Comcast Corp., which is expected to close its mega-merger with AT&T Monday, is talking to Steve Bornstein about a top programming post, according to executives with knowledge of the situation.
The former president of ESPN and more recently the former president of ABC Television is on a short list of candidates for the position, which would complement ‘s program deal-making attorney Amy Banse, VP of programming investments, and Mindy Herman, president and CEO of E! Entertainment Television.
By the nature of the size of -it will control 40 percent of the U.S. cable market-the job is of huge import. owns major stakes in E!, QVC, the Golf Channel, the Outdoor Life Network, Style and two regional sports channels that are part of Sports Net.
“We will continue to look for new cable channels to buy or launch. We would continue to pursue our existing strategy of launching niche channels that offer unique niche content,” Ms. Banse said.
On the drawing board are a number of special-interest cable channels catering to Hispanic, female and African American viewers, knowledgeable executives said. will develop and launch digital tiers of specialty sports offshoots from its Outdoor Life and Gold channels. Ideally, wants to ramp up to launch two new channels every year, the executives said.
Mr. Bornstein’s cable network and Internet expertise (he also headed Disney’s Internet effort for a while) and ties to professional sports would be especially helpful as the new moves aggressively to negotiate available video-on-demand, high-definition and streaming video rights for live sports events and entertainment and carve out new alliances with content giants such as Disney, AOL Time Warner, Viacom and NBC.
executives and Mr. Bornstein declined to comment on their talks. If he joins he would join his former Disney colleague Steve Burke, who is ‘s cable president.
Interestingly, some years ago employed former Disney executive Rich Frank to head its programming operations.
Mr. Bornstein, who is currently an independent consultant for the National Football League, has been talking to about the NFL’s out-of-market “Sunday Ticket” football telecasts as they move from DirecTV and the creation of an NFL-branded digital channel, sources said.
Clearly, any important player in Hollywood is going to have to get used to flights to Philadelphia if he or she wants to produce or distribute content on cable.
“They are going to be the mother of all gatekeepers,” observed a leading studio executive. “They’ll tell us what we can sell and at what price, and then, if they like us, they might just buy us out. That’s the power they have.”
President and CEO Brian Roberts insists on a more modest, altruistic view. “We will be able to enable other people’s business aspirations using our larger footprint,” he said. “Now programmers or media companies, sports leagues, movie studios and independents can come to us with a new idea or technology or a new channel. We’re taking an entrepreneur’s approach.”
has been imbued with an entrepreneur’s spirit since 1963, when Brian’s father, Ralph, founded the company with the purchase of a 1,200-subscriber cable system in Tupelo, Miss.
One move many analysts and insiders expect from the new, bigger is closer ties to NBC. The network is providing news and entertainment programming it owns and produces for ‘s new free video-on-demand trial in Philadelphia. The relationship between the companies is close and the conversations are fluid, said executives close to the situation.
Among the future ventures being discussed with NBC, which owns Telemundo, are the development of Hispanic program channels and more extensive program alliances. Analysts said a potential merger or acquisition between the two companies is not out of the question.
Also, look for to seek to negotiate choice content supply deals with the biggest industry providers, including AOL Time Warner, The Walt Disney Co. and Viacom, to support its major VOD offensive against satellite competitors. It recently added Turner Broadcast and PBS to a roster of free VOD participants headed by NBC, Biography, CNN and Comedy Central, all of which retain advertising revenues from original commercials that remain intact when product is rebroadcast on VOD. The company said it also will seek out smaller independent producers.
“There are a lot of companies that bring expertise and resources we don’t have on the content side that we want to partner with, like NBC, Time Warner and Viacom,” said Mr. Burke, chief architect and commander of ‘s sprawling operations. “The smart thing for us to do is be a place where people bring good ideas.”
Digital technology now makes it possible for to provide targeted programming, services and even commercials to meet the needs and interests of individual subscribers.
That is the essence of the VOD experiment in Philadelphia. It is what Mr. Burke calls ‘s content silver bullet, and the ultimate offense against the growing popularity of satellite service. “It’s a way to get customers back from satellite. We’re trying to win customers back with product,” Mr. Burke said.
Besides NBC, the free VOD, which later will be rolled out to other markets, involves Discovery, Turner Broadcasting, E.W. Scripps and PBS. The experiment will begin to incorporate advertising in 2003.
“The big endgame is to be more competitive with satellite,” Mr. Burke said. “The entire free VOD model is designed to deliver the technology to the consumer at no cost,” which means digital subscribers get to recall and manipulate everything from their favorite pro sports team game to the nightly news and entertainment as they cycle through windows of 24-hour access. Advertisers can match local franchises and dealers to specific local viewing zones.
“For the last 10 years, satellite has had a better mousetrap. For the first time in 10 years, we have a chance to play offense,” Mr. Burke said.
Because the newly merged company will spend the first two years intensely focused on upgrading AT&T’s lagging cable systems, integrating operations, growing cash flow and basic subscribers, will heavily rely on growing new content ventures organically. Besides the cable networks it has stakes in, has the new G4 video game platform. G4 represents a $60 million investment that will break even by 2004.
