‘Free HBO’ Isn’t the Full Picture of WBD’s Charter Bundle

There’s no sugarcoating just how bad things have gotten for cable companies: During just the first six months of 2024, a whopping 4 million U.S. homes exited the pay TV bundle, according to research from MoffettNathanson. That number will rise to over 6 million defectors by year’s end, the company forecasts, shrinking the total number of homes who pay for a traditional cable package — i.e., not including services like YouTube TV — to just under 47 million. As analyst Craig Moffett put it in a report a few weeks ago, “The pay-TV ecosystem as we know it continues its inexorable decline.”

And yet, as dire as things are for big cable, recent developments suggest that maybe, just maybe, the industry is finally getting serious about finding a way to slow the pace of cord-cutting. Late last week, Charter Communications hammered out a new distribution deal with Warner Bros. Discovery, which will result in most of Charter’s Spectrum video customers getting access to the ad-supported versions of WBD’s Max and Discovery+ as part of their cable package. The agreement, coming on the heels of similar deals Charter struck with the owners of Disney+, Paramount+, AMC+, and Spanish-language VIX, means Spectrum now has a potentially very powerful argument to present to customers: Keep your cable package, and we’ll cover the subscription fees for most of the major streaming platforms not named Netflix. Or, put another way: Buy cable, get (a whole lot of) streaming free.

Some of the coverage of last week’s deal focused on the fact that, because Max includes HBO programming, WBD was now letting Charter give away the premium network for “free.” But that’s simplistic on many levels. For one thing, most Spectrum customers who will get access to this deal already pay more than $80 per month for video programming (not counting any discounts offered for bundling TV with phone or internet). And more importantly, Charter will still be paying WBD a wholesale price for Max (and thus HBO), even if customers never use the app. This arrangement mirrors what has been common practice in the cable business for a half-century. While it’s true that few cable operators ever included HBO in their basic packages, the premium network has long been bundled as a sweetener to get customers to pay for channels they might not want otherwise or as an incentive to keep them from canceling their overall subscriptions. “Packaging is what made the cable business so great,” one industry veteran who’s worked in cable for decades told me this week. “You would get all sorts of channels for ‘free’ or on top of other channels, and it made people less likely to churn.”

And stopping churn — and, maybe even signing up a few new customers — is what Charter and its content partners are trying to do by giving folks who still pay for cable access to streaming platforms at no extra cost. While last week’s press release announcing the Charter-WBD deal called it “groundbreaking,” said ground was actually broken exactly one year ago this week when Disney’s Dana Walden negotiated a new carriage deal with Charter that ensured Spectrum customers all got Disney+ included with their cable bundle. And when I spoke to Walden at the time, she made it clear that keeping customers locked in as subscribers was one of the driving motivations for this new paradigm — not just for Charter but also Disney. “Having those subs locked in means there will be significantly less churn,” she said. Indeed, while it’s very easy to wake up one day and cancel a Disney+ subscription you get from an app — it’s literally just a few keystrokes away — canceling a cable subscription takes a lot more effort and results in giving up a lot more than just one platform: You’re nixing access to hundreds of channels and, in the case of Spectrum, multiple streaming platforms.

This helps explain why Walden and WBD’s David Zaslav have decided to accept the trade-offs that come with making deals like the ones they’ve made with Charter — including less revenue per subscriber when someone gets Disney+ or Max via cable, since the wholesale-rate cable companies pay Disney or WBD for their streamers is notably reduced from what consumers pay when they sign up through the app. As Zaslav noted last week at a Goldman Sachs investor conference, companies like his have realized that they can’t be dogmatic about going direct to consumer with their platforms and need to explore a variety of ways to get in front of audiences. “If things were going great for consumers and if things were going great for the media players, then we wouldn’t be doing these creative deals that we’re doing,” he said. It’s why, in addition to the deals Disney and WBD have separately made with Charter, the two companies also recently teamed up to offer cord-cutters the ability to bundle Max, Disney+, and Hulu together for one discounted rate. And last week, just before the WBD-Charter agreement was announced, Disney used its Charter template to engineer a new carriage agreement with DirecTV, one that will give many of its satellite customers the same sort of access to Disney streamers that Charter subscribers currently enjoy. “This disruption is a real challenge, but it’s providing real opportunities,” Zaslav said.

It also represents a step back to where things stood before the streaming wars kicked off in earnest five years ago this fall. Before legacy media companies such as WBD and Disney began trying to compete against Netflix using Netflix’s playbook, much of their profitability came from allowing their networks to be packaged by distributors like Charter or Comcast or DirecTV then sold as a bundle. Consumers justifiably complained about that status quo, because it meant people who existed on an exclusive diet of Bravo and MTV reality shows had to subsidize the insane cost of ESPN, while folks who just wanted to watch their favorite teams were forced to pay for 50 small channels they’d never watch. It was basically TV socialism, and while it had its flaws, it kept the TV industry financially healthy and made things a lot simpler for viewers.

The free-market streaming economy was supposed to make things better for everyone by giving consumers more control of their TV spending and letting media companies reap every last cent of profit from their platforms instead of splitting it with cable middlemen. But the great unbundling of television has failed to live up to the hype for everyone not named Netflix. That doesn’t mean streaming was a mistake or that direct-to-consumer relationships don’t make sense for companies (or consumers, for that matter). But what I think has become clear over the past two years is that the TV industry attempted to change too much too quickly without first trying to find some middle ground between the old and new models.

