DirecTV is on the warpath against Disney in a battle it says is existential for cable TV

• A recent ruling against Venu Sports has put the cable bundle's business model under scrutiny.
• Pay-TV packages have become increasingly bloated and costly, which has led to more cord-cutting.
• DirecTV's Rob Thun previewed his company's strategy ahead of a battle with Disney.

The sports-media world got a serious shock in mid-August as a judge stopped the launch of Venu Sports , a sports-streaming service backed by Disney, Fox, and Warner Bros. Discovery.

What could have been a big blow for pay-TV providers like DirecTV and FuboTV, which filed the motion against Venu, turned into a cause for celebration.

But Rob Thun, DirecTV's chief content officer, wasn't in the mood to pop Champagne bottles. Instead, he recently told Business Insider, his initial joy about the ruling quickly turned to anger.

"These guys lied to us," Thun said of Disney, Fox, and WBD. "When you pulled back the curtain and saw what they were really doing — wow. They really just want to disintermediate all of pay TV and drive everyone to themselves. It's horrific."

Representatives for Fox, WBD, and Venu didn't respond to requests for comment.

A person closely familiar with Disney's thinking pushed back on Thun's statements, including that the company is indifferent to the fate of DirecTV and its peers. This person, who was granted anonymity to discuss sensitive negotiations, said the company wanted to keep the pay-TV business — which has lost tens of millions of customers since the early 2010s and is still losing steam — alive as long as possible.

Fresh off a vicarious victory over Disney, Thun is still looking for revenge. DirecTV's contract with Disney expires on Sunday, leaving just a few days for the two sides to reach a deal.

Playing a different ball game?

Thun's beef with Venu, and the triumvirate backing it, isn't their idea of launching a "skinny" sports-focused bundle . DirecTV and its peers wanted to do that for years but were forced to add those media giants' nonsports channels.

In turn, bundles became big and bloated as their prices skyrocketed. Thun acknowledged this issue and blamed it on networks' higher minimum penetration rates.

TV companies like Disney have been reluctant to separate their most valuable networks, like ESPN, from less-viewed ones like Freeform or Nat Geo Wild. They do this by saying that those smaller channels must be put in a high percentage of packages, securing a monthly affiliate fee for each of them — regardless of who watches them.

"They've been terrified to, frankly, swim on their own and not be buoyed by our minimum penetrations," Thun said, adding: "I don't think there's a network on the dial — well, maybe there's a handful — that are worth the rates that we pay."

If pay-TV carriers balk, they miss out on all of Disney's channels. And since that's not a viable option, DirecTV and its peers have had to offer far too many channels at a price unpalatable to some customers.

"We've hit a ceiling of price that customers are willing to pay, and the only way to try to adjust what people can pay, then, is to offer skinnier bundles," Thun said. "And that's the one thing that is not allowed."

It appeared as if Venu wouldn't have to play by those rules, which infuriated pay-TV executives like Thun. Judge Margaret Garnett appeared to agree, saying in her ruling that "for the first time ever," the trio behind Venu was "granting a firm a license to unbundled sports content." She added "that firm is their own" joint venture.

The person familiar with Disney's thinking strongly disagreed with each of these arguments, as well as the judge's ruling, saying that the company had a valuable and widely watched set of networks that, in aggregate, are watched regularly by most pay-TV customers.

For DirecTV, it's s kinny bundles or bust

DirecTV believes these strict bundling requirements are to blame for putting pay TV on life support. In turn, Thun wants to allow customers to build their own bundles that could be centered on a combination of genres, like sports, entertainment, news, family and kids, movies, or Spanish-language programming.

"We absolutely have to find our way to offering something smaller and less expensive than what we have today," Thun said.

"I'm not sure what the wake-up call is going to be, frankly, for the programmers to realize this isn't good," the content chief said, adding: "If I drive pay TV out of business, the gravy train is over."

If Disney doesn't allow for skinnier packages by separating its weakest TV networks from its most desirable ones, Thun said his company would either sue or temporarily cut ties with Disney's channels.

The person familiar with Disney's thinking said the company was trying to work with DirecTV and Charter to build skinnier bundles, though they were skeptical that consumers were clamoring for them.

From Disney's vantage point, DirecTV has no one to blame for its struggles but itself. The satellite company's technology and interface trail popular streaming TV services like Google's YouTube TV and Disney's own Hulu + Live TV, the person close to Disney said, though growth has also stalled from them .

Michael Pachter, a media analyst for Wedbush Securities who said he'd been a DirecTV customer for nearly three decades, doesn't buy it. He said cord-cutters left because of surging prices, not user-interface shortcomings.

Disney is "completely responsible" for the fall of pay TV, Pachter said, "because they think the only direction that retransmission fees should go is up."

"The content owners are absolutely screwing the consumer by forcing their content onto multiple different networks in order to justify bundles," Pachter added.

Brian Wieser, a former cable analyst who has since started the advertising consultancy Madison and Wall, said it's "almost certainly true" that DirecTV's tech had hurt it but that didn't explain the erosion of pay TV. There's truth to each side's argument, he said.

Without skinny bundles, pay TV is 'going to die'

If skinnier bundles can't solve pay TV's woes, it's unclear what could. Cable providers have tried adding streaming services like Paramount+ or Disney+ to make their packages more appealing, but customers don't seem to be too interested.

Less than 10% of Charter's cable customers have signed up to get Disney+ and ESPN+ within their bundle at no extra cost, Puck's John Ourand reported last month . That remarkably low opt-in rate came as a surprise to Rich Greenfield, a media analyst at LightShed Partners.

"This seemed like the future: adding new streaming offerings desired by consumers and dropping lightly-watched linear TV channels," Greenfield wrote in a mid-July note . "Unfortunately, it does not appear to be working out that way for Charter."

Thun's take is that the low adoption rate for these streamers, even when they're free for Charter customers, proves the value of the existing pay-TV model and interface.

"That should reinforce to these programmers, 'Holy moly, if I'm going to be on my own and this stuff's available for free and I'm getting single-digit take rates, what are my prospects of not having pay TV to subsidize the model?' And if you put us in this min-pen jail, you're going to put us under — we're going to die," Thun said, referring to minimum penetration rates.

Pay TV won't disappear overnight, but Wieser said he could see its penetration shrinking from about 50% of US households to 30% in five years to 10% in a decade. That's unless, of course, companies like DirecTV and Disney not only come to terms but also figure out how to stop the bleeding.

"Is it about maximizing profitability, or is it about maximizing consumer satisfaction in the short term?" Wieser said. "Or is it about maximizing the health, however we want to define it, over the long term?"