What to know about the Disney, ESPN blackout on DirecTV

Walt Disney Co. on Sunday pulled ESPN and other channels from DirecTV, minutes before the kick off a high-profile USC football game and during the U.S. Open tennis tournament — infuriating sports fans who found themselves in the middle of a contentious contract dispute.

More than 10 million DirecTV and U-Verse video customers were swept up in the feud when DirecTV lost its rights to carry Disney programming — including Disney-owned ABC television stations.

The two companies had been negotiating at DirecTV’s El Segundo headquarters for weeks, but failed to agree on a new licensing deal by the Sept. 1 deadline.

The blackout is the latest sign of strain facing traditional television companies as customers shift to streaming.

“Consumers are going to blame somebody but, really, it took both of these companies to get into this position,” Emarketer senior analyst Ross Benes said recently.

Here’s what to know about the dispute:

Why is this happening?

Pay-TV providers, including DirecTV, have absorbed stiff increases in the costs of licensing programming as their customer base has eroded due to cord-cutting. TV distributors are struggling to make money on their video channel businesses and fear that big rate increases will only drive away more customers.

The cost of carrying broadcast channels (ABC, CBS, Fox and NBC) and sports channels, including ESPN, has been skyrocketing as the programmers look to pass along the increases they have agreed to pay sports leagues and conferences. Increasingly, the shrinking pool of traditional pay-TV subscribers has been asked to shoulder these increases.

DirecTV asked Disney for flexibility to offer smaller, genre-themed packages. Disney has long required pay-TV companies to carry its cable channels, including ESPN, in most of its customers’ homes. ESPN is the most expensive basic cable channel, costing distributors nearly $10 per month per subscriber home.

That has led to one of the thorniest issues in the current dispute: Disney’s requirements for “minimum penetration” for its channels, including ESPN. Disney requires that ESPN must be delivered to about 82% of DirecTV’s subscribers.

Over the years, the minimum penetration practice has enabled Disney to collect huge fees, including from subscribers who don’t watch much sports. Pay-TV companies must pay penalties if they don’t meet the minimum threshold.

DirecTV argues that that since fewer than 40% of its customers regularly watch Disney sports content, it is unfair to burden those subscribers with the high costs of sports programming. Disney counters that it invests heavily in high-quality programming and has offered its channels, including ESPN, to DirecTV at market rates.

DirecTV is trying to relax those penetration rates, and fees that it must pay when it doesn’t meet the threshold.

The satellite provider also notes that only 10% of its customer base regularly tunes into kids programming — but more than 80% of its subscribers are paying for those channels.

In addition, DirecTV and other distributors also have been chafing over efforts by Disney and other entertainment giants to build their own streaming services, which compete with their long-time partners, the pay-TV companies. Disney, Warner Bros. Discovery and Fox Corp. this year teamed up to build a sports streaming service, Venu, as an alternative to companies like DirecTV. The effort was challenged in court, and a federal judge in New York granted a preliminary injunction that temporarily blocks Venu’s launch.

How long will this dispute last?

That’s unclear.

A year ago, a similar dispute between Disney and Charter Communications, which operates the Spectrum service, lasted 12 days.

Following that contentious struggle, Charter dropped some smaller Disney-owned channels, including Freeform, and gained the right to offer Disney streaming services, including Disney+, as part of their bundle. However, the outage proved costly to Charter, which lost more subscribers than it anticipated.

The blackout ended just as ESPN’s first “Monday Night Football” game of the season was getting under way.

Typically, a dispute ends when both sides feel the economic pain.

“There’s always a lot at stake,” Benes said. “But if [DirecTV doesn’t] have ESPN channels for the next three months, that will lead to even more cord-cutting. It could be another nail in the coffin.”

What programs might be affected?

Customers who live in cities served by a Disney-owned ABC television station, including KABC-TV Channel 7 in Los Angeles, will see an interruption in some of their favorite programming, including “Good Morning America,” “Jeopardy” and local newscasts. Disney owns eight ABC stations, including in San Francisco, Fresno, New York, Chicago, Houston, Philadelphia and Raleigh-Durham.

For now, much of the pain is being felt by sports fans. College football fans are still miffed that they missed the USC - Louisiana State University clash on Sunday, which saw the 23rd-ranked Trojans execute a thrilling last-minute victory over No. 13 ranked Tigers.

ESPN has rights to the US Open tennis tournament, which is in the latter rounds with the men’s and women’s quarter-finals and semi-finals. The championships are this weekend.

College football is also huge on ABC and ESPN.

Monday marks the kickoff of ‘Monday Night Football’ on ESPN and ABC, with a prominent pairing of the New York Jets against the San Francisco 49ers, two markets served by ABC-owned stations. The game is slated to feature the return of Jets quarterback, Aaron Rodgers, who suffered a season-ending injury in last year’s “MNF” opener.

ABC is also hosting the first presidential debate between Vice President Kamala Harris and former President Trump on Sept. 10. However, other networks are carrying ABC’s feed for the debate.

The Disney-owned network also broadcasting the 76th Primetime Emmy Awards show Sept. 15, so millions of customers won’t be able to watch the TV fan fest — hosted by father-and-son comedy duo Eugene and Dan Levy — if the dispute drags on for two weeks.

Is there a work-around?

Viewers can access ABC signals through a digital over-the-air antenna. But that won’t help viewers of Disney’s cable channels, ESPN, ESPN2, Disney Channel, FX or National Geographic.

Competing services offer the Disney cable channels, including YouTube TV, Sling TV, Hulu + Live TV (owned by Disney), FuboTV and traditional cable and satellite providers, including Charter Spectrum, Cox Communications, Comcast and Dish Networks.