Labor Day Weekend is supposed to be one of the more relaxing holidays of the year in the US Unfortunately, Charter has made it a stressful one for its customers, many of whom have been experiencing up to 3-hour hold times to cancel their cable subscription after Disney's networks went dark. This was a direct quote made by the Walt Disney Company addressing 15 million Americans who just lost access to all Disney-owned cable channels, the most important of which is by far the ESPN sports channel. Charter Communications is a parent company of Spectrum. TV With 15 million subscribers, spectrum is massive, representing about 25% of the entire Us Linear television market every year.

Spectrum pays Disney $2.2 billion for the right to broadcast Disney Owned Channels With the rise of internet-based streaming services like Netflix, it's been clear for some time that the traditional cable bundles days are numbered, but licensing shows to cable providers like Spectrum is still a major Cash Cow For Disney, the profits from traditional television are necessary to subsidize Disney's streaming. Ambitions which is still still losing billions of dollars per year. This Hasty divorce is also disastrous for Spectrum, as more than half of their top 100 programs by viewership are owned by Disney and have now disappeared with the loss of this valuable sports programming. Charter Subscriber declines are set to accelerate.

Disney's share price has fallen below its pandemic lows from 2020. Investors are asking existential questions about the viability of the traditional media business model. In this video, we'll take a look at why Charter took the unprecedented step of divorcing Disney and why this could Mark the beginning of the end for linear television. To understand the current dispute between Charter and Disney, we first have to understand how the cable television industry works.

The end consumer pays a monthly subscription fee to the distributor such as Spectrum TV. The distributor then pays production companies like Discovery Disney and Paramount for the right to air their shows. The amount paid to each production company varies based on the importance of the content they produce. These are called Carriage fees For example: Disney Usually re receives a disproportionately large payment because of their ownership of ESPN Because professional sports are so popular, many consumers would not sign up to a cable package unless it includes ESPN The musthave nature of the channel gives Disney a massive amount of Leverage when negotiating The Carriage fees.

The flip side is that Disney has to pay massive amounts of money to the sports leagues for exclusive access to the games on the other end of the spectrum. Reality: TV Shows have much lower Carriage fees because they're not as important to the end consumer. They are also a lot cheaper to produce. So why do the cable Distributors need to exist? Why can't the production companies just sell their shows to the end consumers directly? Originally, the reasons were technological.

The Distributors like Charter spent billions of dollars laying physical cables to tens of millions of households across the country before the widespread roll out of high-speed internet. This was the only way for people to watch television without lag. Additionally, the distributor can bundle many channels from many different producers into one bundle. This can provide a superior experience to the consumer, albeit for a premium price.

There are also satellite TV Distributors Like Dish, their business model is almost identical to cable TV so we will just refer to both of them as Pay TV as more and more homes were connected to high-speed internet. Throughout the 2010s, directed consumer models like Netflix started to gain traction by cutting out the middleman of the cable distributor. They were able to offer compelling content at a fraction of the cost of the traditional Cable Bundle Since 2014, the total number of Us Payv subscribers has decreased by 35% from 101 million households to 65 million. Cable providers have partially offset this by raising prices.

The average monthly price of Payv service has increased 25% from $35 to $43 per month in the same period. Given the seeming superiority of directed consumer offerings, why does anybody still pay for traditional TV There are a couple of reasons. Firstly, is the power of inertia, which should not be underestimated. Many people people have spent their entire lives watching cable television and they can't imagine going without it.

They don't want the trouble of figuring out a new direct consumer offering like Netflix. A good analogy is landline telephone service. As of 2021, there were still 97 million active landline telephone subscriptions in the US despite the fact that this technology has been obsolete for more than a decade. Another important reason for the continued survival of the traditional Pay TV bundle is live news and sports.

This is the one thing that directed consumer services don't have as directed consumer services have taken market share. Live news and sports have become increasingly important to the Payv Distributors as it's their last point of differentiation. Theoretically, you could put live news and Sports on a directed consumer online offering. Both CNN and ESPN have tried this with CNN plus and ESPN Plus, respectively, but both of them have been flops and CNN plus was canceled just weeks after its launch.

The reason these were such flops is because CNN and ESPN are already locked into deals with Payv Distributors. If they want to continue collecting their Carriage fees, they're not allowed to repost their existing cable content on the lower price streaming offerings. Because the revenue per user is so much lower for streaming, they could only afford to produce content of subpar quality which fail to attract audience interest. With that being said, Disney does have an offering called Hulu Plus Live TV.

