Disney sells its product to a distributor like DirecTV for a fee. In past years, whenever one of the distributors complained that they were being wildly overcharged during contract negotiations and refused to sign a new deal, Disney would just let the contract lapse, a blackout would ensue, tons of subscribers would switch, and the distributor would panic sign. Disney is currently in the blackout step of their negotiations with DirecTV.

     Last Sunday, Disney cut access to all Disney-owned channels for DirecTV subscribers. This includes ESPN and ABC, which is crucial for DirecTV, a service that has attracted millions of subscribers targeting sports-focused customers. The timing is particularly bad for DirecTV because the NFL season is kicking off tonight, college football already started, and the US Open, with a bunch of Americans in the semifinals, is occurring right now. ESPN and ABC are covering almost all those events.

     So, what is Disney actually asking for? We do not know right now, but in general, Disney wants higher fees, with DirecTV paying $10 per ESPN viewer. Disney also does not want DirecTV to offer skinner bundles like the one they just tried to make with Max and Fox. Venu was temporarily blocked by a judge, but after reading some information about that decision, I honestly do not expect that to hold up. Disney wants to corner the skinny bundle market, a pared-down collection of channels, like all sports or all news. Also in the contract is a condition, where DirecTV waives their right to sue Disney and stop them from launching a competitor, which I thought was hilarious.

     DirecTV is right, by the way. Disney is overcharging them for too little service and is basically forcing DirecTV to pay for their transition into a business model created to destroy distributors like DirecTV. Sadly, for DirecTV and all the other distributors, they are weak. Comcast pulled a stunt like this a while ago and while some said they won, in reality, Disney came out on top. These distributors can throw their hands up and complain in the media all they want, but they simply do not have enough leverage.

     What will the outcome be? A lot of people think that DirecTV will win, and that Disney will bend because they are not in the position they were a few years ago. That is an erroneous assumption. DirecTV subscribers will start switching very, very quickly. In an age where these distributors have to claw for each subscriber, and where cord-cutting is the norm, hundreds of thousands of subscribers will flee in the next week or two. Sports is all that matters for these subscribers, and if they cannot get their sports, they will go somewhere they can: Spectrum, Hulu, Comcast, Prime, etc… Disney also cannot look weak right now. Their stock has been a bit weak, and investors need a win to point at. Bob Iger will not give in. Also, DirecTV has no leverage. They have nothing to hold over Disney, at all.  

     There are some odd succession implications around this though. Dana Walden and two nobodies signed a letter basically accusing DirecTV of not negotiating in good faith. Disney had these two nobodies sign the letter to dissuade the notion that Josh D’Amaro and Walden are the only two options, which they are. This is a race completely between those two, and a win here, higher fees while giving away meager wins to DirecTV would be a boon for Walden, who runs the entertainment division. Beating DirecTV looks great to investors, and it encourages more faith in her from Iger, another reason I think Disney will not yield.

     Disney will crush DirecTV, and it will make me happy.