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

• 📰 This Week’s Topic: Charter Spectrum has thrown down the gauntlet and blocked its 15 million cable subscribers from accessing Disney channels, including ESPN and ABC, due to a contract dispute. This fight will eventually get resolved, but it has far reaching implications for all parties involved in the sports media value chain.

• 🍸️ 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”: The Messi Effect, quantified.

• 💪 Weekly Reminders that Sports are Awesome: An all-time fan interview, a heartwarming family moment watching Real Madrid, and the downside of being the team mascot when your team scores 81 points

Hey team,

A number of you probably had a similar experience to me last Thursday evening.

I finished all of my work early, told the future Mrs. Sports Business Playbook it was a momentous day and I could not be bothered with possible dinner plans with friends, and giddily went to ESPN to turn on the first major college football game of the year, Florida at Utah.

Right as coverage was supposed to start, this came up on our screens:

In the next hour, I went through the five stages of grief as I researched what was happening and came to grips with the fact that I could not watch college football due to a contractual disagreement between Charter Spectrum and Disney.

This boardroom row, known as a “carriage dispute” led to Disney’s channels, including ESPN, to go dark at the moment of highest anticipation and really twist the knife on fans.

And it’s a lot of fans.

Charter Spectrum is the second largest cable company in the country, and this corporate fight impacts nearly 15 million cable subscribers in some of the biggest metropolitan areas in the US — LA, New York City, and Houston, to name a few.

Unfortunately, there is the potential it could extend over the next several weeks, which would coincide with arguably the best, most high demand stretch of sports TV in the US each year - the last few weeks of the MLB regular season when the playoff brackets are being decided, college football getting into full swing, and the NFL ramping up.

Usually, these carriage disputes pop up and quickly get resolved on an almost annual basis with one of the numerous cable providers out there. And there is the hope that this one, too, will eventually get put to bed — fingers crossed by this weekend.

But, there is something different about this particular Charter-Disney dispute, and I think it has far reaching implications for all parties involved in the sports media value chain that is generating billions but is on shaky ground.

This week, we look at the cable TV model, the inner workings of the Charter-Disney dispute, and what it could mean for the whole industry.

Cable TV 101

If you remember our primer on the sports media landscape a few months ago, there are four key players that interact in the media rights market:

• Rightsholders: leagues, teams

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

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

• Viewer: fans

With cable, here is how the model works:

Rightsholder —> Network —> Cable company —> Viewer

Step 1: The rightsholder is paid an annual fee by the media partner for the specific rights to a slate of games. As you can imagine, the stronger the viewership/following of that rightsholder, the bigger the check (see: NFL).

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 cable company for the rights to carry the media partner’s channel. Having a suite of premium products means the cable company’s viewers will want the channel, so they’ll be willing to pay more. For example, ESPN receives about $9 per user per month on the cable platforms.

Step 3: And finally, the cable company 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 — meaning, the percentage of subscribers the cable company is obligated to have paying for a specific channel (i.e., ESPN) in their cable package at a given time. Remember, cable companies offer different packages, so not all channels are included.

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.

The Charter-Disney dispute is different, though.

Charter vs. the Mouse

There is actually an agreement in place on the first item above — Charter is reportedly set to pay Disney $2.2 billion in carriage fees.

The main battleground issues for Charter are as follows:

1. Lowering the distribution requirement (currently assumed to be ~80% according to LightShed Ventures; Charter may want it below 50% for this current negotiation)

2. How Charter can potentially offer Disney’s streaming services (i.e., Disney+, Hulu, ESPN+) as a part of its cable offering to offset the cord cutting.

Disney has, of course, said no to both of these, which is why we are where we are, and Charter’s demands get at the heart of what most cable companies have been shouting from the rooftops for the past few years.

What Cable Companies Believe

The media networks like Disney are negotiating these increasingly larger carriage fees to subsidize the development of their (currently highly unprofitable) direct-to-consumer streaming platforms, which they’re then shifting much of their premium content off of cable to. This move cannibalizes the same linear cable businesses that are propping them up financially and deepens the tail spin for the cable model overall.

The data backs this concept up. 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%.

Charter’s Thought Process

So, Charter looks at potentially having to sign up for another 4-5 years of the status quo in a dying business that Disney has made very clear it’s trying to kill and essentially said “nah, son.”

