The recent contract dispute between Charter Communications (the large telecom provider) and ESPN (a Disney subsidiary) is possibly this generation's most compelling business strategy story. It goes back several decades and it hit a tipping point in the last few weeks when Charter removed ESPN from its cable bundle. Ben Thompson from Stratechery has been writing some fabulous stuff about all of this that I highly recommend reading.

It's complicated and convoluted but the short version is that for years ESPN has been charging the cable companies extremely high per-subscriber rates to allow them to include their content in the cable bundle. Live sports content has always been a major driver for cable subscriptions. You can't really offer cable if you don't have live sports. And ESPN has held extremely lucrative sports contracts with MLB, the NFL, the NHL, and others. This allowed ESPN to keep raising rates on the cable companies. Cable companies consistently passed this onto consumers in the form of increased subscriber rates but that could only go so far. Ultimately it had to be taken out of the cable companies’ margins and they were suffering as a result. ESPN was loving life. They leveraged the cable companies to acquire new subscribers and then leveraged the cable bundle that included content providers like CNN, TBS, Food Network, etc., to lock in their customers and experience near-zero churn (requiring that your product be bundled into a set of other products that appeal to different users with different use cases is probably the #1 way to retain customers). To make it worse, ESPN also went around the cable companies and offered a direct internet-based TV service (ESPN+) that had exclusive content that they wouldn't show on cable. As a golf fan, I know this firsthand. The first two days of major tournaments can often only be watched on ESPN+ and not cable. So ESPN was gouging the cable companies on their distribution contracts and then devaluing their distribution partner and generating even more revenue by going around them.

The tables finally started to turn when broadband internet became by far the major growth and profit driver for the cable companies. Because of ESPN and other content providers's high rates, and consumers starting to churn and move to the streaming providers, Charter, in particular, started to care a lot less about cable television. This came to a head a few weeks ago when they removed ESPN from their bundle to get ESPN to bring their rates down and offer the cable companies a much better deal. To put the screws to ESPN, when the subscriber tried to tune into ESPN, Charter was planning to include a message that said something like, "We no longer offer ESPN, if you'd like to watch ESPN, please sign up for YouTubeTV or some other streaming service", of course, requiring the consumer to sign up via Charter broadband. This would be really bad news for ESPN, as those companies pay ESPN a far lower per-subscriber rate and churn rates are much higher (ESPN learned the hard way that big tech has a lot more leverage than a regional cable provider). Charter and ESPN finally reached an agreement that was much more favorable to Charter just before Monday Night Football aired on ESPN last week.

ESPN had the dominant position and they took advantage of it and over time they got greedy and ended up weakening their own negotiating position. That's what's so interesting about all of this. They took it so far that Charter just didn't care about ESPN or even cable TV anymore. The value chain that allowed ESPN to flourish for so many years has started to collapse.

There's a lot more to this story, and ESPN may be the winner over the long term for a variety of reasons. And if you're interested in this kind of thing, I'd recommend following it closely. This is nowhere near over, and in fact, it's going to get a lot more interesting in the coming years.

All of this is such a good reminder that companies need to deeply understand where they sit in the value chain and adapt as the structure of that value chain changes over time. This one is so complex because there are so many important and powerful players with different incentives and varying degrees of leverage: sports team owners, sports leagues, telecom companies, content providers, and now a new and enormous threat from big tech (Prime Video, YoutubeTV, AppleTV, etc.).

If your business model and your position inside the value chain seems too good to be true, it probably is, and you can be sure it won't stay that way forever.