May 26, 2003  •  Post A Comment

Comcast Corp.’s success just six months into the $54 billion merger that made it the largest U.S. cable operator is giving it firepower to reshape many important aspects of the media business. But it still faces some of its stiffest challenges.
The most formidable challenge has to do with the role Comcast will play as a primary gatekeeper in realigning and repricing content for the entire industry. Comcast’s initial moves to reduce the license fees it pays to content suppliers based on its newfound scale-including its intensifying talks with ESPN amid growing pressures among government regulators for a la carte sports fees-are just the opening salvo. Comcast’s lawsuit against Liberty Media’s Starz Encore, disputing $270 million in license fee payments, is part of that initial posturing.
How effectively Comcast can use its business savvy and unparalleled size (or what is the cable industry’s first-ever national footprint) to redraft programming economics could turn out to be its most crucial function in a media world being turned inside out by interactivity and new supply-demand dynamics.
Comcast will exercise untested negotiating leverage in retransmission consent agreements, local and national spot advertising sales, and launching its own local programming. The critical mass it soon will have with video-on-demand and high-speed data customers will put it in direct competition with all of media’s big guns. As the largest broadband Internet service provider, Comcast wrestles with AOL and MSN. Its guaranteed distribution and infrastructure will increasingly pit it against ABC, CBS, NBC and the mother of all media conglomerates, News Corp., after News Corp. has wrapped leading satellite provider DirecTV into its Fox Entertainment Group.
“Comcast touches every major network broadcasters in a material way, and these broadcasters’ sister cable programming divisions represent 65 percent of the company’s basic-level programming, based on Comcast’s $4 billion in annual program costs,” observes Bear Stearns analyst Ray Katz.
With a platform to launch local, syndicated and first-run programs, Comcast could “bump up against the studios’ production arms soon enough”-the same studios whose corporate parents own the broadcast networks, their owned TV stations and sister cable networks, Mr. Katz said.
With more than $500 million in mostly program-related cost savings tied to scale economics earmarked for the next several years, and a full-scale deployment of video-on-demand and high-definition TV services under way, Comcast is stockpiling some powerful ammunition to use with other major distributors and content providers.
Yet content was the one major issue Comcast officials mostly sidestepped at their first post-merger investors meeting May 16 in New York.
The new services and technology exhibits outside the ballroom of The Pierre Hotel set a tone of congeniality and homespun enterprise not unlike what prevails at Warren Buffett’s annual Berkshire Hathaway investor visits in Omaha.
Comcast CEO Brian Roberts and his father, Comcast founder Ralph Roberts, demonstrated that they bring the same combination of shrewdness and down-to-earth sensibility leading their $70 billion, 82,000-employee media behemoth.
Comcast is benefiting from some good early returns that have put Wall Street at ease with its conservative 2003 financial guidance. Analysts are expecting Comcast to achieve a 27 percent increase in cable cash flow and more than $100 million in overall operational free cash flow in a year when no positive cash flow was expected due to massive AT&T system upgrades that will cost about $4 billion, less than originally earmarked. Free cash flow will be back on track at more than $2 billion next year and more than triple that by 2008, giving it the resources it needs to pay debt and do plenty of big deals.
`Less leveraged’
Having recently paid off $2 billion of its nearly $30 billion in post-merger debt, Comcast is on track to achieve at least the additional $2 billion in debt reduction slated for 2003. Comcast already is “less leveraged” than when it took over AT&T late last year, and has $5 billion in untapped bank credit, Mr. Roberts said.
Comcast’s operating cash flow per subscriber, which cable President Steve Burke considers one of the most telling metrics, is on track to rise nearly 13 percent to $315 annually per subscriber. Mr. Burke’s turbocharged integration plan and execution has made him the “architect of Comcast’s early success,” Mr. Roberts said.
It’s on its way to gaining back about one quarter of the 500,000 basic subscribers lost mostly by AT&T, whose systems are on track to reach 36 percent cash flow margins this year on the way to Comcast’s historical 40 percent margins. And it converted 55,000 satellite customers with its dish buyback program in the past year. This year, its robust regional interconnect business will generate more than half of the company’s anticipated $1.2 billion in revenues, up 11 percent over 2002.
“This would imply little risk surrounding the 2003 performance, if for no other reason than that the easier things will be done and the company’s numbers will be made,” Mr. Katz said. “However, we think that for 2004 an beyond, when synergies and improvements will be more challenging, the market still perceives some risk.”
One immediate risk may come from haggling by Comcast and Liberty Media over the value and sale of QVC, which Mr. Katz estimates, at worst, can have a negative $2-per-share hit on Comcast’s steadily rising stock.
Clearly, Comcast executives have demonstrated that big media mergers can work if they hinge on core businesses and a well-thought-out, painstakingly detailed and firmly executed plan. But many analysts, such as Alan Bezoza of CIBC World Markets, caution that Comcast “is not out of the woods yet.”
Most specifically, analysts and investors I spoke with in New York last week said it isn’t so much what Comcast’s senior executives talked about as what they don’t openly talk about, namely how Comcast can control and command enough differentiated content and services to make the most of the digital platform it is hustling to create.
Mr. Roberts referred to VOD as the first step toward what he envisions to be personalized TV and a “My Comcast” portal being developed for integrating video and online content. While Comcast initially is receiving and retransmitting other companies’ branded content (NBC, ABC, Discovery) at no charge as part of its free VOD service, the model can’t last. Despite Mr. Roberts’ well-intended appeal for “a partnership with the content community,” the most cost-effective solution to Comcast’s content needs will be controlling and owning more of the sources.
At the rapid rate that Comcast is getting its balance sheet under control, it could rekindle its merger-and-acquisition activity sooner rather than later, despite tax implications that restrict it from big deals in the next year.
Already, Comcast is mostly seeking to swap partnerships and equity stakes for cash to reduce debt or for more cable systems to fortify its existing clusters-as with a $725 million “put” Paul Allen will likely make good on with Charter Communications systems.
“I don’t think you are going to see any big merger changes. Right now execution is Job One,” Mr. Roberts told investors. And in almost the same breath he conceded that Comcast “must be prepared to take more risk” to grow and, indeed, already struggles with the question of what to do with all that free cash flow.
Some high-powered bankers and investors say they already know. Comcast will be well-positioned enough in another 18 months to march triumphantly into the Magic Kingdom and take over the struggling Walt Disney Co., whose vast content and creative resources would be the perfect match for Comcast’s dominant distribution platform at the right price. It’s a natural fit, they contend, and a necessity since it would instantly put Comcast on equal footing with News Corp. and Viacom.
As Comcast executives told investors in New York, the fun has onl
y just begun.