Disney v Charter
Lessons for B2B price increases
This is a free edition of Marketing BS. Last week there was no premium edition, so this week expect two in the next three days. Maybe next week I will get back to the “regular” schedule of Tuesday and Thursday…
After more than a week of stalemate, around 3pm ET yesterday (just in time for Monday Night Football), Disney and Charter came to an agreement and Disney’s staple of channels, including ESPN, ABC, and FX, can now be viewed by Charter customers.
The dispute started when Disney tried to raise cost of the their bundle of channels by $1.50 per subscriber. This has happened before. Disney has used the leverage of ESPN (i.e., the fact that a significant percentage of households care a LOT about seeing their sports-ball games), to raise prices on their bundle year-after-year. Most recently YouTube TV tried to push back on a price increase, but backed down after two days when they saw the effect on their churn rate.
Disney does not have a monopoly on sports, let alone entertainment, but ESPN has a monopoly on a specific set of sports games. And that monopoly was enough to drive the price they could charge the cable operators higher and higher. Every other time a carried stood up to Disney and refused to accept the price increase, Disney held firm and the cable company crumbled.
Until now.
Charter gave very public notice that this time they were NOT going to back down. There were a few stated reasons:
Charter claimed that they no longer make money on television — all of their profit comes from providing internet (this is likely NOT true, but it is more true now than it ever has been)
In the past if a Charter customer quit TV, they likely went to an alternative like DSL, and often quit internet as well. Now if a customer cancelled cable TV to watch sports, they likely keep their internet and sign up for YouTube Live TV — which still has ESPN
Basically Charter has a better BATNA now than ever before, and they decided to use it. And it worked. Disney effectively backed down. Here is the new agreement:
Charter accept the the $1.50 price increase
Disney agrees to provide Charter customers with FREE access to Disney+ ad supported ($7.99/month list price) [All subscribers of Charter’s most popular package]
Disney agrees to provide Charter customers with FREE ad-supported ESPN+ ($10.99/month list price) [All sports package subscribers]. They will also get the streaming version of ESPN when it launches for no additional charge
Some low-viewership Disney channels will be dropped (Freeform, Disney XD and FXX)
Charter can now turn around and increase their price to consumers by $1.50 and offer them the additional streaming services for free. Given that Disney had 42MM Disney+ subscribers in the US it is very likely many of the Charter customers already have Disney+. Many will now cancel (cannibalization). The only upside for Disney is that many may down-grade to ad supported, and Disney may pick up a some marginal, new ad-supported subscribers.
I guess the other upside is that Disney continues to get revenue from their legacy business with Charter (Disney’s TV revenue is ~$6.7B, Charter is 17% of the US cable market, so approximately… a lot!)
How did this happen
There is plenty of analysis available on what caused this. Disney hubris. The economics of streaming. The slow death of traditional TV. YouTube TV. The reduced importance of sport in people’s lives.
All of these drivers are true and interesting, but what they forget is that all of these negotiations are being run by people. Individual vice presidents at these two giant companies, who often care more about their own careers (and egos) than the health of the businesses they are running.
I am going to tell another “A Place For Mom” story.
When I got to APFM we were charging providers 70% of first month’s rent and care. The industry standard outside of assisted living when a real estate broker walked a renter in the door was 100% of first months rent. We were under-charging by a lot. We were not a monopoly, but we were close, and we were gaining share. We should have been able to charge MORE than the “standard” rate, but we should have AT LEAST been able to charge the standard.
But we had a problem.
Over the years the company had treated it’s customers poorly. Not the families we helped. We always did a great job with our families. But the company played very hard ball with the suppliers - the communities that we helped our families get into.
Frankly most of the major Assisted Living chains hated us. They worked with us because they felt they had to, not because they wanted to.
Our owners were terrified that if we raised prices even a little, some (many?) of our top suppliers would use it as an excuse to cancel. Never mind that we provided great value — the average resident stayed ~30 months, and mostly filled beds that would otherwise not be occupied. The ROI in APFM spend was something like 42x. If we raised the price to a full month’s rent the ROI would drop to ~30x. Still pretty good!
But it only worked if our customers were rational.
We were pretty sure they were not rational, which, ironically, got them a much better deal than they would have if they had been.
Eventually we raised prices. We capped it at 85% of a month’s rent and created tiers so that the largest customers paid less than that. We only lot one large account, overall family conversion rate went up, we used the additional cash flow to create a supplier sales org, and net number of partner properties increased every month post price-increase. We should have raised prices higher.
Which brings me back to Charter/Disney.
I expect the executive in charge of the Disney/Charter price negotiation was NOT Iger. They were tasked with a P&L and they had a playbook where price increases had always been a driver before. When they were budgeting for the year, they backed in a $1.50/subscriber price increase, and thought it would be fine.
Meanwhile on the Charter side, I expect when the price increase was announced, it went directly up the chain. The executive on the Charter side did NOT have a $1.50 price increase built into his budget. In order to accept the price increase he would need to go back to his bosses (the CEO?) and get his budget changed so he could still get his bonus. In the past the CEO likely backed down, but now, for all the reasons discussed he could tell his manager: “Push back. Let’s see what happens”.
Changing economics gave the opening for Charter to push back, but I expect the Charter executives really did not LIKE Disney. They didn’t like being pushed around and told to “take it or leave it” for decades. For decades they had no choice. But the second they thought they had a chance, they took it.
They were willing to hurt their own business, because they thought it might hurt Disney’s more, and get the Mouse to back down. But they also likely enjoyed it.
Never forget that businesses are run by individuals, not ROI-maximizing robots.
Keep it simple,
Edward