The day after the blackout began, Charter executives took a bold step and held an investor call, telling analysts that it had reached the “point of indifference” as to whether it even stays in the video business at all. Charter CEO Chris Winfrey then really laid it on thick: “We’re on the edge of a precipice. We’re either moving forward with a new collaborative video model, or we’re moving on.”

Most likely a negotiation tactic given Charter has over $100 billion in debt and the cable represents over a third of its revenue, but there’s enough “there, there” to be effective since some analyst estimates believe dropping Disney would actually be a break even move by Charter — meaning, the reclaiming of $2.2 billion would outweigh the potential lost revenue due to customer churn because Disney is no longer carried.

Disney’s Position is a Bit More Tenuous

While Disney has held the cards for 30+ years in these negotiations, it’s hard to see how they’re not behind the eight ball on this one.

They cannot afford to forgo that $2.2 billion in annual carriage fees revenue, and that’s not even factoring in the estimated $5 billion potential loss in advertising revenue from the blackout of 20% of ESPN’s linear cable subscriber base.

These potential revenue gaps hurt even more given the current media rights landscape. ESPN has to foot the bill for newly increased media rights in the NFL and college football, and it is gearing up for a massive NBA media rights deal coming next year that could reach $75 billion total contract value across the various networks.

To be fair, Charter is not necessarily 100% in the right, though.

1. It’s a cable company — it is a natural law of the world that they will do anything and everything to somehow screw their customers.

2. The request to give customers streaming service access at no additional cost is a ludicrous demand, particularly given how unprofitable most of the streaming platforms are. The media networks can’t afford to forgo the revenue from cord cutters, and this would have a compounding effect due to “most favored nation” (MFN) clauses that all major cable platforms have in their carriage contracts. In simple terms, if Charter negotiates this deal, Comcast, Cox, DirecTV and any other major providers can automatically apply these same terms to their current agreements with ESPN, which creates additional challenges.

Regardless of who is right and how this particular dispute gets resolved, more and more cable companies are looking at this broken business model and saying out loud that the juice may not be worth the squeeze, particularly when one takes in account the opportunity cost of not deploying these same resources into the much more profitable broadband and wireless phone businesses.

This last point is what has the sports world on the edge of its seats.

What Happens Now?

I don’t expect a black swan event to occur where the entire system collapses proverbially overnight, but it seems the traditional cable TV bundle is not long for this world. This shift has far-reaching implications.

Let’s revisit the cable model value chain again and examine the knock-on effects of what this unraveling could look mean

Rightsholder —> Network —> Cable company —> Viewer

Rightsholders

This is bad news if you’re a league or team.

Media rights are often the teams/leagues’ biggest revenue stream, and they continue to grow. The appreciation of these deals is driven by how strong the competition is amongst media networks, which are clamoring for these rights because they know it means potentially higher carriage fees from the cable companies and advertising revenues.

This model, in turn, fuels the increasing team valuations seen across the major league sports landscape because the media contracts are so lucrative and considered a stable asset.

Realistically, if the carriage fees safety net is largely gone and the status quo shifts to more of a true subscription model, it means the networks could be more judicious with their spending. The streaming providers, as seen by Apple’s stinginess with the Pac-2 (sorry, couldn’t help myself) in its most recent negotiations, are also not willing to overextend just because they have deep pockets.

Lower willingness to pay has cascading effects then on the dollar value of the media contracts signed, which impacts the revenues and stability, and which ultimately impacts the value of the teams/leagues.

It means that Tier 1 properties (i.e., the NBA) will get increased deals, but it may not be at quite the same breathless numbers that had been projected in the past.

The groups that will really feel the pinch, though, are the Tier 2/Tier 3 rightsholders because they’re caught between two worlds — not small enough to be a low budget production, but not big enough to necessitate the major investment. These groups, as seen by the Pac-2’s demise (okay, I’m done), will be forced into a difficult adjustment period.

Media Networks

The only media executive sweating more right now than Disney CEO Bob Iger is Warner Bros. Discovery CEO David Zaslav. Note that in addition to all of the Discovery/HGTV channels, WBD owns TNT, TBS, and other cable networks that carry sports content.

WBD has long feasted on carriage fees, and the conglomerate derives a much larger percentage of overall revenue from these than Disney. The only reason the firm is not in the crosshairs is because their contract with Charter isn’t up yet.

