One Good Reason Disney Sacrificed Freeform in its New Charter Deal

Disney may have sacrificed carriage of Freeform (nee ABC Family, Fox Family, The Family Channel, CBN, Christian Broadcasting Network) in part because it was easier to give up carriage of a linear channel which had an "ironclad" obligation to carry The 700 Club, the conservative evangelical Christian talk show for 2 hours every day (currently 11PM and 9AM ET).

In the recent past, "shelf space" for fully distributed basic cable TV channels was perhaps the most valuable asset in the media. Basic cable networks with inexpensive programming like MTV, could run at greater than 50% margins. Cable cord cutting has reduced those margins, in some cases pretty dramatically. Programming companies, like Disney, have been prioritizing entertainment investments in growing on-demand services like Disney+ and Hulu over the declining "linear" TV business of 24 hour scheduled channels. Disney CEO Bob Iger has discussed its options for the linear services in a recent interview on CNBC; they "might not be core to Disney".

The Disney-Charter deal, which saw the inclusion of Disney+ and ESPN+ in Charter's Spectrum "cable TV" packages, despite the fact that they had not, to date, been considered cable TV services. The services clearly have some attractive programming. Charter had asked for it to be included in its deal for free for Charter customers; the announcement of the deal made it clear that Charter is paying a "wholesale" rate for them. Depending on what that rate is, the inclusion of these services in Spectrum's cable video packages could represent a lot of value to Charter or a lot of value to Disney. Most likely, it is a little bit of both.

What is clear is that the Disney linear services that were carried by Spectrum systems in its expired deal, but not in the new one (Baby TV, Disney Junior, Disney XD, Freeform, FXM, FXX, Nat Geo Wild, and Nat Geo Mundo), were no longer growing assets for Disney nor highly valued by Spectrum. 

Cable operators have been pruning their cable lineups to control the cost of their video service which have looked expensive and bloated next to the much cheaper streaming services over the last decade. It was very clear that the streaming services were also getting more and more of the high profile new original programming, because the programming companies had been rewarded by the stock market for the growth of their streaming services, despite the fact that these services were all highly unprofitable.

Whether these straight-line trends towards streaming and away from cable video will continue now that the fast growth of streaming has ended, investment in streaming programming is being cut back, and streaming retail prices are going up sharply, is less clear.

I believe consumers' move from cable to streaming was much more about the relative value they offered than the "inevitability" of the newer technology.

Vegas Golden Knights Switch to Broadcast from RSN for 2023-2024 Season - Implications

Shortly after the Phoenix Suns entered into what appeared to be a broadcast TV deal for the rights that they used to sell to RSN Bally Sports Arizona, the NHL Vegas Golden Knights, entered into a true broadcast TV deal for their regional rights. 

E.W. Scripps is operator of local TV stations mostly affiliated with major networks, including the ABC affiliate in Las Vegas, KTNV (channel 13). In 2020 Scripps acquired Ion Media, which operates the Ion broadcast network which primarily programs off network reruns (e.g., Law & Order SVU). Ion is  distributed on a hybrid basis -- its on broadcast stations in most of the country via its owned and operated stations which are in virtually all of the top 20 TV markets and most of the top 75. Ion is distributed via cable, satellite and telco in the places where it does not have a station. ION's affiliate in Las Vegas in KMCC (channel 34) and Scripps' plan is to offload the Ion programming to cable and run the station as an independent television station, including the Vegas Golden Knights games. 

This is a bit of a back to the future moment. Independent broadcast television stations were routinely the local distribution for MLB, NBA, and NHL games prior to the launch of regional sports networks in the 1980s and 1990s. Regional sports networks outbid local TV stations for regional sports rights in that period because of the fees that cable operators were willing to pay for the programming where greater than what the local stations could make selling advertising during those games. 