This includes 90 television channels including ESPN, CNN and Fox News just to name a few. Unlike ESPN, Plus or CNN Plus, this is a viable alternative to the traditional Cable Bundle, but its high price point of $70 per month is roughly the same as comparable cable TV Plans Given the inertia of cable television, Hulu Plus Live TV has failed to gain significant market share. Despite the decline in Payv subscriptions over the past decade, it still generates tens of billions of dollars per year. Both the Distributors like Charter and production companies like Disney know that cable television is slowly dying.

Nevertheless, the arrangement has still been too lucrative for either of them to abandon. Knowing the outsized importance of live sports. Disney has been consistantly increasing the carriage fees at charges for years. This has allowed them to continue growing their content licensing.

Revenue Despite the decline in overall subscribers, The increasing Carriage fees have squeezed the profit margins at Charter Communications and in 2023, it looks like they finally hit their breaking point on the first weekend of September 2023, 15 million Trump TV Subscribers found that ESPN ABC News and dozens of other Disney owned channels were no longer available Charter already pays Disney $2.2 billion per year. The two companies were renegotiating the contract and Disney wanted to increase the price even further. Charter refused and the two parties ultimately couldn't come to an agreement. Charter published an article explaining what happened.

over the past 5 years. the traditional Payv industry has lost 25% of its subscribers. As this has happened, content production production companies like Disney have moved much of their content to the new directed consumer offerings like Disney. Plus, As a result, Disney's cable television channels have experienced a significant decline in viewership.

This is to be expected, as many people are now watching Disney Plus instead. despite the declines in viewership, Disney wanted to increase the price Charter proposed the counter offer. They would accept the higher price, but only if Disney agrees to include ad supported tiers to their streaming offerings presumably Disney plus and ESPN Plus for spectrum video subscri rers free of charge. Their proposal was unacceptable for Disney Disney is still losing money on their streaming services, and over the past year their number of subscribers has been decreasing due to increased competition.

If they had to start giving away Disney Plus for free to Charter customers, they would lose millions of paying customers and their losses would get even worse in the first half of 2023. Disney generated 3.7 billion of operating income from Linear Television Networks. They lost $1.2 billion on their streaming service Services All the traditional media companies which launch their own streaming services have similar results. Their streaming service is losing money, but they can subsidize this with the profits from Linear Television.

Now that Charter is dropping Disney they will lose the $2.2 billion Carriage fee as well as the advertising Revenue associated with airing their shows on. Spectrum TV To be clear, Disney still has their theme parks in movie businesses which are highly profitable so they will still be sustainable even after losing Charter as a customer. However, their profitability will take auge huge hit. That's why we've seen their stock price plunge to lessen its pandemic lows.

But instead of getting bogged down in the accounting of who will win and who will lose in the short term from the Disney Charter divorce, we're probably better off taking a step back and looking at the bigger picture. With the majority of Us households having access to high-speed internet, why do middleman like Charter even need to exist anymore? Almost immediately after the divorce from Charter Disney started encouraging Charter subscribers to cancel their subscriptions and sign up for Hulu Plus Life TV instead. In the past, this option failed to catch on because its value proposition was similar to cable television which already has an entrenched position. Now that Spectrum TV doesn't even have ESPN or any of the other, Disney Channels Hulu Live finally has a significant advantage over Spectrum in terms of value for money.

We don't know how much money Disney makes from Hulu Live because it includes some channels that Disney doesn't own and must pay licensing fees for. But even if we assume that the contribution profit from a new Hulu Live subscriber is just $5 per month, it's not impossible to see Disney ultimately coming out on top. Spectrum has 15 million subscribers. According to Neelon data, 71% of them watch at least one Disney owned Channel per month.

If half of them cancel their Spectrum subscriptions and switch to Hulu Plus Live. TV that would be 5 million households at $35 of contribution profit per month. That would be $2.1 billion per year, which would almost make back the entire Carriage fee that they lost from charger. In the age of high-speed internet, the cost of Distributing content is negligible, so the only thing of real value is the content itself.

Business models may need to change to adjust to this new reality, but one way or another, most of the content production companies will probably survive. For the cable companies, it's a whole different story. They no longer provide any real value and eventually they'll take their place in the trash heap of obsolete businesses. All right guys, that wraps it up for this video.

What do you think about the Charter Disney Divorce. Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one. Wall Street Millennial Signing out.

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