After catching its breath next year and paying down some of its $30 billion acquisition debt, will selectively acquire or take stakes in established cable networks and production companies. It is likely Disney, which is selling assets to reduce debt, will sell its stake in E!, giving complete control.
Furthermore, could still become a bidder for such available properties as the Rainbow Media cable networks and Liberty Media’s Discovery Communications or move to acquire the QVC stake it doesn’t own from Liberty during a limited window next February. executives concede they must seek stronger ties to bigger content players-such as NBC or Disney-through joint ventures or mergers.
“To take full advantage you need to be a fully integrated company. You need production, film library, cable assets, a broadcast network,” programming investment executive Ms. Banse said. “What we need to think about from [a] strategic programming and distribution perspective is how to expand your existing cable product. But [with] the variety of content offered, how do you explore the VOD, the broadband world and the international distribution,” Ms. Banse said.
Working with program syndicators and local broadcasters, will seek to construct platforms showcasing locally produced news and talk shows, integrating special-interest syndicated fare that targets regional subscriber and advertiser interests. already is trying out this “local channel” concept in Philadelphia. The company is examining ways to similarly develop targeted content for high-speed data customers.
“High-speed data five years from now will be more like cable, with a basic service the bottom of specialized layered services that could be streaming video, online gaming, h
ome security,” Mr. Burke said.
After reviewing the fine print of AT&T’s existing programming contracts, executives will attempt to renegotiate existing pacts and negotiate new program deals using their newfound scale. Some analysts estimated the immediate result could be 15 percent or more reduction in overall program licenses costs, generating an initial $500 million in savings. Because AT&T has had twice as many subscribers as , the merged company will be able to immediately embrace the lower program license fees granted to AT&T on the basis of scale.
However, Liberty Media last week said it will challenge any effort by to apply AT&T’s lower negotiated rate for program license fees to all of the combined company for any of the programmers in which Liberty has an interest.
For its networks that aren’t fully distributed on the former AT&T systems, look for to fill out the distribution of its existing cable channels domestically and strengthen their distribution abroad.
Analysts have their say
Controlling license fees and ramping up cash flow from new programming services are key to ‘s delivering what industry analysts estimated will be a pace-setting 20 percent annual growth in cash flow based on an average 12 percent growth in revenues.
Veteran Merrill Lynch analyst Jessica Reif Cohen said executives, who are conservative and won’t be giving any official guidance to investors for months, could deliver as much as 25 percent cash flow growth even while spending at least $2 billion the first two years to upgrade AT&T’s deficient cable systems.
Some analysts conservatively estimate that the merged company can realize between $1.5 billion and $2 billion in synergies the first two years, including close to $500 million in program cost savings, more than $200 million incremental advertising revenues and cost savings from what eventually could be the elimination of more than 5,000 jobs from a combined 60,000 person workforce. Savings could turn out to be more or less depending upon how quickly executives integrate and streamline operations.
Morgan Stanley Dean Witter analyst Richard Bilotti estimated the new Corp. should deliver close to $7 billion in cash flow on $24 billion in total revenues in 2003, even if new video and high-speed services grow only at a modest pace and even if the economy remains tepid and unpredictable.
All of that points to a stable, well-managed financial base with plenty of upside that can only be realized if the new can partner with or acquire major content providers that have film libraries, studios, production companies and broadcast networks to become a formidable cost-effective content player in its own right and make the most of its economies of scale, analysts said.
Looking for partners
In a report to clients, Mr. Bilotti said will need to join forces with another cable operator to have a footprint big enough to economically support the launch of new digital channels and new programming to avoid having to negotiate carriage agreements across the entire industry.
The new company also will need to partner with or buy existing programmers, trading its vast distribution with another players’ low-cost libraries or content, Mr. Bilotti said.
Conmcast also will need to partner with a television station or a major TV station group in developing free VOD content that appeals to specific regions, although officials said they are not interested in acquiring TV stations even under deregulated cross-ownership rules.
Mr. Bilotti expects to make such moves within the first two years as it begins generating higher levels of free cash flow. “Having the funding necessary to launch and/or expand programming is almost as important as having the distribution platform to do so,” he said.
“If AT&T attempts to start a new channel outside of its existing program niches, it also will need to buy a block of programming or negotiate a venture with a content provider,” Mr. Bilotti said. “Unlike the media conglomerates, AT&T would not have a library that could be used as a low-cost programming source.”
Although executives insist the AT&T acquisition is “not about cable vs. content,” the new company’s mere size and clout dictates bigger things down the road.
“It’s like a pretty girl at a dance. The possibilities are endless,” quipped a executive. “But we refuse to fall in love with what could be.”
The driving force behind the AT&T merger and any content-related expansion that will come after is intensifying domestic satellite competition, which soon could be in the clutches of News Corp. chairman Rupert Murdoch. Mr. Murdoch’s News Corp. will soon get another chance to acquire Hughes Electronics’ DirecTV and even its foiled suitor, EchoStar Communications. Already a global satellite force, News Corp. and its Fox Entertainment subsidiary own the content resources to transform the U.S. satellite business into an even more provocative force.