Media stocks melt down as Spectrum feuds with Disney and ESPN: ‘We’re on the edge of a precipice’

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The summer of media-industry disruptions continues with a carriage dispute between Walt Disney Co. and Charter Communications Inc., which runs the Spectrum cable service.

channels, which include ESPN and ABC, went dark for Spectrum subscribers Thursday night, on a busy evening for sports, as the media companies duke it out over the future of their distribution deal.

Read: Disney-Spectrum feud heats up as ESPN goes dark for college football and U.S. Open. Could the NFL be next?

The drama weighed heavily on shares of media names Friday as it highlighted the vulnerability of the current cable landscape amid the rise of streaming.

While Warner Bros. Discovery Inc.
and Paramount Global Inc.
aren’t involved in the current Spectrum dispute, their shares got crunched Friday given Charter’s
seemingly determined pushback against the status quo. Both Warner and Paramount are highly levered, so they’re more sensitive to dynamics that could alter the industry dramatically, and they have more of their businesses tied up in cable programming.

Shares of Warner fell 12.0% to log their largest one-day percentage decline since Nov. 4, 2022. Paramount’s stock was off 9.5%, while Fox Corp. shares
dropped 6.3%. (Fox and MarketWatch parent News Corp
share common ownership.)

Meanwhile, shares of Disney declined 2.4%, while Charter’s shares fell 3.6%. Shares of cable peer (and NBCUniversal owner) Comcast Corp.
lost 2.2%.

Shares of fubuTV Inc.
which runs a live-TV streaming service, ended the day up 13.3%.

“As the media stocks have already started to properly contemplate, the future of this Charter/Disney negotiation has dramatic ramifications on the rest of the industry aside from Disney,” SVB MoffettNathanson analyst Craig Moffett wrote in a note to clients.

Media companies and cable providers periodically engage in disagreements over distribution terms, and the yanking of content can be a negotiating tactic that draws consumers into the fray. But Charter Chief Executive Chris Winfrey said the spat with Disney “is not a typical carriage dispute.”

“We know there’s a better path,” Winfrey said on an investor call earlier Friday, according to a transcript provided by AlphaSense/Sentieo. “We also believe that Disney and Charter are uniquely capable to lead the way. So we’re on the edge of a precipice. We’re either moving forward with a new collaborative video model or we’re moving on.”

While distribution disagreements between media and cable players typically hinge on pricing, Charter executives said that the current situation is more complicated because the company seeks a fundamental shift in its relationship with content providers in the streaming era.

Rich DiGeronimo, Charter’s president of product and technology, said that the company agreed to Disney’s “supposed market-rate increases but requested carriage flexibility relative to their asks,” and also asked for streaming-related benefits for Spectrum subscribers.

Charter wanted Disney’s ad-supported streaming services to be made available to Spectrum subscribers at no additional cost, while adding that the company would help market Disney direct-to-consumer offerings.

“Although Charter claims to value our direct-to-consumer services, they are demanding these services for free as they have stated publicly,” Disney said in a statement. “Charter is depriving consumers of that content because they are failing to ascribe any value in exchange for licensing those services.”

Citi’s Michael Rollins wrote that the current saga “feels different from some past disputes that were resolved quickly” as it “seems to be more about business model and the future of video distribution, which are larger issues than just PxQ math,” or the idea of “price times quantity.”

He said a drawn-out saga could further accelerate cord-cutting, the implications of which are uncertain.

See more: 1.7 million Americans cut the cord last quarter as traditional TV continues to erode

“We believe the market is generally positive on cable firms pivoting focus on being a broadband-first provider and exiting the low-margin video business over time,” Rollins wrote. “However, the transition does create some risk of revenue and cash-flow headwinds over the near- and medium-term, as we believe Charter’s video business does contribute to the company’s current overall cash flow generation.”

Charter Chief Financial Officer Jessica Fischer highlighted various financial puts and takes on Friday’s call.

“We anticipate some video-related revenue loss as a result of the dispute, given the expected decline in video customers and any potential credits or rate adjustments to video customers, even if the outage is brief,” she wrote. “In addition, we would expect reduced advertising revenues related to the lost content.”

On the flip side, she anticipates “significant reductions to programming expense given the license fees we pay to Disney, which we expected to be over $2.2 billion for 2023 absent the current dispute.” However, the company said it expects to incur greater costs related to customer service as it anticipates it will field higher call volume during the dispute.

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