Now the cable operators are looking at the costs of RSNs and frequently opting to drop them rather than renew when the contracts expire. Altitude Sports, in nearby Denver, has not been carried by Comcast, the primarily cable operator in Colorado since 2019, reportedly because of its cost. Dish Network has dropped every RSN that it used to carry and it used to carry virtually all of them.

For their entire existence, the Golden Knights have been distributed by RSN AT&T Sports Rocky Mountain, which also distributes games from the MLB Colorado Rockies and the NBA Utah Jazz. Warner Brothers Discovery, the new parent company of AT&T Sports Rocky Mountain had announced plans to shut down its handful of RSNs this year.

How the Golden Knights plan differs from the Phoenix Suns proposed plan is that KMCC is a full power television station, currently carried by all of the major MVPDs. The Suns plan put most of the games on a low power television station that was not carried by any of the major MVPDs, it would need to gain carriage -- just like an RSN would. Additionally, the coverage area of KMCC, which has two transmitters, appears to cover a lot of the Las Vegas market for those relying upon an antenna for reception.

It's unclear when Scripps' deals with the major distributors for the retransmission consent of its stations are up (they may be staggered) and what sort of fees that it will be looking to get. Unlike a stand-alone RSN negotiating on its own, Scripps has the advantage of bringing the programming from ABC to systems in Las Vegas in additional to the Golden Knights and whatever else will surround the games on the new independent station. Generally, MVPDs have come to terms for Big 4 broadcast affiliates in most markets. MVPDs fees for Big 4 network affiliated stations has gone up pretty dramatically in the last decade, after being modest for the first decade or so of retransmission consent.

However, it is unclear if MVPDs will be willing to pay the same money that they used to pay for RSNs for retransmission consent of the stations now carrying the games. It is possible that MVPDs will start to look at broadcast station retransmission consent costs the way that they now look at RSN fees -- as simply not worth it. Without regional sports, cord cutting has been at higher levels than we saw in the past. Without ABC, CBS, Fox and NBC programming, we might be looking at the demise of cable TV altogether. Ironically, the biggest losers in that case may be the companies, like Scripps, that own the Big 4 affiliates in many markets and have developed substantial revenue streams from retransmission consent fees. The cable operators can, and smaller operators often have, focused on selling Internet access service and getting out of video altogether. No cable video means no cable retransmission consent fees.

Value Is the Problem with Current Regional Sports Offerings

Consumers are moving to better value services, not away from traditional services. Basic cable TV represented an outstanding value in the 1990s when it cost $20 per month and there was no service like Netflix. 

In the 1990s cable TV competed with free broadcast television and, for those who wanted something more and were willing to pay, video stores. In the 2020s, basic cable TV service costs more like $75 per month. While video stores are no longer significant players, free broadcast television is very much around and there are a number of subscription video services (e.g., Netflix, Disney+, Max, Paramount+) which offer additional entertainment choices for those who want something more and are willing to pay. iTunes and Amazon rentals are the new video stores.

It was inevitable is that consumers would leave services that seemed to offer less compelling value and move to services that offered better value. Streaming was the technology that enabled these options; it wasn't necessarily that the technology was better (virtually all of the viewing is still at home on a TV; phones and tablets are a small part). 

It is not inevitable that the streaming offerings in the marketplace now (e.g., Bally Sports+ typically at $20 per month, MSG at $30 per month, NESN at $30 per month) will be the solution to the regional sports network business going forward. The CEO of Diamond Sports Group, the parent of the Bally Sports RSNs, David Preschlack, is an experienced sports executive with stints at both NBC's regional sports networks and ESPN. Preschlack had to admit yesterday in court, that its over-the-top a la carte subscription service had only 203,000 subscribers after 9 months in the marketplace, a figure is only 55% of the entity's budgeted number. That 203,000 subscriber count works out to an annual revenue "run rate" of only $36 million, which is a fraction of the amount of revenue that Bally's needs to generate to make up for the shortfall it is seeing it its fees from MVPDs, whose customers continue to "cut the cord" in large numbers.

