Comcast’s Eye on Disney Proves Content Again King

Feb 16, 2004  •  Post A Comment

This past summer, at the height of a programming-fee battle between multiple system operators and cable networks such as ESPN, many Wall Street prognosticators declared that distribution had become king and that cable operators with scale would forever steer the media business.
Last week that theory was blown out of the water.
With Comcast proposing to merge with Walt Disney Co. in a tax-free stock swap transaction that values the media giant and Mickey Mouse franchise owner at just over $65 billion (including assumption of debt), Comcast is acknowledging that it has always been about the content and that its prospects for future growth rest on owning that content.
“Cable is increasingly in the position of facing higher competition and a greater commoditization of their business,” said Lara Warner, an analyst at Credit Suisse First Boston. “There isn’t that much of a benefit from scale, and if there is it’s offset by the need to provide more content. This is a defensive offer by Comcast.”
It could also be a sign that other cable operators and media companies are starting to rethink their views of the media sector, as Comcast’s move has the potential of shifting the landscape once again, sparking other content and distribution companies to consider similar linkups.
“This announcement is consistent with our view on cable, including the need for cable companies to develop and own proprietary content to fill their [video-on-demand] pipes to compete with the [regional Bell operating companies] as the RBOCs enter the video business,” said Doug Mitchelson, a media analyst at Deutsche Bank Securities.
By most accounts, analysts are hailing the merger proposal-which is under review by Disney’s board after being initially rebuffed by Disney Chairman and CEO Michael Eisner-saying it makes as much sense as News Corp.’s $6.6 billion acquisition of a controlling stake in DirecTV parent Hughes Electronics late last year.
Michael Goodman, analyst at Yankee Group in Boston, said he sees Comcast’s move as part of a larger plan by the cable giant to have a stake in what Mr. Goodman calls the three-legged stool: content, distribution and devices.
“This is not all of a sudden a new aspiration for Comcast,” Mr. Goodman said. “Almost from the day they closed the AT&T Broadband deal, the question has been when are they going to make a content purchase to serve as the yin to their yang?”
If the deal is completed, Comcast would be creating an entertainment behemoth with annual revenues of $45 billion and a market capitalization estimated to be $125 billion. In terms of scale and diversity of businesses, only Time Warner and News Corp. would rival it: The new company would own the largest cable system in the United States, with 21.5 million subscribers, as well as cable channels ESPN and E! Entertainment, broadcast network ABC, a film studio and theme parks.
“The Disney offer suggests that Comcast believes it needs to own content assets to fully leverage the value and capabilities of its distribution platform,” Citigroup Smith Barney analyst Niraj Gupta wrote in a research note, adding that Comcast’s move “indicates the merits of the recent [News Corp./ Hughes] transaction.”
That content is again on top represents a huge shift from as recently as six months ago, when the industry believed players such as Comcast would have significant leverage over content providers such as Disney, whose ESPN was looking for double-digit programming fee increases. The thinking was with all of the consolidation in the cable industry, programmers needed distribution a lot more than the other way around.
But as Comcast is showing, distribution is only a piece of the puzzle, particularly as the cable sector faces stiff competition from satellite. When News Corp. took over DirecTV, analysts said, Comcast realized it had to make its move.
Indeed, Comcast’s offer has sparked speculation of how other content and distribution companies might get together to better compete. Among the scenarios being bandied about is Viacom making a play for satellite operator EchoStar or cable operator Cox. Sources said such a marriage would make sense, since Viacom is heavy on content yet light on distribution and boasts a balance sheet that could sustain such a purchase.
However, a source familiar with the company said Viacom’s focus has long been on content, not distribution, and that acquiring a company such as EchoStar would dilute Viacom’s stock at a time when the company is buying back shares and is in the process of spinning off its Blockbuster unit, which will further reduce the number of shares outstanding.
A Viacom spokeswoman declined to comment. An EchoStar spokesman also declined to comment.
Cox President James Robbins said during a conference call Thursday that he has no plans to enter the fray that might ensue as a result of a proposed Comcast-Disney deal, and despite a growing sense that such combinations might be the future, his company will stick with cable system ownership.
“Our expertise is in the distribution business,” he said. “Economies of scale will come in programming and purchasing, but this is really a regional business. If we are operating very well on a regional basis, we will do just fine.”
Another company that could make a move is John Malone’s Liberty Media, which owns content and has a pile of cash. Liberty is the biggest shareholder in News Corp., owns an 18 percent stake in Barry Diller’s InterActiveCorp, and has been oddly silent about its next move after acquiring controlling interest in shopping channel QVC last summer.
However, Mr. Goodman sees neither Liberty nor Mr. Malone casting much of a shadow over a Comcast deal. “One might argue that [Comcast CEO] Brian Roberts usurped Malone’s position as the ultimate deal-maker in the industry, “ Mr. Goodman said.
News Corp. is another entity that some have suggested might swoop in and vie for Disney. However, News Corp. Chairman Rupert Murdoch ruled that out last week during a conference call.