By Dawn Chmielewski
(Reuters) - Thirty-one years ago, cable TV pioneer John Malone predicted customers would have as many as 500 channels in their living rooms.
Charter, the cable company in which Malone’s Liberty Broadband (NASDAQ:LBRDA) is a major investor, began downscaling that vision this week.
The agreement on Monday to settle an epic battle between Walt Disney (NYSE:DIS) and Charter Communications (NASDAQ:CHTR) over distribution rights is ushering the end of the lucrative, decades-old pay-television bundle and creating a template for future deals that includes streaming services, nine current and former senior media executives who have worked on these agreements told Reuters this week.
The Disney/Charter pact gave the nation’s second-largest cable company by subscribers the rights to distribute streaming video services that were formed as a hedge against the end of the traditional cable TV business. Disney also agreed to drop eight of its less-viewed networks, signaling the end of bloated cable TV bundles.
Analysts say this will save customers money so they do not have to separately pay for the same content on cable and streaming services.
“The media companies were blatantly double-dipping,” said MoffettNathanson cable industry analyst Craig Moffett. “Going forward, you’re not going to be able to simultaneously charge the same customer twice for the same content.”
THE NEXT EVOLUTION OF CABLE TV
A 1992 U.S. law requiring cable TV distributors carry local broadcast signals supercharged the television industry. Broadcasters could negotiate fees that included adding new cable TV channels.
Cable TV evolved from its earliest days of delivering broadcast signals to rural residents into a bustling mall for programming with about 225 cable networks in the U.S. today, according to S&P Global Market Intelligence.
But cable subscribers started dropping off as internet video streaming services like those Netflix (NASDAQ:NFLX) launched gained popularity. Pay TV households dropped from 95.9 million in 2012 to 72 million today, according to Leichtman Research Group. That precipitous decline has set the stage for contentious re-negotiations of these deals.
Cable distributors like Charter accused big media companies of putting some of their best shows on subscription streaming video services like Disney+ and Paramount+, and using cable fees to subsidize the cost of creating this exclusive programming.
Frustrated by paying media companies higher fees for less, Charter proposed a new type of cable TV bundle that combines Disney’s most popular cable TV channels, such as ESPN and FX, with access to ad-supported versions of its streaming services, Disney+ and ESPN+, which certain Charter’s Spectrum customers will receive for free. Spectrum’s customers will also receive ESPN when the sports network begins offering its flagship channel as a streaming service.
The new type of bundle deal combining traditional channels with streaming services provides a way forward for the media business. LightShed media analyst Rich Greenfield estimated Charter will pay Disney a wholesale rate of $3 a month, per subscriber, to give 9.5 million of Charter's Signature Select customers access to Disney+ at no additional cost to the consumer. That potentially enhances the streaming service’s value to advertisers, even as the cable company ensures its subscribers can watch content created for streaming.
“The end result is a more expensive bundle, but a more valuable multichannel video package,” wrote Greenfield.
Pity the cable TV channels that few people watch, said one TV station group executive. The owners of these channels “are probably having a lot of heartburn,” as they anticipate “those will get chucked overboard” in the next round of negotiations.
“We’re at an interesting inflection point where the traditional bundle is falling apart and the question is, what’s going to replace it?” said Jonathan Miller, a veteran media executive and chief executive officer of Integrated Media Co., a special purpose media investment company. “It’s pretty clear that only the largest networks will survive as part of bundles.”
Warner Bros Discovery (NASDAQ:WBD), for example, operates 30 general entertainment, lifestyle and news networks in the U.S., including the American Heroes Channel and the Science channel. Paramount Global has created numerous spin-offs of its main cable channels, with Nickelodeon siring five programming offspring, Nick Jr., Nick at Nite, TeenNick, Nicktoons and Nick Music.
As these companies enter into renewal talks in the coming months and years, the new deal template could give media owners an excuse to drop losers in the lineup, executives said.
“All these dogs and cats networks take a certain amount of capacity on the physical plant,” said Moffett. “Most operators at this point would say that capacity is far better allocated to higher broadband speeds rather than filler video.”