Sports fans still want to watch their local teams' games. It appears to me that the fundamental problem here is that customers don't think that the value of these streaming services is attractive. Consumers see the same problem that caused them to drop cable TV in the first place. 

The other streaming services, all of which have a monthly ticket cost of less than $20/month, are perceived by customers as a reasonable value (if not quite as attractive a value as they were a few years ago). 

The contrast between a pro game every day or two on Bally Sports+ in a given month for $20 and Max at $16 (or less with ads), for a content library with hundreds of high-profile hours does not flatter the sports service. From a content standpoint, Bally Sports matches up more favorably with a service like Apple TV+, which retails for only $6.99/month. Like Bally's, Apple TV+ is a service focused on new programming; it doesn't have a large valuable library of popular older content.

Regional sports networks are not required to sell themselves on a monthly subscription basis. All of the services I have mentioned in this post also provide an annual subscription with an effective discount for those who purchase it (for Bally it's $190 annually, a savings of 20%). In addition to cutting the monthly rate, the services might also experiment with selling single games or other lower-priced offerings. Ultimately the rights holders should be flexible in considering how they might entice fans to want to buy in. Running a sports service is a fixed cost business and the games can't be sold after they are played. In this way, the business is much like an airline. Airline-style "yield management" might make a good deal of sense to maximize each service's revenue.

The RSNs are not alone in the annals of communication in finding their historical business model does not seem to be holding up in today's world. A similar situation is playing out in audio, as FM radio continues to hemorrhage listeners. Unlike cable TV, FM radio listening is free and the streaming solutions for music (e.g., Spotify, Apple Music) generally have a monthly subscription fee. FM represents a poor value for music listeners is because of the high commercial advertising load on such stations. FM became a lousy listener experience at some point and eventually services emerged as alternatives (first Sirius XM, later Internet delivered services). Music fans are willing to pay for Spotify to avoid the high commercial load on FM (Ad-supported Spotify has a much lower ad load than commercial FM stations). Also those who don't subscribe to a streaming music service can easily put together hours of their own audio programming via free podcasts and collections of music they have assembled on their phones and can easily play in their cars.

NFL Network Gets New Deal with Comcast; Peacock Gets Exclusive NFL Playoff Game

Today news broke that the NFL had agreed to sell the rights to a playoff game to Comcast's past-nascent-but-not-yet-well-established Peacock streaming service. This is quite a coup for Peacock. Generally, the NFL, as the purveyor of the most popular sports programming sticks to leading television services for their marquee events. Amazon Prime Video, after all, started with a package of often-lackluster Thursday night regular season games in its first NFL season.

Close observers will note that less than two weeks ago, on May 2, 2023, NFL chief Roger Goodell and Comcast leader Brian Roberts were personally involved in negotiating a new agreement for NFL Network and NFL Red Zone, restoring the service to the systems of nation's largest cable operator after they had been dropped a day earlier.

It appears the parties recognized that each had something the other really wanted.

Have the Phoenix Suns Created a New Model for Regional Sports Networks?

The first new model deal to replace an RSN appeared in Arizona on April 28. The NBA Phoenix Suns, along with the WNBA Phoenix Mercury, agreed with a local broadcaster (Gray Television) to move all of their games to free-to-air television, along with a separate direct-to-consumer offering. This deal, with respect to the Suns, would begin this fall, as the rest of the Suns' games this year are post-season games that will be carried by national services like ESPN, TNT, and ABC. The first regular season game for the Mercury that will be part of this deal is set for May 25.

There are a few wrinkles here worth noting. 

