ESPN, ABC and other Disney channels excluded from DirecTV due to contract dispute

The Walt Disney Co.-owned channels, including ESPN and ABC, were pushed off DirecTV's platforms on Sunday after talks on a new distribution deal failed.

The blackout, affecting nearly 11 million DirecTV customer homes, came before kickoff of Sunday's highly anticipated college football game between the University of Southern California and Louisiana State University and in the midst of ESPN's coverage of the U.S. Open tennis tournament in New York. The blockage came just before the deadline for a new distribution deal after the two companies haggled for weeks over contract terms and fees Disney would charge to broadcast its programming.

Without an agreement, DirecTV lost its rights to broadcast the Disney channels.

Sports fans will feel the impact quickly. In addition to college football on ESPN and ABC, the new NFL season also begins later this week. ESPN will open the season on Sept. 9 with a “Monday Night Football” game between the San Francisco 49ers and New York Jets, with Jets quarterback Aaron Rodgers expected to return from an injury a year ago.

Disney's eight ABC stations, including KABC-TV Channel 7 in Los Angeles, are no longer available on DirecTV. That means viewers of local news and “Jeopardy,” “Wheel of Fortune,” “Good Morning America” ​​and “Jimmy Kimmel Live” will miss out on some of their favorite shows. Customers in Fresno, San Francisco, Chicago and New York will also no longer have access to their local ABC station.

Other Disney-owned channels, including Freeform, FX and National Geographic, are also affected by the outage.

It is not clear how long the suspension will last. A year ago, a similar dispute between Disney and Charter Communications, the operator of the Spectrum TV service, resulted in a 12-day suspension of Disney channels.

“I don't think a blackout is a good dynamic for anyone, especially the consumer,” Justin Connolly, Disney's president of platform distribution, said last week. “Let's roll up our sleeves … and put something together that both sides can execute.”

The disputes over Labor Day weekend reflect the economic strain on the television industry.

The shift to streaming and the associated cancellation of cable TV have hit pay-TV companies hard. DirecTV has lost more than half of its subscribers in the last decade. The El Segundo-based company currently has about 11 million subscribers, according to industry estimates.

According to financial research firm MoffettNathanson, this year saw the industry's largest decline in pay-TV subscribers ever. In the first quarter, the industry lost nearly 2.4 million pay-TV households in the U.S. – a 12% year-over-year decline, the company said in a recent report.

The decline in subscriber numbers has put pressure on Disney.

The Burbank-based entertainment company has long relied on billions of dollars in programming fees it receives annually from DirecTV and other providers, which are calculated in part based on the number of subscribers who receive the channels.

In addition, Disney's ESPN has historically been the most expensive cable channel, costing providers nearly $10 per month per subscriber household. Disney has tried to maintain these markups to finance its expensive sports rights deals, including long-term NFL and NBA contracts.

These objections set the stage for controversial contract negotiations at DirecTV headquarters in El Segundo.

The landscape has changed dramatically since the two companies last reached an agreement, in 2019 when DirecTV was wholly owned by AT&T. Since then, the phone giant has spun off its television distribution group into a separate entity and hired a private equity partner, TPG, to run the business.

Over the past year, DirecTV executives have been working on plans to expand its offerings to consumers.

DirecTV wants to offer themed packages — sports or general entertainment, for example — to provide cheaper plans for customers who aren't willing to pay $100 or more each month for a traditional package with more than 100 TV channels. It wants to appeal to customers who have long craved a way to subscribe to only the channels they actually watch.

But according to DirecTV, existing contracts with programmers prevent the company from offering curated packages to its customers on a large scale.

“Instead of allowing distributors like DirecTV to develop smaller, customized packages at prices that reflect the value they get from the content, programmers have continued to impose and enforce strict bundling requirements,” DirecTV said in a position paper in late August.

The expiration of the distribution agreement with Disney in 2019 gave DirecTV the opportunity to change the terms of the contract.

The satellite TV company said it asked Disney to relax a key distribution requirement – minimum penetration rates. Disney's contracts, for example, require DirecTV and other distributors to provide ESPN to at least nearly 80 percent of their subscriber base.

DirecTV claims that such “outdated” penetration rates “force pay-TV customers to subscribe to many channels they may not even watch” and that the contracts limit DirecTV's ability to offer smaller and less expensive packages.

“People watch genres,” Rob Thun, chief content officer at DirecTV, said in a recent interview with The Times. “We believe customers can have choice and control, but that flexibility isn't available to us today.”

However, such a change could result in revenue losses for Disney at a critical time.

Disney shares are under pressure due to weakness in the theme parks and resorts and are trading near a five-year low. On Friday, Disney closed up almost 1 percent at $90.38.

The loss of ESPN and other Disney channels on Charter's Spectrum last year ended with an agreement that resulted in several smaller Disney channels, including Freeform and Disney Jr., being removed from Spectrum's schedule.

In the end, both companies declared that they had emerged as winners.

Charter did not push the issue of penetration rates. Instead, Disney and Charter agreed to expand the reach of the Burbank company's streaming services, including Disney+, in Spectrum households.

Disney executives hope last year's charter agreement can serve as a template for a pact with DirecTV.

“There has to be a path to a deal here,” said Disney’s Connolly.