The Disney-Spectrum Conflict Is Deadly Serious Business

A lot of people were no doubt ready to watch Duke take on Clemson Monday night only to realize that, as we have seen so often over the years, a battle over carriage rights takes the service off the air.

In this case, it was ESPN/Disney vs. Spectrum. We got the usual message and the now-traditional Web sites arguing that one side is in the right and other is in the wrong.

Only this time, things are a bit different and the stakes are much higher.

Disney and ESPN come to the table in a weakened position. The House of Mouse has lost a lot of money lately and ESPN, which allowed Disney to finance a lot of acquisitions, is not the cash cow it once was.

Disney has lost about $2 billion just at the box office in just the last 15 months or so which is a devastating run of flops. And its struggling streaming service Disney+ hasn’t been the juggernaut people expected when it was projected to eclipse Netflix. ABC revenue is down as well and linear TV, generally speaking, is in sharp decline.

That includes ESPN, where profits are down 29 percent. The contractual obligations are enormous: ESPN has deals with the NFL, college football, Canadian football, the NBA, MLB, the NHL, FIBA, Cricket, Handball, Tennis, the PGA, various motorsports, college basketball (men’s and women’s), baseball, hockey, lacrosse, soccer, softball, volleyball, the UFC, boxing and even high school sports.

Then there’s the on-air talent, much of which was recently cut loose as a cost-saving measure.

This comes as Disney+’s struggles deepen and as cord cutting continues (the SAG-AFTRA strike certainly isn’t helping. Incidentally, both unions are also about to go on strike against video game companies).

Spectrum’s argument, which you can reasonably project as the cable industry’s default argument, is that the traditional bundle no longer makes sense. Furthermore, they maintain that Disney+ has accelerated the decline of cable TV and with Disney planning a direct-to-consumer model for ESPN, that’s another accelerant tossed on the pyre.

Spectrum wants Disney to offer Disney+ for free to Spectrum subscribers who already pay for Disney channels, which Disney, understandably, is balking at.

Spectrum also has said that it is willing to dump Disney completely if it can’t get the deal it wants, which would be a huge blow for ESPN: Spectrum has 32 million subscribers. We don't know if you can get a Spectrum package without ESPN, but that’s a huge subscriber base no matter how you cut it. And what if other major providers like Comcast follow suit?

So this is a much more challenging situation than anyone anticipated: both sides are hemorrhaging money and hoping to use the other to get out from under financial armageddon.

In the short term, it’s an inconvenience to consumers and at some point, people will figure out ways to see the events they want to see. Who doesn’t want to see what happens in the Clemson-Florida State beatdown game?

In the longer term though, this is a huge deal for televised sports. ESPN’s extensive contractual liabilities have to be fulfilled, but they may not be renewed at the same rates when they expire. For the ACC, this is less immediately relevant because its contract lasts through 2036. When other conferences and professional leagues renegotiate, they may find the available deals far less lucrative.

Aside from ruthless negations with Spectrum, Disney is trying to find other arrangements. They have looked for investors for ESPN or, alternatively, for buyers. The obvious candidates are the tech companies that are also streaming - Apple, Amazon and Netflix - but they probably won’t want to take on all of ESPN’s liabilities. Why in the world would they?

If that’s the case, some investors may emerge from China, but the Chinese are running into significant economic issues of their own and that may limit their involvement (so might Congress).

If so, that leaves some stark alternatives: vastly reduced contracts for content and, possibly, another international source of revenue. That source recently invested heavily in golf and has the cash to take on ESPN and its liabilities. And that source, of course, is Saudi Arabia.

Or, perhaps, the Saudis might just set up a well-financed rival, as they did with golf, and just pick the Bristol carcass clean.