First is that in-bankruptcy Diamond Sports Group, which carried the Suns' games this season on its Bally Sports Arizona RSN, is threatening to sue the teams for breaching their contract which they claim provides the RSN to match any new offer the team might receive. Additionally, if the Suns are relying upon the right to terminate the contract because Diamond declared bankruptcy, while it may be a surprise to non-lawyers, those provisions are usually unenforceable. Companies in bankruptcy, in some respects, have a more favorable position than those that are not. For example, Diamond's failure to make a rights fee payment might give the Suns a basis for termination. Once Diamond has the protection of bankruptcy, the court typically wouldn't allow them to do so, as it would look at the Suns' rights agreement as a crucial asset of the business that might be needed to help pay off Diamond's creditors.

Update: On May 10, 2023, the US bankruptcy court blocked the Suns move to enter into this new agreement, saying that it violated Diamond's contractual rights, notably its right to match any deal for the Suns renewal. Recall the Diamond-Suns deal only ran through the 2022-2023 regular season. As the Mercury were not carried on Bally Sports Arizona, their portion of the Gray deal was unaffected.

Second is that of the 70 regular season games in the typical RSN season, 40 or so are planned for Gray's full power TV station, independent KTVK, channel 3, and the rest will be on a co-owned low-power TV station KPHE-LD, channel 44. The distinction between full power and low power stations is important for two reasons. For those receiving the station via an antenna, low power stations, as their name would suggest, do not cover as large an area as a full power TV station does. 

For those receiving a station via a cable, DBS or similar distributor, low power stations are not always carried by those distributors, full power stations almost always are. KPHE does not appear to be carried by either Dish Network or DirecTV, at least not yet. Gray may need to negotiate a new deal to get KPHE carried on the systems of  many, possibly all, distributors. 

Considering KPHE as a broadcast station may be technically true. However, if most of that station's value is in the Suns programming, it is, from the perspective of a distributor, effectively an RSN -- a channel that needs cable carriage to reach customers save for those in its over-the-air footprint (note the linked map doesn't show any area where the station can be received with an indoor antenna). Depending on the retransmission consent fee that Gray/KPHE might request, that might be a tough sell to Dish which has dropped the RSNs in every market. KPHE is also branded like a cable channel, using the slogan Arizona's Family Sports and Entertainment Network; big TV stations typically include their channel number as part of their branding (as KTVK 3 and KPHO 5 do). Note also that none of the games are scheduled to be carried on Gray's most viewed Arizona TV station, CBS affiliate KPHO, channel 5.

Third is that the television deal is non-exclusive, unlike most RSN TV rights deals. The Suns also entered into an agreement with Kiswe, a streaming video technology company. It looks like the streaming concept is that the Suns (and Mercury) would be the face of the streaming service containing the programming. Kiswe would be the technical backend to that streaming service, not the name visible to consumers. Having a different media rights holders is not unusual in that teams typically have a television deal with one company and a radio deal with another. KMVP-FM is the radio rights holder for the Phoenix Suns; it is owned by the radio giant Audacy. However, for streaming vs. traditional TV, this may be a new precedent.

Updated: 5/11/23 to add bankruptcy court ruling and streaming plan

Updated: 5/12/23 to add KPHE signal map, branding information

Dish Network Subscriber Count Falls Below 8 Million

Dish Network reported that it had 7.993 million subscribers to its DBS service at the end of the first quarter of 2022. The last time the count was below 8 million subscribers was nearly twenty years ago, at the end of the third quarter of 2002. Dish's highest quarterly DBS subscriber count was nine years ago, at the end of the first quarter of 2013, when it stood at 14.092 million. Things go up; things come down.

HBO Max and Warner Brothers Collapsing the Theatrical Window

The big recent development in the media and entertainment world was the December 3 announcement by Warner Media that the Warner Brothers Studios' entire 2021 theatrical slate, 17 movies, would be released simultaneously on HBO Max and in movie theaters. Typically theatrical movies play in cinemas on an exclusive basis for a period of thirty to ninety days, then enter other "windows" of exhibition -- pay-per-view, premium television (e.g., HBO, Showtime, Starz), broadcast television, basic cable, etc. The metaphor used to describe this financial system is a "waterfall" -- from the highest price/best viewer experience ($12+ ticket, uncut, no commercials, giant screen and multi-speaker audio) down to "free" media with smaller screens, edited to be advertiser friendly, and interrupted by commercials.  

