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Last week, Charter Communications, the No. 2 cable provider, and Walt Disney Co. cut a deal to include Disney streaming services, such as Disney+ and a new ESPN service still in the works, with Charter’s cable television packages. That pact could be a watershed for traditional TV gatekeepers that want a piece of the action from the streaming services they’ve grown to fear.

Charter urgently wanted a deal in place for Disney-owned ESPN—the most important cable network in the TV ecosystem—because it believed such a deal would help it reach similar arrangements with the operators of other streaming services, one person with knowledge of Charter’s thinking said. In the coming years, Charter plans to negotiate with other TV programmers following the framework of the Disney deal, including Warner Bros. Discovery, Paramount and NBCUniversal, people with direct knowledge of the matter said.

Disney, for its part, has received inquiries from other TV distributors about potential deals for Disney+ and ESPN following the announcement of the Charter agreement, said other people with direct knowledge of the matter. Meanwhile, Verizon—which already offers a streaming bundle of Netflix, Paramount+ and Showtime at a discounted price to its wireless and broadband customers—is exploring similar deals with other streaming services, said Erin McPherson, senior vice president and chief content officer at Verizon.

• Charter wanted an ESPN deal to serve as a framework for other streaming pacts

• The No. 2 cable operator plans to pursue similar arrangements with Warner and others

• Other TV distributors have contacted Disney about streaming deals for Disney+ and ESPN

In one case, a telecom company has gone even further by almost entirely outsourcing the pay TV side of its business to a streaming provider. Since March, fiber broadband provider Frontier Communications has bundled its internet service with YouTube TV, which mimics the traditional cable TV bundle through a streaming app, as its primary TV option for new customers.

There’s good reason to be skeptical that cable deals with streaming services will help cable and telco companies reverse the cord-cutting problem that has been battering their pay TV businesses. Overall, the pay TV video ecosystem has lost roughly 25 million customers, or 25% of total households, in the last five years, according to a presentation from Charter during its Disney dispute. The percentage of U.S. households subscribing to a pay TV service is at its lowest point—58.5%—since 1992, MoffettNathanson said.

That exodus has stemmed in large part from the relentless bill increases pay TV providers have for years imposed on their customers. At the same time, the bounty of streaming services—many of which include programming that used to be only accessible on cable, such as HBO—have made it easier for consumers to pick and choose their entertainment options, often for less money than they used to pay for their cable bundles. The only upside for pay TV providers from the streaming era: It has stoked demand for the broadband side of their businesses.

“The speed of U.S. pay-TV subscriber declines in recent years was accelerated by the consumer choice that streaming delivered,” said Marc DeBevoise, CEO of video technology firm Brightcove and a former top CBS executive who helped launch and operate CBS All-Access, which later became Paramount+. “Streaming made the traditional bundle, while still super-relevant and in half or more of U.S. households, less necessary in every household.”

It’s possible, though, that cutting deals with streaming services could give pay TV providers a way to stop some of the bleeding of subscribers while also giving them a slice of streamers’ businesses. Media and entertainment companies, after all, are desperately looking to make their streaming services profitable in part by raising prices for consumers.

Cable and telecom providers are trying to attract and retain customers by bundling those streaming services with traditional pay TV plans, betting that consumers will feel they’re getting a better value from such packages. At the same time, cable and telecom companies believe they can help programmers turn a profit from their streaming businesses because of their experience in marketing, content sales, billing and customer service.

“It’s early days for bundling [in streaming], but we believe it is the future for entertainment services,” Verizon’s McPherson said. “Before we reach whatever end destination we are heading to, there will be an increase in bundles of [subscription video] services, and we plan on being a leader in the space.”

When, Not If

At first glance, the conflict between Charter and Disney resembles the routine squabbles between programmers and cable companies that have temporarily knocked popular channels off air in years past.

Charter’s deal to distribute ESPN and Disney’s other TV channels, including ABC and FX, was set to expire by the end of August. The two companies were in the thick of discussions about a new pact, through which Disney aimed to collect rate increases for its networks. Charter—which services more than 14 million households through its Spectrum cable service—was paying $2.2 billion annually to Disney for its channels, or 14% of Disney’s domestic revenues from cable fees.

What wasn’t routine was the challenges Charter was facing in its pay TV business. From 2020 to 2022, it lost roughly 1.1 million residential video customers. Six months into 2023, another 426,000 households had cut the cord to Charter’s pay TV services.

Those kinds of declines made it difficult for Charter to stomach another round of rate increases for cable channels, even one like ESPN, long viewed as a keystone of the traditional cable bundle because of the importance of live sports to millions of viewers. Cable companies like Charter had long resisted efforts to move marquee live sports programming exclusively to streaming.

That’s a big reason why Disney’s first attempt at a streaming version of its sports channel, ESPN+, didn’t give cord cutters a way to watch any of the channel’s most popular live sports programming from the NFL, NBA, college football and other top sports competitions. To watch those games, an ESPN+ subscriber would have to already be a paying customer of a pay TV service and authenticate with that provider.

But those days have gradually been coming to an end. More and more live sports programming in recent years has begun migrating to streaming services, thanks in large part to spending on media rights deals by deep-pocketed tech companies like Apple and Amazon. Soon ESPN will finally join the fray with a new service offering all of its live sports programming to anyone with an internet connection, including cord cutters.