But however this Disney dispute plays out, it can be assumed that the same rules will be applied to WBD and other media networks out there, and it looks like that means a less than favorable outcome.

These legacy media giants are in quicksand, and really their only lifeline in my mind is to look for an exit to a large tech company (something ESPN should have done years ago, in hindsight) or try to rip the band-aid off and go direct-to-consumer even faster so their business is reinforced before the model completely collapses.

Cable Companies

With a number of cable companies exiting or reducing their footprint in the space, the remaining ones are going to most likely get squeezed harder for carriage fees since the media networks will be looking for opportunities to collect revenue where they can.

I’m very interested to see how some of the more modern virtual “multichannel video programming distributors (MVPDs) like YouTube TV, Fubo, and Hulu Live handle this. There isn’t really that much of a business model difference between these and the traditional cable providers at this point, so it seems like the same issues that have plagued the current leaders could play out here as well. What could they potentially do differently to avoid these same pitfalls?

Viewers

This one is obvious — we as consumers and sports fans are getting the short end of the stick. 15 million Americans, through no fault of their own, are without two of the biggest sports channels as the two biggest sports in the country ramp up.

More broadly, when the other entities in the value chain run into headwinds and/or deal with market shifts, those decreased revenues or increased costs are often made up by being passed along to the customer. It seems likely that whatever resolution happens in the Charter-Disney dispute will end this same way.

It’s a weird time to be a sports fan.

The price of fandom continues to increase each year, and I’d argue that the reciprocated value is flat or even decreasing given the corporate sheen and unbridled capitalism that is being applied to the teams and sports that we love so dearly.

Despite that, we keep coming back.

I was glued to the Michigan opener shown only on Peacock ($5.99/month) this past weekend, and I will screw myself into the ground this coming Sunday justifying the massive overpayment for NFL Sunday Ticket ($400 for the season) because there is a small but mighty part of me that believes Sean Payton has what it takes to turn my Denver Broncos around and I want to be there to watch it.

This dichotomy captures the essence of being a fan: we suspend our better judgment and economic sensibilities to live and die with the teams and communities we care about, and the feeling when they reach the pinnacle makes it all worth it.

This is the sports industry’s superpower, and my hope is that the space’s power brokers recognize this truly one-of-a-kind dynamic and appreciate it enough to not go so far that it kills the golden goose.

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: Charter Spectrum, the US’ second largest cable provider, has thrown down the gauntlet and blocked its 15 million cable subscribers from accessing Disney channels, including ESPN and ABC, due to a contract dispute. This fight will eventually get resolved, but it has far reaching implications for all parties involved in the sports media value chain.

• Opener: Primer on Cable TV 101: Rightsholder —> Media network —> Cable company —> Viewer

• Opener: 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).

• Shot: The Charter-Disney dispute is different. Charter believes the cable model is broken and wants to create a new one that includes giving subscribers access to Disney streaming services. Disney does not agree with this, which is what has led to the blackout. Interestingly, Charter has claimed that it is ready to walk away from the cable business altogether because of how lopsided the model is. Right now, Charter appears to have most of the leverage given its willingness to leave the business and ESPN’s continued reliance on the revenue from the cable model.

• Chaser: This back-and-forth gets at the heart of what cable companies have been saying for years: the media networks have used their leverage with the carriage fees to subsidize the creation of these DTC streaming services. The networks then move their premium content to these platforms, which effectively cannibalizes the cable business that is propping them up right now.

• Chaser: The Charter-Disney fight will get resolved, but it indicates that we’re most likely going to see the death of the cable model sooner than we expected. This notion has shaken a number of industry entities, particularly rightsholders and media networks, given both how dependent they are on media revenue and how intertwined their business economics are with one another.

• Chaser: The ultimate loser here is the fans, who continue to pay more for the price of fandom. Here’s hoping the powers-that-be can find an amicable solution both for this current problem but also the broader challenges facing the industry

“Whoa” of the Week

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

1. Well, it would appear the Messi Effect is real.

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. Silly to start: this Astros’ fan is electric

2. Heartwarming: A special moment between family watching the club they love

3. Silly to finish: the Oregon Ducks’ mascot does pushups for the number of points the team has after every score. It’s all fun and games until your team scores 81 points

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