After striking a new carriage agreement with Disney last month that involved linear networks and inclusion of the media company’s direct-to-consumer apps in certain video packages, Charter Communications executives on Friday indicated plans to seek similar deals with all programmers as the cable operator eyes a video future where distribution models meld linear and streaming.
Speaking on Charter’s third-quarter earnings call, CEO Chris Winfrey described creating “a glide path” to bridge linear video and DTC services and drive growth for both, with Disney and ESPN serving as “key first step to repairing the video ecosystem.”
“We plan to modernize all of our distribution agreements upon renewal in a way that works for customers,” Winfrey said Friday. “That means packaging flexibility, value, and not asking customers or us to pay twice for similar DTC and linear programming. If programmers insist on customers paying twice, we just won’t carry those channels.”
Charter would still be willing to sell their content in an a la carte app, he added.
The Disney dispute played out very publicly as linear channels including ESPN went dark on Charter’s systems in September, right at the start of football season. Winfrey cited a goal to update future agreements “quietly and seamlessly for our mutual customer base.”
Charter sees the deal with Disney as adding value to its video packages and alignment with programmer’s DTC efforts through the inclusion of ad-supported Disney+, ESPN+ and the forthcoming flagship ESPN DTC product in certain Spectrum TV packages, while terms also give Charter the ability to offer more flexible and skinny TV bundles. On the flip side Disney got rate increases for ESPN carriage and benefits from broader distribution of its DTC apps. It also gets ad revenue from Charter video customers and Charter’s marketing and sales might as the operator promotes Disney’s DTC apps – including marketing upgrades to ad-free tiers to its broadband-only customer base, as well as through Xumo over time.
The push for new video models comes as Charter in Q3 continued to lose traditional video subscribers, reporting record quarterly net losses of 327,000 (including 7,000 SMB losses) in the period. While continuing to lose video subscribers, Charter’s base had been declining at a slower rate than industry peers but Q3 was less rosy, in part due to the Disney dispute. Its Q3 losses compare to 211,000 net residential losses a year ago and 189,00 net losses in Q2 2023. Charter ended September with a residential video customer base of around 13.75 million.
Charter CFO Jessica Fischer attributed around 100,000 of the video disconnects in Q3 to the programming dispute with Disney, and estimates approximately 15,000 internet disconnects in the period were driven by the temporary loss of ESPN in September. Still, the overall customer impact was less than Charter expected. Fischer noted that following the Disney blackout billing and retention call centers weren’t fully back to normal until early October, citing a lingering customer net add impact early in the fourth quarter. While Charter had additional overtime at call centers due to the Disney dispute, she said it wasn’t a material expense driver in the quarter.
Charter’s traditional residential video business generated around $4 billion in revenue in Q3, a decline of 8.6% year over year. For the full year 2023 Charter expects programming costs per video customer to decline by about 3% year over year.
Asked by investment analysts on the call how Charter sees the future of video in five years, Winfrey said he thinks traditional video will still exist but with additional value as DTCs are bundled in, providing stickiness for the linear business. And looking ahead he envisions a more hybrid linear-DTC model, where Charter’s Xumo joint venture with Comcast also comes into play.
The Xumo Stream Box debuted earlier this month. It’s a streaming device that combines linear and SVOD apps into one interface – powered by Comcast’s EnteratinmentOS – with an integrated programming guide and unified search and discovery via a voice remote. It’s initially being rolled out to Comcast Xfinity and Charter Spectrum customers and is now Charter’s go-to-market platform for video sales going forward. Mediacom has also signed on to offer Xumo Stream Box to internet customers.
Winfrey said that the new hybrid distribution model, through “renovated agreements with programmers” combined with Xumo and its content-forward interface, offers a path to solve consumer struggles around choice, value and utility with integration of linear, DTC and VOD options.
“This creates a state-of-the-art video marketplace supported by our scaled distribution, sales and service infrastructure” and one he believes offers path to broader distribution, better economics and more choice for Charter, programmers, and consumers alike.
There’s the opportunity to evolve the marketplace, according to Winfrey, “where we can provide that type of traditional linear, integrated and DTC and SVOD product for customers who can afford it,” adding that makes for a very valuable product.
He noted that for consumers that come in and out of the video market with different packages because of affordability and the availability of DTCs a la carte, the Xumo platform offers Charter a marketplace to sell those products and “give customers options wherever they want to go.”
And not only does it have the traditional video business via Spectrum, but Winfrey also cited the ability to monetize through advertising revenue on the Xumo platform.
The chief executive reiterated that video is still going to be very important to Charter’s connectivity and broadband relationships. The scaled video platform also provides a distribution engine for DTC apps on a standalone or bundled basis for customers and programmers down the line.
Charter appears to see a turning point in the evolution of video. Over the past 15 years, he said there was not much to be optimistic about on video both from a consumer and a distributor perspective.
“For the first time, I see a path where we can create value for customers, increase utility, and that ultimately will enhance the value of the connectivity services that we provide,” Winfrey said.
Charter’s total third quarter revenue increased 0.2% year over year to $13.6 billion, which was negatively impacted by $68 million in total customer credits related to the temporary loss of Disney channels in September. Net income grew 5.8% to $1.3 billion, and Adjusted EBITDA increased 0.7% to $5.4 billion.