DirecTV and Disney reach deal to end ESPN, ABC blackout

After a 13-day blackout, Walt Disney Co. and DirecTV settled their contentious contract dispute early Saturday, restoring ESPN, ABC stations and other Disney-owned channels to more than 10 million DirecTV customers.

DirecTV and U-Verse subscribers have been frustrated by the loss of Disney programming since talks broke down on Sept. 1.

Both organizations were motivated to reach an agreement before ESPN and ABC begin another weekend of college football, with Sunday's ABC broadcast of the 76th Emmy Awards and week two of ESPN's “Monday Night Football” featuring a game between the Philadelphia Eagles and the Atlanta Falcons. ABC's new prime-time season also begins later this month.

The nearly two-week battle has been costly. Thousands of customers canceled their service during the blackout, DirecTV acknowledged earlier this week. The satellite TV giant wanted to stop the bleeding.

After marathon negotiations, the companies said they reached an “agreement in principle” to increase the fees DirecTV pays for Disney programming. Earlier this week, DirecTV warned customers that it plans to raise the price of some bundles next month due to higher programming costs.

DirecTV also came away with a win on the new deal. It gained the ability to offer Disney channels in genre packages including sports, general entertainment and a “Kids & Family” package. DirecTV can also offer Disney's streaming services – Hulu, ESPN+ and Disney+ – to customers who subscribe to certain packages as well as on an a la carte basis. That will include the ESPN streaming service that Disney plans to launch next year.

“Through this first-of-its-kind collaboration, DirecTV and Disney are empowering consumers to tailor their video experience with more flexible options,” the companies said in a joint statement. “DirecTV and Disney have a long history of connecting consumers to the best in entertainment, and this agreement furthers that commitment, recognizing both the tremendous value of Disney content and the growing preference of DirecTV customers.”

The dispute has strained traditional pay-TV distributors amid a shift to streaming.

A shrinking pool of increasingly big-bundle subscribers is asked to bear higher programming costs.

The cost of carrying broadcast channels (ABC, CBS, Fox and NBC) and sports networks, including ESPN, has skyrocketed; Programmers have agreed to pay sports leagues they want to pass on fee increases. ESPN is the most expensive basic cable channel, costing pay-TV distributors about $10 per month per subscriber's home.

Sports spending has become a major rub in recent disputes. Another important factor is Disney's requirement that its channels be available on most DirecTV and U-verse homes.

Disney has long claimed that its channels reach about 90% of DirecTV's subscriber base. ESPN's minimum threshold is around 82%.

Pay-TV companies like DirecTV must pay fines if they fail to meet “minimum penetration”.

Heading into the negotiations, DirecTV is gearing up for battle with the goal of relaxing those thresholds. DirecTV wants fewer requirements so it can offer its customers smaller, genre-themed bundles at lower prices.

DirecTV executives argued that forcing customers to buy a “bloated bundle” filled with expensive channels they don't watch is unsustainable. Most consumers watch fewer than 30 channels, they said.

Disney has countered that programming is expensive and is investing heavily in high-quality content.

Neither side was interested in prolonging a war pitting consumers against each other. Meanwhile, more than 4 million U.S. consumer homes dropped pay TV in the first six months of the year, according to research firm MoffettNathanson.

Disney and DirecTV still make billions of dollars from traditional pay-TV packages, and they want to keep the spigot on. Disney gets about $2 billion a year from DirecTV, Moffett Nathanson said.

Unlike cable distributors that also offer high-speed Internet and phone service, DirecTV is focused solely on selling video channel packages including U-Verse, since the company's 2021 spinoff from AT&T. The El Segundo firm, which has lost more than half its customers since a decade ago, couldn't chase away more customers and began offering $30 credits to encourage them to stay during the blackout.

Early on, Disney said it was willing to work with DirecTV to create genre-themed bundles such as children's and family entertainment, local broadcast stations and sports.

“Disney talking openly about the small bundle is a major tipping point strategically and perhaps indicates where the industry is ultimately headed,” Lightshade Partners media analyst Rich Greenfield wrote in a report.

But the two companies spent days haggling over penetration rates. Negotiators have long spent trading proposals since the blackout began, though the barbs traded publicly.

Blackouts have become increasingly common as the industry's economy declines. Last year, Disney Channels went dark for about 12 days on Charter Communications' spectrum service during a similar spat over fees and flexibility to offer Disney's streaming services to its subscribers at no extra charge.

Charter, DirecTV and other distribution executives resented Disney's efforts to bypass distributors and offer its programming directly to consumers. Disney plans to launch ESPN as a streaming service next year.

The Burbank giant is also this year's Warner Bros. Teamed up with Discovery and Fox Corp. But last month, a federal judge granted a temporary injunction against Venu's fall launch on antitrust grounds.

Distributors see such services as a direct threat to their business.

DirecTV Chief Content Officer Rob Thune also said that Disney's general counsel has asked DirecTV to drop any legal claims against Disney alleging antitrust behavior as part of any distribution deal. This also became a sticking point during the discussion.

Last weekend, DirecTV filed a complaint with the Federal Communications Commission alleging that Disney was not negotiating in good faith and that its tactics were anti-competitive.