The reaction from the people who worked on these movies was quick and unfavorable: the director of the upcoming Dune hated it, the director of the recent theatrical pandemic release Tenet hated it, the head of a huge talent agency hated it, the union of directors hated it, and the head of another huge talent agency hated it. 

To my eye, there are six issues that have been raised:

1. Movies are meant to be seen first in theaters on the big screen. These movies are meant to be enjoyed first that way and only that way.
2. This is a poor strategy financially, as it devalues the first tier on the waterfall, and that may devalue the subsequent tiers, and the value of these movie franchises in the future.
3. The compensation that participants will receive will be lower with this approach.
4. We were not consulted about this change; it was presented to us without our participation and that shows a lack of respect.
5. The contracts that we have give us approval rights on distribution strategy and choices and you have ignored those rights.
6. By selling the movies to your co-owned HBO Max you have engaged in self-dealing, rather than seeking out whether other streaming services might be willing to pay more for those rights.

The first concern is the easiest one to dismiss. All of these movies are being released to theaters, so those who want the full cinematic experience can get it. A movie doesn't play any differently to a moviegoer in the theater because it is on a streaming service on the same day.

Whether the second concern is true seems to depend on how things actually play out. One thing is certain, if these movies were released with exclusive theatrical exhibition windows, there is little chance that they would attract cinema audiences the same size as they might have absent the pandemic. A movie available on HBO Max at the same time it is available in the cinema might be expected to be less of a draw at the box office, although one notes that's not true of professional sports -- TV exposure seems to promote the live event business. Depending on how and how much these movies are promoted in the media, they might do more or less business than they would as exclusives. 

As to the third point and the subsequent points, the compensation of the participants is not a matter on which this writer can opine with public data available. If the participants will be getting less pie -- because the pie is smaller -- and the contracts they signed permit the studio to do this (which no one has contested yet), it seems like that's one of the issues talent face about having revenue or profit participation in the first place. If you don't want that kind of deal, negotiate for a flat fee. 

I do understand that scoring things are more complicated without apples-to-apples theatrical grosses to look at. To that I can only say, welcome to the new digital world, movies -- Netflix shows don't get apples-to-apples Nielsen ratings with cable and cable Nielsen numbers aren't 100% comparable with broadcast numbers...and everyone in the ecosystem has figured out a way to work together without relying on the historical currency. 

One participant beef that I am quite sympathetic to is that all of these arrangements contemplated a world where both sides had an incentive to maximize the theatrical window revenue. To the extent that Warners is now generating value for itself (via its ownership of the presumably more valuable HBO Max) and the talent don't get a piece of that, they have a fair concern, even if they may not have legal recourse via their contract (shame on their lawyers if the big fish didn't have it). The record labels shared the benefits they got in Spotify stock with their artists, whose work they licensed at lower prices than that work probably would have fetched without that "equity kicker".

That Neflix offered a big price for Dune, perhaps larger than what HBO Max will pay, is, to be charitable, not a good look for Warner Brothers living up to its fiduciary duty to its partners.

Regarding the lack of respect of unilaterally making such a change on their professional partners, I do understand it. Given that Warners probably knew this move would be controversial, they might have figured out that they had more chance to make such a bold move work this way than by having a lot of private conversations that would leak out. This follows the strategy of "better to ask forgiveness than permission", especially if you aren't going to be given permission. That said, I have little faith that AT&T is a particularly savvy understanding of Hollywood relationships or the value of distribution, given their substantial overpay for DirecTV.

