DirecTV is on the warpath against Disney in a battle it says is existential for cable TV
DirecTV and Disney are in a heated negotiating process over the future of the pay-TV bundle.
The sports-media world got a serious shock in mid-August, as a judge stopped the launch of Venu Sports, a sports-streaming service backed by Disney, Fox, and Warner Bros. Discovery.
What could have been a big blow for pay-TV providers like DirecTV and FuboTV, which filed the motion against Venu, turned into a cause for celebration.
But Rob Thun, DirecTV’s chief content officer, wasn’t in the mood to pop champagne bottles. Instead, he recently told B-17, his initial joy about the ruling quickly turned to anger.
“These guys lied to us,” Thun said of Disney, Fox, and WBD. “When you pulled back the curtain and saw what they were really doing — wow. They really just want to disintermediate all of pay TV and drive everyone to themselves. It’s horrific.”
Representatives for Fox, WBD, and Venu didn’t respond to requests for comment.
A source closely familiar with Disney’s thinking pushed back against Thun’s statements, including that the company is indifferent to the fate of DirecTV and its peers. They said the company wants to keep the pay-TV business — which has lost tens of millions of customers since the early 2010s and is still losing steam — alive as long as possible.
Fresh off a vicarious victory over Disney, Thun is still looking for revenge. DirecTV’s contract with Disney expires on September 1, leaving just a few days for the two sides to reach a deal.
Playing a different ball game?
Thun’s beef with Venu, and the triumvirate backing it, isn’t their idea of launching a so-called “skinny” sports-focused bundle. DirecTV and its peers wanted to do that for years but were forced to add those media giants’ non-sports channels.
In turn, bundles became big and bloated as its price skyrocketed. Thun acknowledged this issue and blamed it on networks’ higher minimum penetration rates, or “min pens” for short.
TV companies like Disney have been reluctant to separate their most valuable networks, like ESPN, from less-viewed ones like Freeform or Nat Geo Wild. They do this by saying that those smaller channels must be put in a high percentage of packages, securing a monthly affiliate fee for each of them — regardless of who watches them.
“They’ve been terrified to, frankly, swim on their own and not be buoyed by our minimum penetrations,” Thun said. He added: “I don’t think there’s a network on the dial — well, maybe there’s a handful — that are worth the rates that we pay.”
If pay-TV carriers balk, they miss out on all of Disney’s channels. And since that’s not a viable option, DirecTV and its peers have had to offer far too many channels at a price unpalatable to some customers.
“We’ve hit a ceiling of price that customers are willing to pay, and the only way to try to adjust what people can pay, then, is to offer skinnier bundles,” Thun said. “And that’s the one thing that is not allowed.”
It appeared as if Venu wouldn’t have to play by those rules, which infuriated pay-TV executives like Thun. Judge Margaret Garnett appeared to agree, saying in her ruling that “for the first time ever, the JV Defendants … are granting a firm a license to unbundled sports content. That firm is their own JV.”
The source familiar with Disney’s thinking strongly disagreed with each of these arguments as well as the judge’s ruling, adding that the company had a valuable and widely watched slate of networks that, in aggregate, are watched regularly by most pay-TV customers.
For DirecTV, it’s skinny bundles or bust
DirecTV believes these strict forced bundling requirements are to blame for putting pay TV on life support. In turn, Thun wants to allow customers to build their own bundles that could be centered on a combination of genres like sports, entertainment, news, family & kids, movies, or Spanish-language programming.
“We absolutely have to find our way to offering something smaller and less expensive than what we have today,” Thun said.
The content chief added: “I’m not sure what the wake-up call is going to be, frankly, for the programmers to realize this isn’t good … If I drive pay TV out of business, the gravy train is over.”
If Disney doesn’t allow for skinnier packages by separating its weakest TV networks from its most desirable ones, Thun said his company will either sue or temporarily cut ties to Disney’s channels.
The source familiar with Disney’s thinking said the company is trying to work with DirecTV and Charter to build skinnier bundles, though they were skeptical that consumers are clamoring for them.
From Disney’s vantage point, DirecTV has no one to blame for its struggles but itself. The satellite company’s technology and interface trails popular streaming TV services like Google’s YouTube TV and Disney’s own Hulu + Live TV, the person close to Disney said, though growth has stalled there also.
Michael Pachter, a media analyst for Wedbush Securities who said he’s been a DirecTV customer for nearly three decades, doesn’t buy it. He believes cord-cutters left because of surging prices, not user-interface shortcomings.
Disney is “completely responsible” for the fall of pay TV, Pachter said, “because they think the only direction that retransmission fees should go is up.”
“The content owners are absolutely screwing the consumer by forcing their content onto multiple different networks in order to justify bundles,” Pachter said.
Former cable analyst Brian Wieser, who has since started advertising consultancy Madison and Wall, said it’s “almost certainly true” that DirecTV’s tech has hurt it, though that doesn’t explain the erosion of pay TV. There’s truth to each side’s argument, he said.
Without skinny bundles, pay TV is ‘going to die’
If skinnier bundles can’t solve pay TV’s woes, it’s unclear what could. Cable providers have tried adding streaming services like Paramount+ or Disney+ to make their packages more appealing, but customers don’t seem to be too interested.
Less than 10% of Charter’s cable customers have signed up to get Disney+ and ESPN+ within their bundle at no extra cost, Puck’s John Ourand reported last month. That remarkably low opt-in rate came as a surprise to media analyst Rich Greenfield of Lightshed Partners.
“This seemed like the future: adding new streaming offerings desired by consumers and dropping lightly-watched linear TV channels,” Greenfield wrote in a mid-July note. “Unfortunately, it does not appear to be working out that way for Charter.”
Thun’s take is the low adoption rate for these streamers, even when they’re free for Charter customers, proves the value of the existing pay-TV model and interface.
“That should reinforce to these programmers, ‘Holy moly, if I’m going to be on my own and this stuff’s available for free and I’m getting single-digit take rates, what are my prospects of not having pay TV to subsidize the model?'” Thun said. “And if you put us in this [minimum-penetration] jail, you’re going to put us under — we’re going to die.”
Pay TV won’t disappear overnight, but Wieser said he could see its penetration shrinking from around 50% of US households to 30% in five years to 10% in a decade. That’s unless, of course, companies like DirecTV and Disney not only come to terms but also figure out how to stop the bleeding.
“Is it about maximizing profitability, or is it about maximizing consumer satisfaction in the short term?” Wieser said. “Or is it about maximizing the health, however we want to define it, over the long term?”
