to pay for broadcast and cable channels. Instead, they’ve attempted to redraw the battle lines, affirming their willingness to pay more for the same set of channels, as long as they get something else in return.
That new front in the carriage war was first made public last year when Disney engaged in a carriage dispute with another pay TV provider, Charter, which offers cable service under the Spectrum TV brand. For more than a week, Spectrum TV customers lost access to Disney-owned channels like ESPN, FX, Freeform, National Geographic and ABC stations in several major markets like New York City and Houston where Disney owns the local broadcast outlet.
Charter’s argument then was that Disney was moving more highly-sought programming like “Dancing with the Stars,” FX’s “The Bear” and ESPN’s “Monday Night Football” to its own streaming services, which it sells directly to TV fans. Charter wondered aloud why Spectrum TV and its subscribers should have to pay Disney more money for the same set of channels, given that Disney was devaluing its own linear channels in favor of its streaming services.
Related: New Charter-Disney deal will see Spectrum TV lose some channels
Disney eventually acquiesced, and both sides eventually reached an agreement that allowed Charter to move some channels to different Spectrum TV programming packages, or drop them entirely. It also gained the ability to offer the ad-supported tiers of Disney’s streaming services to Spectrum TV subscribers as part of their service, with Charter subsidizing the cost of those services through wholesale purchase agreements with Disney. Charter has since inked similar distribution deals with other programmers like Paramount Global and Televisa-Univision, while Disney has extended the same carriage benefits to other cable TV platforms.
That isn’t good enough for DirecTV, though. While Disney executives have offered DirecTV a new contract that is, in effect, the same as what it offered Charter and others over the past few years, DirecTV executives say Disney needs to embrace a new genre-based method of distributing channels across cable and satellite platforms like theirs.
The difference between now and then is Venu Sports, a forthcoming streaming service that is being launched by Disney and two peer broadcasters — Fox Corporation and Warner Bros Discovery (WBD) — that aims to offer sports-inclusive channels like Fox, ABC, TBS, TNT and ESPN without general entertainment or news networks.
The broadcasters say Venu Sports operates like any other pay TV distributor: Like cable and satellite companies, Venu Sports will have to pay fees to the broadcasters for the rights to carry their channels, and the fees will be substantially similar to what other pay TV platforms must pay for sports-inclusive networks.
Of course, the only channels that will be carried by Venu Sports are the ones owned by the broadcasters — who also own Venu Sports. Effectively, the money paid for those channels is simply moving from one pocket to another.
And the contract by which Venu Sports may carry channels are substantially different from what other cable, satellite and streaming cable-like companies are forced into — typically, cable companies must carry ESPN in a base programming package that also includes channels like FX and Disney-owned ABC, and Fox News must be offered in that same base subscription plan as Fox Sports 1 and the local Fox-owned broadcast station. Venu Sports doesn’t have those same requirements — and that is why one service, Fubo, recently took the broadcasters to court on antitrust grounds. (DirecTV has provided some support to Fubo during the case.)
While a judge overseeing Fubo’s lawsuit recently approved a temporary injunction that prevents Venu Sports from launching until the case is settled, the development of Venu Sports has given DirecTV fodder for its contract dispute with Disney.
As DirecTV’s Chief Programming Officer Rob Thun sees it, Venu Sports proved that broadcasters are willing to embrace a new distribution model by which channels are bundled around genres like news, sports and entertainment, rather than the way channels are distributed today.
Currently, broadcasters try to group high-value and low-value channels together, so financially-solvent networks like ESPN help subsidize lesser-watched networks like Disney Junior and Freeform. Since the broadcasters charge a per-subscriber fee based on each channel (ESPN is believed to command the highest amount of money of any cable network today), the broadcasters stand to substantially benefit from today’s bundling arrangement.
The customer, however, loses out. As it stands now, customers who pay for ESPN must also take FX and Freeform, even if they only want sports channels. The opposite is true, too, with non-sports fans forced to pay high fees for ESPN, even if they never watch a second of football or baseball.
“Customers have to pay the Big Mac pricing to get the junior cheeseburger,” Thun quipped.
