SUBSCRIBE

Disney flexes muscle in deal to avert blackout for 2.6 million cable customers in New York

Walt Disney Co. and its ESPN sports empire still have plenty of muscle in the market — even in an era of cord cutting and falling ratings.

Some analysts had feared that Disney would struggle to secure substantial carriage fee increases for its ESPN and entertainment channels as the Burbank entertainment giant faced its first major test in nearly three years.

But Disney and New York pay-TV provider Altice USA reached a tentative accord Sunday that contained fee increases for Disney’s channels, according to two people familiar with the situation who were not authorized to comment. It was not clear how much of an increase Disney negotiated.

Disney had threatened to pull its channels from Altice’s Optimum cable television service, including ESPN and the popular WABC-TV Channel 7 in New York. The contentious, high-stakes showdown went down to the wire, but the companies came to a tentative agreement at the 2 p.m. Pacific time deadline.

“Disney achieved two key goals,” Morgan Stanley media analyst Benjamin Swinburne wrote in a report Monday. “Optimum will carry Disney's current SEC Network and the upcoming ACC Network, and ... it will pay higher distribution fees for ESPN and ABC and likely, Disney's other networks.”

Disney’s stock rose 1.3%, or $1.29, to $99.86 a share Monday after the deal was announced.

“We have reached an agreement in principle and have extended the deadline accordingly to try and finalize the terms,” the two companies said in a joint statement.

The tentative deal allows millions of sports fans who subscribe to Altice’s Optimum cable service to watch "Monday Night Football" and a pivotal New York Yankees wildcard playoff game on ESPN on Tuesday. ABC’s broadcasts of local news, “Good Morning America,” “Jeopardy,” “Wheel of Fortune” and “Dancing With the Stars” also continue.

Disney has long sought to use its considerable leverage to wrangle agreements with its pay-TV partners behind the scenes, rather than yank its channels, which upsets consumers.

Wall Street was closely monitoring the dispute because the Altice talks represented Disney’s first major deal renewal since ESPN’s fortunes have fallen, as the company begins a new round of carriage fee negotiations with pay-TV operators.

Disney has been under pressure to boost revenue at ESPN because it faces huge increases in sports rights fees. ESPN pays the NFL $1.9 billion a year for "Monday Night Football." And its NBA contract, which kicked in last year, costs an estimated $1.4 billion a year — more than double the amount of the previous basketball contract.

MoffettNathanson Research, in a recent report, estimated that Disney must absorb $450 million in annualized costs in fiscal 2018 to 2021 to cover the inflation in its sports rights deals. Until about three years ago, Disney's subscriber fee increases were more than enough to provide a cushion for the rising costs — but not any longer.

ESPN is the most expensive basic cable channel in the industry, costing distributors about $7.50 a month per subscriber home, according to consulting firm SNL Kagan.

The skyrocketing cost of sports programming also has squeezed pay-TV providers, including Altice. The French-owned company, which last year acquired Cablevision, the Long Island pay-TV service, sought to curb the fee increases for ESPN because it did not want to lose customers who do not care about sports. Altice did win some flexibility and plans to drop a little-watched Disney channel from Optimum, according to the knowledgeable people.

Disney is a key source of programming. Its channels attract about 14% of the prime-time viewing of Altice’s Optimum customers, according to an analysis by Guggenheim Partners.

“Operating without Disney's family of networks in this environment, in our view,would have been extremely challenging,” Morgan Stanley’s Swinburne wrote.

meg.james@latimes.com

@MegJamesLAT


UPDATES:

3:35 p.m.:This post was updated with additional reaction to the Disney-Altice deal.

This article was originally published on Oct. 1 at 2:55 p.m.

Copyright © 2017, Los Angeles Times