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Good Thursday Morning. Here’s the rundown of this week’s Sports Business Playbook:

• 📰 This Week’s Topic: The DirecTV-Disney dispute has a lot of the same characteristics as last year’s Charter-Disney dispute. There are some key differences, however, that could lead to a different outcome.

• 🍸️ Impress Your Friends at Cocktail Party: Want to show off your sports knowledge in a public setting but don’t have time to read the deep dive? Hit the “Impress Your Friends at Cocktail Party” section at the bottom for a CliffsNotes of this week’s topic

• 🤯 “Whoa of the Week”: Scottie Scheffler’s dominance

• 💪 Weekly Reminders that Sports are Awesome: UCF doing it for the kids, Luda’s big arms are back, and Nick Saban was born to be on College Gameday.

Hey team,

If you’re a sports fan like me, you likely tuned into ESPN for a number of the opening weekend games of college football and the on-going coverage of the U.S. Open.

You may have even been sitting down on Sunday night to take advantage of the long weekend and watch the USC-LSU game and fourth round of the U.S. Open.

Unfortunately, if you’re one of the more than 10 million DirecTV subscribers, you never got that chance.

The satellite provider and Disney failed to renew their deal, and all Disney channels, including ABC and ESPN, were shut off just after 7pm EST on Sunday, right before these major events were taking place.

If this sounds oddly familiar, you’d be right!

An almost identical dispute occurred last year between Disney and Charter during a similarly high leverage weekend of programming (you can read my piece about it here, written a year ago this week!).

That being said, there are a few notable differences on this one that raise the stakes.

So, let’s dust off the Carriage Dispute 101 textbook and dive in. In this week’s SBP, you’ll learn:

• How the legacy TV value chain works

• What this dispute is about

• Why the DirecTV fight looks different from last year’s Charter-Disney tiff

How Legacy TV Works

If you remember our primer on the sports media landscape from last year, there are four key players that interact in the media rights market:

• Rightsholders: leagues, teams

• Media companies: Networks (ESPN, CBS) or a streaming service (Amazon Prime, Apple)

• Distribution platform: cable company (Charter Spectrum, Comcast), satellite service (DirecTV), or streaming service (YouTube TV, Fubo)

• Viewer: fans

Here is how the model works:

Rightsholder —> Network —> Distribution platform —> Viewer

Step 1: The rightsholder is paid an annual fee by the media partner for the specific rights to a slate of games. The pricing power of the top tier properties (i.e., NFL, NBA) continues to grow, which puts pressure on the media partner, and therefore, the rest of the system. More on this shortly.

Step 2: The media partner then can generate revenue in two ways. The optimal situation is that these revenues outpace the capital expenditures on the sports media rights.

• Sell advertising in commercial breaks. A better product on the screen means more coveted advertising spots, which means more revenue.

• Charge a “carriage fee” to the distribution platform for the rights to carry the media partner’s channel. Having a suite of premium products means the distribution platform’s viewers will want the channel, so they’ll be willing to pay more. For example, ESPN receives about $10.79 per user per month on the platforms (industry average is about $0.75).

Step 3: And finally, the distribution platform then charges the viewers a monthly fee for using the platform.

That point between Step 2 and Step 3 is where we get the friction that often leads to a carriage dispute.

Most times, the issues are due to:

1. The carriage fee the cable company will have to pay

2. The overall distribution requirements — known as “minimum penetration” — which refers to the percentage of subscribers the distribution platform is obligated to have paying for a specific channel (i.e., ESPN) in their package at a given time. Remember, distribution platforms offer different packages, so not all channels are included. If this floor is not met, the distribution platforms must pay penalties if they don’t meet the minimum threshold.

The media networks have had most of the leverage for the last several decades, so while there is some saber rattling on both sides, the deals ultimately resolve themselves quickly without much media coverage.

This has not become as much of a rubber stamp effort as of late, though, and it’s mostly due to the increasing media rights being fed into an eroding legacy TV ecosystem, which puts downward pressure on the whole value chain.

The cost of these media companies holding onto the ever increasing rights fees (i.e., the NBA’s new 11-year, $76 billion package) continues to explode, which in turn means the media companies need to find revenue somewhere.

The group they extract from the most: the distribution platforms. The problem: the legacy TV business is in free fall.

According to a report from S&P Global and MoffettNathanson, since 2015, media networks have more than doubled the amount of money they've charged cable companies for distributing their programming, while cable TV subscriptions have declined in that same period by more than 40%.

