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Explainer-Behind the Disney-Charter dispute over the future of TV

By Dawn Chmielewski and Lisa Richwine

(Reuters) - Charter Communications, one of the biggest cable companies in the United States, is locked in a battle with Walt Disney in a distribution dispute that may shape the future of television in the streaming era.

ESPN, ABC and other Disney channels disappeared from Charter's Spectrum cable service on Thursday, depriving its nearly 15 million video subscribers of access to the U.S. Open tennis tournament, college football and other programming.

While such "carriage disputes" are commonplace in the media world, with TV channels going dark as cable companies negotiate with media companies over how much its channels are worth and how to package channels, this fight is different.

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WHY ARE THE TWO COMPANIES FIGHTING?

Media executives are trying to build profitable streaming services even as cable providers argue they are subsidizing a business that cannibalizes their own.

Charter pays Disney more than $2.2 billion annually for the right to distribute ABC, ESPN, FX and other channels to subscribers, which include major markets like New York and Los Angeles.

Companies like Charter say rising distribution fees are forcing cable companies to increase prices, causing consumers to leave. This "vicious video cycle" has cost the industry 25 million customers the last five years, according to a Charter presentation.

The company wants a hybrid model that would slow the deterioration of its traditional business while giving subscribers access to new streaming services.

Charter President and CEO Christopher Winfrey indicated the company is willing to walk away from the traditional cable television business if Charter does not get acceptable terms.

“We’re on the edge of a precipice," Winfrey told a press conference on Friday. “We’re either moving forward with a new collaborative video model, or we’re moving on.”

WHAT DOES CHARTER WANT?

The nation’s second-largest cable operator said viewership for Disney’s sports, entertainment and children’s programming has declined as the media conglomerate invested in its Disney+ streaming service.

Charter said it agreed to pay higher fees to carry Disney’s channels, but in turn sought greater flexibility in how it bundles programming for subscribers, including an option to leave sports channels out of more packages. Charter also wants to make Disney’s ad-supported streaming services available at no additional charge to its broadband customers.

WHAT DOES DISNEY WANT?

Disney is trying to manage declining cable subscribers as it builds streaming offerings. The company counts on fees companies such as Charter pay to partly cover rising programming costs, including the rights to air sports such as the NFL and NBA. It wants to keep as many cable subscribers as possible while it prepares to offer ESPN directly to consumers on an app. Disney has balked at Charter’s demand that it provide Disney+ for free.

WHY IS ESPN IMPORTANT?

Disney’s public statements about turning the sports network into a streaming service made distributors nervous, SVB MoffettNathanson analysts said. Charter sought assurances from Disney that any future ESPN direct-to-consumer service would be offered at no additional cost to its existing subscribers, an idea Disney rejected, according to SVB MoffettNathanson.

Charter also wants to offer subscribers a way to opt out of sports packages, LightShed analyst Rich Greenfield said. Under its previous Disney agreement, Charter carried ESPN as part of video packages taken by 80% of its subscribers, he wrote. Charter is seeking to reduce those so-called “penetration” requirements.

WHAT DOES THIS MEAN FOR CONSUMERS?

Streaming services have given consumers alternatives to cable packages. Disney is urging Spectrum customers to sign up for a live TV package from its streaming service Hulu that includes ESPN and dozens of other channels, similar to other streamers.

For Spectrum customers who do not want to switch, Disney-owned channels will remain dark until the sides reach an agreement. If the dispute stretches into next week, those viewers will not have access to the U.S. Open finals or the season debut of the NFL's Monday Night Football.

(Reporting by Dawn Chmielewski and Lisa Richwine in Los Angeles; Editing by Josie Kao)