Most people viewed the recent contentious negotiations between Walt Disney and Charter Communications like a prize fight: two combatants, one winner.
I see it differently. Viewed through the lens of Michael Porter’s competitive forces, which we use at Harding Loevner to analyze industry dynamics, the dispute was a clear example of a change in the bargaining power of buyers amid the changing economics of streaming services.
Disney and Charter clashed over a new cable agreement. Charter complained about the high fees it paid for ESPN, FX, and other Disney channels while Disney was funneling premium content to its own Disney+ streaming service. Eventually, Disney’s channels disappeared from Charter’s Spectrum TV service, and Spectrum stood firm: it was prepared to give up Disney’s networks, seemingly forever.
It didn’t come to that, though, and the terms of the agreement don’t sound monumental: Disney+ will now be an option for Charter subscribers for an additional fee. Disney gets new eyeballs, but hands over a chunk of its fees to Charter, which had faced a seemingly inevitable revenue decline from its cable business due to the rise of streaming. The agreement offers a reprieve from that.
However, the terms of the resolution show that Disney as a supplier had far less bargaining power with its customer than it had assumed. It was forced to make material concessions that will affect its transition to a full-streaming model. Make no mistake, Disney backed down, and that loss is going to hurt its bottom line in the long run. Moreover, if the world’s largest entertainment company couldn’t use its muscle to get what it wants, then all the other networks are going to face the same dilemma when their carriage agreements come up for renewal. Disney’s capitulation could signal a major shift in the entertainment industry.
For decades, “content is king” was the mantra of the media industry. While cable companies were the primary distributor of content made by studios, the ultimate pricing power was always in the hands of the studios, especially studios like Disney that owned must-see kids, sports, and movie content. A cable provider could not attract subscribers without these must-have channels. As a result, even though there would be heated negotiations over fees, ultimately cable providers would yield to the studios’ demands.
The studios’ leverage has been weakened by the very thing they are focused on: streaming. Streaming subscribers often cherry pick services, signing up for a short time if there’s a must-see program and then canceling. For Disney and the others, there is a fundamental mismatch between costs and revenue duration. Streaming platforms need a constant flow of new programming to limit subscriber churn, but that pushes operating costs up into the billions. Not all of them can afford it.
It’s possible Charter perceived this, or just felt like it had nothing to lose. It was willing to take a loss of subscribers upfront by terminating its Disney arrangement rather than bleed subscribers over a number of years if it didn’t challenge Disney, given either course would likely lead to the same terminal point, just in different time frames. Charter’s hard stand showed the flaw in the Disney plan.
The content king may not be dead but it definitely seems like he holds less power. ∎