If it weren’t for the crappy state of everything else going on in the country (including Ajit Pai seemingly being about to dismantle net neutrality) it would be an exciting time for the evolution of the TV industry, as the cable bundle looks like it’s about to be on its last legs. Earlier this month, reports came out that Viacom, Discovery, Scripps, AMC, and A&E were joining forces to form their own, relatively cheap, skinny bundle called “Philo” – the inclusion of the last of which was very surprising to me, as A&E is co-owned by Disney and Hearst, which also (separately) co-own ESPN, and just the other four companies forming their own skinny bundle is the last thing ESPN wants. But Disney and ESPN have a bigger fight on their hands. Altice, the French conglomerate that now controls Cablevision and Suddenlink, hass Cablevision’s old carriage agreement with Disney expiring after this weekend. Disney has faced contentious carriage agreements with the likes of DirecTV and Dish in recent years, which have gotten certain elements of the media worked up over the possibility of showdowns with companies that had ramped up their rhetoric about the high price of sports and stood up to regional and college sports networks, but in the end the power of ESPN was too much to resist and the companies sucked up and signed up for another round of fee increases and adding the Longhorn and SEC networks. But just days before the expiration of the agreement, there seems to be no end in sight to the Altice standoff, and plenty of signs that Disney’s luck and indispensability has run out, not just with Altice but with other cable operators as well.
Were it not for these two stories, I wouldn’t normally think the decline of the cable bundle has reached a tipping point. Large majorities of people still subscribe to the cable bundle… but they’ve now fallen below the 80% mark, and it’s clear that things have reached a critical moment. Disney trying to add yet another high-priced regional ESPN spinoff, one with significantly less value than the SEC Network, certainly looks like an ill-timed misstep that sent things spiraling down further (and Disney wants Altice to add not only ACC Network to a fairly basic package in New York City, but SEC Network as well). On the other side, Disney has announced the launch of OTT Disney and ESPN services, with the latter being limited to events that won’t hurt the value of ESPN to cable providers too much to lose but the former being stocked by Disney pulling its movies off Netflix a relatively short time after signing a big deal to put them on. Continuing the return of sports to broadcast, Fox will air the majority of next year’s World Cup matches on its broadcast network, meaning if the United States makes it, matches that gave ESPN gerbonkers ratings in the last two World Cups will air on broadcast where they belong, possibly even on weekdays. And while I’m still, in general, skeptical of streaming services’ ability to win major sports rights while also justifying their cost, in the wake of their Thursday Night Football deal, it’s hard for me to argue against the notion that Amazon at least has the potential to overcome most, though not all, of the obstacles I worry about (the fundamental problem of streaming being inferior to deliver live events than real linear channels, which bedeviled Amazon this past Thursday, is in my view ultimately insurmountable) to become a real player for mid- to lower-tier sports events.
There’s also the recent history of carriage standoffs to consider. Before its acquisition by Altice, Suddenlink kept Viacom channels off its systems for nearly three years, with Cable One possibly still leaving those channels off their lineups, and both companies made clear that they were just fine without Viacom’s networks. Viacom is on the expensive end of the non-sports four and, at least at the time, didn’t have as many shows with serious buzz as the others, so it could have been considered more expendable than most other Big Nine members. By dropping Disney channels, Altice would be risking a significantly larger backlash, not only from sports fans but from fans of Disney Channel’s kids shows, especially with the Yankees playing their wild-card game on ESPN Tuesday. But if it coupled dropping the Disney channels with a significant drop in customers’ bills, it could gain more than that in goodwill from non-sports fans.
Meanwhile, sports and Disney fans aren’t as out of luck as in the carriage disputes of the past, thanks to online cable providers like Sling TV. No service carrying ESPN would cost less than the $10-15 that’s likely to be the most Altice would refund customers; Altice’s moves wouldn’t totally break up the cable bundle unless they dropped multiple companies’ programming. But what would hurt Altice, but is likely to hurt Disney more in the long term, is if customers dropped Altice’s TV service entirely in favor of Sling or a more comprehensive service like PlayStation Vue, DirecTV Now, YouTube, or Hulu. Based on listed prices, dropping down from a TV+Internet bundle to just Internet should save $20/month with Optimum for New York customers; throw in fees charged only to TV customers, and that could be enough to justify getting one of the online bundles for $35/month (and that’s assuming they don’t drop Optimum entirely for Verizon FiOS). Sports and Disney fans that drop Altice’s TV services entirely are no longer directly putting pressure on Altice to add them back to the lineup. If that gives Altice enough backbone to leave Disney off the lineup entirely, especially if people with no investment in those networks start telling them not to restore them and threatening to quit if they do (especially once Philo launches), it puts Disney, and ESPN more specifically, in a very tight spot financially, as well as in terms of standing up to other providers, with deals with Verizon, AT&T/DirecTV, and the old Time Warner Cable deals now controlled by Charter looming over the next two years.
In 2011, Dish chairman Charlie Ergen suggested there was room for a cable or satellite operator to position themselves as a cheaper non-sports alternative; today he thinks Altice can survive without ESPN, and he certainly must be rooting for it. If Altice is successful at saying no to Disney and ESPN, it gives other providers, as well as potential future online providers, more confidence to say the same. Altice is not one of the larger providers, but if they manage to weather the storm and spend two years or more without ESPN on their lineup, Disney will suddenly look like an emperor with no clothes, and will find it hard for their demands to be met when they enter negotiations with AT&T, Charter, and further down the line, Comcast and Dish, and will find it especially difficult to get the ACC Network off the ground. Couple that with the pending launch of Philo representing the one thing Disney hoped to avoid by staying shackled to the cable bundle, and suddenly there’s a very real possibility that ESPN goes full-on direct-to-consumer with all of their content before the end of the decade (and indeed A&E’s inclusion in Philo starts to look more understandable if Disney thinks the cable bundle is already collapsing). Sports fans would probably still need Fox, NBC, and Turner’s networks to get all the sports they want and need, at least in the short term, but a successful standoff with ESPN would also allow cable operators to show down with those companies for lower fees and lower penetration for expensive regional sports networks. It’s possible the sports four-and-a-half will start to find that clinging to the old cable bundle model will bring down their smaller and non-sports networks more than prop them up, making a sports-specific bundle an increasingly viable proposition. At that point, Disney might just bail on cable operators and even their would-be competitors and seek to salvage whatever revenue (and data) they can for themselves.
Even if Disney and Altice reach a deal, it could still be bad news for Disney, ESPN, and sports leagues. Disney wants to ratchet up its fees and restore some of the coverage lost when they gave providers flexibility to offer skinny bundles. If Disney takes lower fee increases than they’re hoping for and keeps ESPN at present levels of penetration to avoid the catastrophe of being outright dropped, they’re going to have to budget less money for production and rights fees. Look for more layoffs to come down the pike and ESPN to scale back on what they’re willing to bid for rights as they come up early in the next decade. And the ads Altice has been running have arguably already increased awareness of just how much of their cable bill is being passed on to ESPN regardless of how much or little customers watch it, meaning if a deal is reached without ESPN being dropped, there could be a deluge of customers dropping service.
Keep an eye on how this situation develops over the next couple days, because no matter what happens, it could well mark the point of no return for the sports cable boom, as well as the beginning of the end for the cable bundle as we know it, and the start of shaping whatever comes next.