It’s not as if folks in the business didn’t realize the risks associated with going all-in on streaming and tried to carve out a more cautious path forward. Consider, for example, the strategy Comcast execs laid out in the early days of Peacock. Back when the streamer launched during the early months of the COVID pandemic, the streamer promoted itself with a very simple message: “Peacock is free.” That branding was partially a nod to the fact that, early on, the service offered a pretty robust free, ad-supported tier with limited content in addition to its main, $5-per-month premium offering (which also had ads, just far fewer). But “Peacock is free” was also meant to lean in to what Comcast execs originally thought would be their eventual business model: giving everyone who paid for a cable package free access to the premium tier of Peacock. “The longer-term vision is that we really believe that through bundling and through these partner integrations, both internet and pay TV, we’re going to be able to reach a majority of the country and give them … Peacock for free,” NBCUniversal direct-to-consumer boss Matt Strauss told me at the time. He said the plan was to negotiate new distribution deals and partnerships with cable companies and internet providers and that by around 2022, most consumers who paid for TV or premium internet would just automatically get access to Peacock Premium.

Sound familiar? Back in 2020, Strauss and Peacock were essentially pushing for a model not unlike what Charter has done with Disney, WBD, and Paramount: Buy cable, get Peacock Premium. For whatever reason, though, that didn’t happen. And Peacock eventually dropped its totally free tier then decided to push for everyone to pay for Peacock, cable subscription or not. It followed rivals Disney, Warner Bros. Discovery, and Paramount Global right over the direct-to-consumer cliff, incurring massive losses in the process.

But the fact is Peacock’s 2020 philosophy was right. Likewise, Disney and WBD are correct in agreeing to the demands of Charter and DirecTV now and letting access to streaming platforms be packaged with a pay-TV subscription. The past five years have seen programming budgets slashed at Disney, WBD, and Paramount cable networks. People who pay for cable are getting a substantially worse product than they were in 2019, but they’re not paying any less. Instead, the media companies are taking the profits they’re still making from cable and investing them in making shows for streaming while starving their cable networks. Is it any wonder cord-cutting has accelerated — or that the Charters and DirecTVs of the world have been demanding changes?

That’s why the Disney and WBD framework with Charter makes sense. There’s no going back to the days when cable networks were home to lots of exclusive and expensive scripted content. Nobody is making TNT or USA great again (even if both are planning to make some new scripted shows soon). But for consumers who still want the convenience of cable and live TV, offering them “free” access to the programming they used to get on cable lets them justify continuing to pay $80 per month or more. “A lot of the content that’s on streaming is already being paid for by the cable operators,” says the aforementioned industry vet. “Why shouldn’t they be able to give it to their customers?”

Quite frankly, this is how it should’ve been five years ago and why Peacock execs were right to initially focus on trying to bundle the service with existing cable packages. The goal should have always been to keep as many people as possible locked in to cable deals — with streaming a source of extra revenue and not the whole enchilada — for as long as possible. Instead, legacy companies made cord-cutting more attractive than ever and hastened the speed of the bundle’s inevitable decline.

Unfortunately, the downside to doing this now — after tens of millions of people have ditched cable for streaming — is that there is a not small number of cable customers who already pay for Disney+ or Max but will have every reason to cancel those full-price subscriptions once they become part of their cable bundle. But whatever revenue hit streamers take from that will be offset if these new bundles reduce overall churn on the streaming side and reduce cable cord-cutting. As for the new customers who will be brought to streaming by these “free”-with-cable subscriptions, it’s worth remembering that they’ll be getting the ad-supported versions of Max or Disney+. That means they’ll be able to be indirectly monetized by streamers, since more subscribers equals more viewing impressions, which in turn equals more money from Madison Avenue. And then there’s this: Many older cable customers have still not explored streaming services, or at least don’t use a lot of them regularly. So “getting these consumers exposed to streaming apps could be beneficial in the long term,” the industry vet says. “If they ever get off cable, they will be more likely to want to subscribe to a streamer directly.”

Obviously, it’s still early days in this new era of cable-streaming bundles. And for viewers who have no need for live-broadcast networks or sports, the idea of paying $85 per month for a cable package in order to get $60 worth of “free” streaming will remain a nonstarter. But for viewers who watch a lot of TV and use a lot of different services, bundles like the one Charter offers could be incredibly appealing. I regularly hear from folks bemoaning how complicated streaming has become or how expensive it now is to maintain all the major streaming services, especially if you want to go ad-free. “I sometimes think I maybe should go back to paying for cable,” one friend in his early 30s told me just this week. (Really!)

It should be noted that, even after several months of bundling Disney+, Paramount+, and AMC+ with its Spectrum TV service, cord-cutting among Charter homes has continued, with its number of video subscribers falling by nearly 10 percent this year, per MoffettNathanson. That’s a bit better than rival Comcast but still not great. The addition of Max (and thus HBO) could make a difference, given it’s by far the broadest and most complete streaming offering Charter has bundled to date. But even if it doesn’t lead to an immediate halt in cord-cutting, cable providers and media companies need to keep experimenting. There are still tens of millions of Americans who want a lean-back TV experience and the simplicity of a single TV package. And for all its flaws, the pay-TV bundle remains the single most profitable model of television ever invented. “Right now, the cable business is bleeding out,” the industry vet says. “You have to find the best way you can to plug that hole, or at least make it leak more slowly.” Given the fact that things couldn’t get much worse for big media companies than they are right now, why not keep trying new things? At this point, there’s very little left to lose.