Put all that together, and you have not only the aforementioned friction but a potential earthquake that plays out in a very public manner. It was Charter-Disney last year, and now it’s DirecTV-Disney.

What DirecTV and Disney are fighting about

As with the Charter dispute last year, the main sticking point here is not necessarily the increased carriage fees on their own but the fact that, in the distribution platforms’ eyes, Disney wants to have its cake and eat it too:

1. Increasing carriage fees

2. Requiring higher penetration rates

3. Requiring bundling of its less-viewed channels

Disney would argue it needs all of these provisions in order to afford the content that makes its operations economically sustainable, and there is some truth to this.

But, at the same time, while it’s hard to have a lot of sympathy for the distribution platforms (cable companies, amirite?), DirecTV brings up some fair points:

1. According to the LA Times, Disney requires that ESPN must be delivered to about 82% of DirecTV’s subscribers. DirecTV counters that that less than 40% of its customers regularly watch Disney’s sports content and it’s unfair to have the remaining 60+% absorb those high costs.

   1. Note that Disney disputes this because it invests heavily in high-quality programming and has offered its channels, including ESPN, to DirecTV at market rates. Some experts suggest ESPN on its own is worth about $50-60 per month.

2. Disney wants equal or higher penetration rates, which DirecTV disputes because only 10% of its customer base regularly tunes in to kids programming but more than 80% of its subscribers are paying for those channels. Disney’s programming allegedly costs DirecTV more than of $2 billion per year, or around $270 per subscriber, so the customer frustration for paying for something they don’t want is high.

   1. Note that Disney also disputes this and contends that 90% of DirecTV households engaged with some aspect of Disney programming every month in 2023

3. While all of this is going on, ESPN is developing streaming alternatives and attempted sports bundles that are cannibalizing the legacy TV business but want the platforms to comply. For example, in the wake of the major courtroom defeat for the Venu Sports (“Spulu”) joint venture, Disney demanded in its negotiations that DirecTV waive all future legal claims that its behavior is anti-competitive.

Similar to Charter, DirecTV has gone public and tried to win in the court of public opinion.

In addition to a few fire quotes from their C-suite (below) poking at Disney, DirecTV has set up websites — KeepMyESPN.com and UnbundledDisney.com — and even sent letters to the commissioners of the SEC, ACC, and Big 12 to try to drive home their points for what they want: a fairer negotiation and for the media company to work with them on more creative, skinnier bundles that benefit consumers.

Disney, in turn, has responded and placed the blame on DirecTV for denying subscribers the chance to watch top tier sports programming.

It’s fair to say that neither side is fully in the right or wrong here given the complexity of the issue and the existential threats both groups face. Unfortunately, the ultimate losers here are the fans that are stuck while this corporate chess match plays out.

What happens now?

Last year’s Charter-Disney spat became a game of chicken/war of attrition.

This fight figures to be the same, with both sides absorbing losses during a critical time of the year for programming — ESPN: ad and carriage fee revenue; DirecTV: subscribers and revenue — until one side blinks.

The biggest difference here between Charter and DirecTV, though, is that unlike Charter or one of the other platforms, DirecTV cannot treat its pay TV business as a loss leader because it does not have an additional line of business (i.e., broadband, Google search) that it can fall back on.

This is it’s core business, and it can’t afford to have this negotiation go sideways, particularly when it is in such a precarious position.

Per Sportico, DirecTV lost more than 6 million subscribers in the last five years, and of the 1.67 million subs that left pay TV in Q2 2024, DirecTV and Dish accounted for 30% of those defections

Some would say this means DirecTV will cave quickly on these demands in order to stop customers from churning, and all of this public tough talk is a negotiation tactic to try to get Disney to give into some concessions. This is understandable because DirecTV also services a number of bars and restaurants, and it will lose a number of these if the dispute continues deep into football season.

Others contend it means it has nothing to lose and will go to the mat on this to try to protect the business from doing a deal that further accelerates its demise. DirecTV has drawn out disputes before, including just last year with Nextstar, so there is precedent here. Plus, neither side wants to set an unsustainable standard in the market since both will have to go negotiate with other distribution platforms or media companies, which could further draw out the impasse.

As for when specifically, the Charter dispute resolved itself just before the first Monday Night Football Game of the season. If this tiff is to follow a similar course, that would mean the two sides have effectively four and a half days to get something hammered out. Despite the tough talk, DirecTV definitely left the door open for that resolution, and that’s likely what the sides want.