In August, Charter executives took notice when Bob Iger, CEO of Disney, told analysts launching a new streaming version of ESPN that would live outside the traditional cable TV bundle was “not a matter of if, but when.” The Charter executives decided the time was now to take a stand: They wanted a cut of Disney’s streaming business, the people with knowledge of their thinking said.

At the end of August, when Disney and Charter could not come to an agreement on a new distribution deal, Disney’s channels, including ESPN, went dark on Charter’s systems.

Eventually, after weeks of haggling, the two sides hammered out an agreement. Under it, the ad-supported version of Disney+ will become a part of Spectrum’s most popular cable package, and ESPN+ will be bundled into a separate package. When Disney launches an all-streaming version of ESPN, it too will be packaged and sold by Charter to its customers.

Customers won’t pay anything extra beyond the prevailing retail price for Charter’s various bundles. And Disney will get rate hikes for its networks carried by Charter, which it pays wholesale rates for. At the same time, Charter will no longer carry some smaller Disney channels, including Freeform, Disney Junior, FXX and Nat Geo Wild.

Including Disney’s streaming services in TV packages for Charter’s customers incentivizes both companies to get new customers to sign up for those services and existing ones to keep their subscriptions, their thinking goes.

Another important angle to the deal is advertising. Iger lately has talked up his optimism about how streaming ad sales can help the company’s bottom line, in part because that market is healthier than the linear TV ad business. But revenue in advertising demands reach. In early July, Disney had only 3.3 million subscribers to the ad-supported tier of Disney+, a small fraction of the 105.7 million total subscribers for the service (excluding Disney+ Hotstar in India).

Disney’s need to expand reach for the ad-supported version of the service was a motivating factor in its push for a deal with Charter, according to people familiar with the matter.

The data that Charter and other TV distributors can provide on their video and internet households could also be useful in improving the ability of streaming services to more precisely target the right demographics with advertisements on their services, said Jason Manningham, CEO of ad technology company Blockgraph, which is jointly owned by Charter, Comcast and Paramount.

“The authenticated relationship with consumers [that TV distributors have]...is a bigger deal than some industry analysts are giving them credit for,” he said.

A Risk of Bundling Backlash

Other players in the TV and streaming businesses have also decided they’re better off working together.

In July, YouTube and Verizon announced a deal to give away for free a full season of Sunday Ticket—a complete package of all NFL games, including those that aren’t airing in a viewers local market—to some new and existing Verizon mobile and broadband internet customers. YouTube has cut similar deals with Frontier and Comcast, which offer Sunday Ticket to their internet or pay TV customers at a discount on the $349 to $489 annual price the service retails for.

For YouTube, getting distribution from these providers could help cover the hefty $2 billion price it is paying the NFL annually for rights to offer Sunday Ticket. In July, MoffettNathanson forecast that the Sunday Ticket service would remain unprofitable for YouTube through at least 2026, when it’s expected to generate $1.6 billion in revenue. YouTube’s deal with Verizon comes with a minimum guarantee on payments Verizon makes to YouTube based on how many subscribers they expect to attract, a common practice in these sorts of arrangements.

There’s a danger to this kind of deal-making, though. For distributors and programmers, bundling streaming services could provide benefits to both of them, including reduced subscriber churn, since a customer is less likely to cancel a subscription when they have multiple options under one bill. But excessive bundling could also create the bloated packages of content that turned so many customers off on cable in the first place.

Verizon’s McPherson said her company is being careful about how many such streaming deals it agrees to. Putting profits over giving customers what they want is likely to backfire, she said.

“Then the tail wags the dog,” she said.

‘Taxing Customers’

For Frontier Communications, the cable TV math simply no longer worked.

Over the years, programming costs kept rising for Frontier—a relatively small player in the pay TV business that serves households in New York, California, Texas and other states. At the same time, its cable packages kept getting bigger as TV network owners insisted that Frontier include more of their channels within its most popular TV bundles. Cable packaging rules made it difficult for Frontier to say no to their demands. Pay TV providers like Frontier in turn had to jack up rates for customers.

“It’s almost like we are taxing customers for a bunch of channels they don’t watch,” John Harrobin, executive vice president of consumer at Frontier and a former senior NBCUniversal and Verizon executive.

Customers responded by accelerating their cord cutting, which shrank profits, said Harrobin. During the first six months of 2023, Frontier’s video services business generated $229 million in revenue, a drop of 15% from the same period a year earlier, driven by customers canceling their traditional TV subscriptions.

One longtime executive at another cable TV provider, who has negotiated deals with programmers for decades, said the margins in the video business now are often in the single-digit percentages or in some cases even negative. It’s one of the reasons why over the years cable TV companies have charged extra fees to customers for set-top boxes and upselling customers to other products and services—a practice unfriendly to customers that he referred to as “bad profits,” he said.

During the Covid-19 pandemic, Frontier decided it was going to stop selling its legacy TV service to new customers. While existing subscribers can keep their Frontier packages, the company cut a deal with YouTube to refer new Frontier customers to its YouTube TV service as the primary pay TV option.

Earlier this year, Frontier and YouTube decided to deepen their relationship: Frontier now allows its customers to sign up for YouTube TV through Frontier, and it rather than YouTube TV manages the billing for the service. Since that change, sign-ups to YouTube TV through Frontier have more than doubled, though the number of subscribers to the service hasn’t yet surpassed that for its legacy TV business, Harrobin said.

“We do not have to manage carriage relationships with content providers, we do not have to manage hardware, we do not have to adjust fees when [programming costs] go up,” Harrobin said. “From an administrative and operational standpoint, it’s so much easier to execute.”