Disney’s first set of contract negotiations with service provider Altice are proving to be more challenging for the content owner than expected, according to BTIG analyst Rich Greenfield. Greenfield predicts these negotiations have already deteriorated and notes the likelihood of a carriage interruption is growing.
Altice is the first in a series of contracts Disney is seeking to renegotiate in hopes of offsetting recent revenue declines. Disney may have trouble justifying its per-subscriber rate increases for its top sports network, ESPN, in light of the network’s recent and well documented subscriber declines.
ESPN has found itself stuck with extremely pricey sports rights at a time when the pay TV industry is seeing record numbers of cord-cutters leaving the ecosystem. EPSN has lost some 5 million subscribers over the past two years, a fact that has continued to weigh down Disney’s quarterly profits.
Disney’s strategies for raising revenues typically include contract provisions that determine which pay TV packages carry ESPN. But Disney has received pushback from service providers like Verizon in recent years against these practices, as the value of ESPN and other premium cable networks has come under scrutiny amid cord-cutting.
After its acquisitions of Suddenlink in 2015 and Cablevision in 2016, the Netherlands-based Altice is considered a newcomer to the US pay TV ecosystem, a fact that’s led analysts to believe Disney may try to strong-arm the service provider during in this first round of negotiations. But BTIG’s Greenfield predicts Altice won’t be an easy win for Disney.
“Unfortunately for Disney, their legacy practice of strong-arming distributors is no longer going to work,” Greenfield said in a note. “[Altice] is taking a fresh look at the price [and] value of all programming as it has just recently entered the US market. ESPN/ESPN2 are no longer worth the $7-$8 per-sub per-month that they are paid by distributors.”
The last Disney contract was negotiated by Cablevision back in 2013. Further complicating the matter is the rise of so-called skinny streaming TV bundles during the intervening years. These low-cost streaming pay TV services all now carry ESPN, a fact that may give service providers like Altice new bargaining chips against Disney in contract negotiations.
“Back in 2012, there was no easy way for a subscriber to add-back ESPN during a carriage drop,” Greenfield said. “Today, with a few clicks on their computer or mobile device, a consumer can add ESPN via an array of vMVPDs, costing as little as $20/month and they can sign up for however long/short they want.”
The biggest risk to Altice—if a carriage interruption does occur—is its New York business which overlaps with Verizon’s FiOS footprint. Greenfield doesn’t expect Verizon to respond aggressively to any such blackout, as Verizon’s relationship with Disney is itself strained: Disney sued Verizon for allowing video subscribers to opt out of receiving ESPN in its “Custom TV” package in 2015.
“This fact should increase Altice’s leverage vis-a-vis Disney,” Greenfield said. “ESPN is simply not in the power position it once was and its leadership should recognize how ESPN’s value to distributors has declined rather than trying to fix their business challenges by forcing consumers to absorb dramatic cost increases.”