If they don’t, though, it’s unclear what the next major compelling event would be. Awful Announcing points to October 7th, which is the first MNF that features the Kansas City Chiefs and likely several opportunities to show the most famous popstar in the world. But again, it’s hard to tell who is going to give first.

Regardless of the outcome of this dispute, I’m left with more questions about where this industry is going and when the true transformation from legacy TV to something else will actually occur.

There are countless articles by people much smarter than me explaining all of the things the industry should do to evolve and move forward, but these are hypotheticals that often don’t take into account human incentives and emotions.

There is a lot of history and pride here, and these legacy TV companies are not going to just roll over and/or completely tear it down to start over.

The likeliest outcome I can foresee is a long, protracted consolidation of the distribution platforms into the larger, more well capitalized tech companies (i.e. Apple, Amazon, YouTube TV, [maybe Netflix?]. These groups have the balance sheets and motivation (collecting customer data) to absorb these costs.

The interesting thing to watch will be which carriers are able to survive as a standalone platform amongst the giants (potentially best case scenario), which get acquired (also a positive outcome), and which have to fold up shop or are acquired at a loss (worst case).

Buckle up, friends!

🍸️ Impress Your Friends at a Cocktail Party

Want to show off your sports knowledge in a public setting but don’t have time to read the deep dive? This section is the CliffsNotes of this week’s topic

• Opener: DirecTV, the 3rd biggest Pay TV provider with more than 10 million subscribers, failed to renew its deal with Disney, so all Disney channels, including ABC and ESPN, were shut off just after 7pm EST on Sunday, right before major events — U.S. Open, USC vs. LSU college football game — were taking place. If this sounds oddly familiar, you’d be right! An almost identical dispute occurred last year between Disney and Charter during a similarly high leverage weekend of programming.

• Shot: Primer on legacy TV: Rightsholder —> Media network —> Distribution platform —> Viewer. Carriage disputes usually occur when the network and cable company disagree on the carriage fees (price per subscriber paid by the cable company to the network). Given the increasing media rights and the loss of subscribers to Pay TV services working against each other, these disputes get more public and more nasty.

• Shot: As with the Charter dispute last year, the main sticking point here is not necessarily the increased carriage fees on their own but the fact that, in the distribution platforms’ eyes, Disney wants to have its cake and eat it too:

  1. Increasing carriage fees on ESPN (estimated to be $10.79 per month per sub — the industry average is $0.75 👀👀👀)

  2. Requiring higher penetration rates

  3. Requiring bundling of its less-viewed channels

• Shot: DirecTV believes these are untenable demands given the number of people that are actually consuming Disney content, particularly when Disney and other networks are actively cannibalizing the Pay TV business with streaming services. It wants lower penetration rates, flexibility on carriage fees, and the potential to develop creative, skinnier bundles of content.

• Chaser: Many believe the dispute will get resolved before the first Monday Night Football, which takes place in 4.5 days. Others think that this is truly existential for DirecTV and they will drag this out to get what they want since they have nothing left to lose. Regardless, I’m left with more questions about the future of the sports media industry. The likeliest outcome I can foresee is a long, protracted consolidation of the distribution platforms into the larger, more well capitalized tech companies (i.e. Apple, Amazon, YouTube TV, [maybe Netflix?]. These groups have the balance sheets and motivation (collecting customer data) to absorb these costs. The interesting thing to watch will be which carriers are able to survive as a standalone platform amongst the giants (potentially best case scenario), which get acquired (also a positive outcome), and which have to fold up shop or are acquired at a loss (worst case).

🤯 “Whoa” of the Week

Insane, mind-blowing things constantly happen in the sports business world. Here was my favorite of the past week.

1. The historic run of Scottie Scheffler

💪 Weekly Reminder that Sports are Awesome

This newsletter is, of course, mostly centered on the business side of sports and the things that happen off the field. That being said, it’s important to remember why we fell in love with sports in the first place, though.

This section is meant to highlight the amazing things that happened in sports this week that serve as that reminder.

1. UCF’s special helmets

2. Ludacris brings back an iconic music video prop for his first pitch with the Braves

3. Nick Saban. Already a College Gameday legend

Thanks for reading! Let me know what feedback you have.

Also, if you enjoyed this breakdown, please consider sharing it with your friends and network by clicking the social media icons at the top of the newsletter.

Until next time, sports fans!

-Alex