The reaction to this news on the tech side was a lot more favorable. In its usual fashion, anything "disruptive" to "the old way of doing business" is good. I find that simplistic. Certainly, the movie studios didn't fully see Netflix streaming business model coming on as fast as it did. However, these studios aren't run by dopes. The system of windows that they have constructed may be frustrating to a viewer (where is that movie playing?), but it probably does a good job of maximizing revenue from the available buyers in the world of yesterday. If it didn't, it would have been jettisoned long ago as too complicated. That said, I'm less certain that's true for the world of tomorrow.

There are not a lot of other media products like big Hollywood movies. TV shows are windowed -- fetching one price for their initial network runs, then fetching another price in syndication. Most high profile books are windowed, released first in hardcover and later in less expensive paperbacks, but that's about it. Amazon doesn't complain that books are available free in public libraries. There have been a few examples of music that was released exclusively to one platform for a short amount of time, but generally that doesn't work well -- the industry is built around non-exclusive listening as a shared experience. 

The film business has mistaken the future engine of growth for an existential threat before.

"'I say to you that the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone.' Jack Valenti [then head of the Motion Picture Association of America] said this in 1982 in testimony to the House of Representatives on why the VCR should be illegal. He also called the VCR an "avalanche" and a "tidal wave", and said it would make the film industry "bleed and bleed and hemorrhage". 

The winner in this is HBO Max. It has a lot of high profile content to attract viewers that it wouldn't otherwise have (or even be able to make given the way the pandemic shut down movie and TV production). Even if this year's slate is not very strong, it probably has some significant hits. If this moves HBO Max closer to being Netflix, that's a pretty important strategic step for the company to take.

It's not clear to me that the participants are going to be losers in this ultimately. First, it looks like the discussion about money hasn't happened yet and the participants have some cards to play in that negotiation. Second, it is unclear if the exposure the work will get via this release pattern will be better or worse than what would have happened otherwise. Some film franchises started on TV -- like Star Trek. If the participants in the theatrical revenue have the basis to make a legal claim (or lean on the relationship), they might get a bit more consideration than the minimum Warners might be able to get away with paying. It is often said that Hollywood is a relationship business. If that's still true, Warners will have to pay something more to fix/maintain/replace the talent relationships they have clearly injured.

Similarly, I'm not sure it is clear that the movie theaters are the losers with this change even though they think that they are and so does Wall Street. I'm not sure there were going to be any big movies for these theaters to show anytime soon, so they now have "access to product" and that's a plus at getting someone to come out of the house. And the cinemas are likely to get much more favorable splits of the COVID-diminished box office receipts because they don't have an exclusive window on these movies. With the growing competition from in-home entertainment options in general, the movie theater business looked challenging before "losing" its exclusive window...which is another way of saying that it was probably going to lose its exclusive window anyway. And, if theatrical exhibition exclusivity clearly makes the studios more money -- for example, if the vaccines are a success and everyone celebrates by going to the movies -- well, the empire can strike back as quickly as AT&T can fire its Warner Media executives (which it has already done a few times). 

The big loser in this are the ones not being written about in the press coverage. The more attractive streaming services like HBO Max become, the worse basic cable TV packages look. Basic cable used to be a great consumer value for in-home entertainment -- it offered more choices and quality content that broadcasters didn't provide at a reasonable price. But has cable prices have risen over the last four decades, now the value isn't so great. The significant innovations of the DVR and HD are effectively replicated by streaming platforms at a far lower starting ticket price. The cable resisters of the 1990s were older people; the non-cabled households of today are young people. 

Even before Warner Brothers' move, programming investment has been leaving the cable ecosystem for the streaming video ecosystem -- Disney has shifted programming investment from Disney Channel, ABC, and Freeform to Disney+ and so have all of the other big players in cable programming (NBC Universal to Peacock, Discovery to discovery+). If basic cable TV subscriptions are a declining business -- which they are, and have been for several years -- the basic cable TV channels could, probably will, become hollowed out services with less and less marquee original programming and more and more reruns (because they still have 168 hours to fill every week). Higher prices and less value could spell a death spiral.