Related: DirecTV exec accuses programmers of ‘posturing’ as Disney blackout looms
Only the broadcasters benefit from that arrangement, and it isn’t clear how long that will continue. Cable and satellite companies have lost customers every year for the past decade, and while broadcasters have told Wall Street that they’ve offset those declines by raising carriage fees on pay TV companies, they stand to earn substantially less from the business over the next few years if the trend continues.
For this reason, Thun said he understands why programmers like Disney, FX and WBD would embrace Venu Sports, since it gives sports fans access to the channels they want, at an attractive price point (it will reportedly launch for less than $50 per month, if it ever gets off th ground), and without having to pay for news and entertainment programming that they can get elsewhere.
What Thun doesn’t understand is why that same model isn’t available to other cable and satellite platforms, who helped build the viability of the broadcast and premium network TV business over the past few decades.
“We’re not trying to kill the cable channel model, but if the model doesn’t change, it’s going to kill us,” Thun warned.
While the idea of genre-based bundling appears to be a new direction for DirecTV, the company has actually hinted at this approach in the past. Last year, while negotiating a new contract with local TV broadcaster TEGNA, DirecTV floated the idea of offering TEGNA’s local ABC, CBS, Fox and NBC affiliates on an à la carte basis.
As DirecTV put it then, TEGNA’s local TV signals are usually available to receive for free with a conventional TV antenna, and most DirecTV and U-Verse subscribers can probably receive them that way. Rather than forcing all customers to pay for TEGNA’s local TV channels, DirecTV said it was willing to pay TEGNA whatever it wanted in carriage fees, so long as it could move TEGNA-owned stations into an opt-in, add-on TV package that customers could purchase if they wanted to.
Ultimately, the idea went nowhere. DirecTV did not have the kind of leverage it thought it did, and faced with the prospect of losing customers in the middle of football season, it quickly signed a new agreement with TEGNA just in time for the National Football League’s (NFL) playoffs. The company never moved TEGNA’s channels into an à la carte bundle, and TEGNA apparently got everything it was looking for, even if it did emerge with some short-term financial bruises.
Related: TEGNA said DirecTV dispute hurt revenue during Q4
TEGNA, however, is not a participant in Venu Sports, and it remains unclear if TEGNA-owned Fox and ABC stations will even be part of the service. So, the dispute with TEGNA may not have provided DirecTV with much ammunition to argue that genre-based channel bundling arrangements are the better approach.
The same isn’t true for Disney: By participating as a co-owner in Venu Sports, the company has already proven it’s willing to embrace a model where sports channels are segregated from non-sports channels, and sold to consumers accordingly.
In this instance, Disney appears to be the holdout. Justin Connolly, a senior Disney executive in charge of platform distribution, told the Hollywood Reporter last week that DirecTV was trying to “to spin back some flimsy rationale around these ‘genre-themed packages,’ and frankly, it just feels like a tactic to distract from the real issues in negotiation.”
Connolly never said what those “real issues” are, but he did say that DirecTV’s idea of genre-based channels “don’t feel like they can be executed easily, and that continues to be a challenge.”
That seems like bull. DirecTV’s genre-based channel bundling idea is no different from the sports bundling arrangement that Disney was willing to embrace for Venu Sports. No one at Disney — including Connolly — can explain why Venu Sports, as a distributor, should be treated differently than DirecTV. If Venu Sports can offer just sports-inclusive broadcast and cable channels, why can’t DirecTV offer the same package?
As of Sunday afternoon, ESPN and other Disney-owned channels remain available on DirecTV and U-Verse, though it seems highly likely they will disappear from those platforms before the Labor Day weekend is done. Neither side can really afford to engage in a long-term dispute — Disney has certain commitments to the NFL, and is gearing up for a highly-anticipated “Monday Night Football” match-up scheduled to take place on September 9. And DirecTV cannot afford to not offer that game, since its customers can easily switch to another service like YouTube TV, Fubo or Hulu with Live TV to watch it.
It isn’t clear when the situation will get settled, or how. But one thing is certain: If DirecTV loses Disney-owned channels, they will eventually come back. If DirecTV is successful in negotiating a deal where channels are grouped by genre, it will show the satellite and streaming TV provider not only has the stamina to fight, but the leverage to pull off novel distribution agreements — and that will benefit the whole pay TV industry. On the other hand, if DirecTV winds up with a deal that is substantially similar to what Disney offered Charter, it will prove that Disney still has the upper hand.
