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Analysts Bullish on Comcast Move

Sep 20, 2004  •  Post A Comment

In striking a content-distribution deal last week with Sony Pictures Entertainment, cable giant Comcast has fulfilled its dream of using its vast distribution to leverage content but has avoided shelling out the billions of dollars it was proposing to spend earlier this year to acquire The Walt Disney Co.

That is the general consensus of Wall Street analysts, who are hailing last week’s partnership between Comcast and Sony to offer Sony- and MGM-owned films on Comcast’s burgeoning video-on-demand service. The alliance will also create a Comcast-controlled joint venture that will explore the launch of new channels using content from the two studios and provide the cable company the opportunity to purchase up to 20 percent, or $300 million, of the Sony consortium that last week agreed in principle to buy MGM for $4.8 billion.

While Comcast’s participation in the content-distribution deal helped give Sony the edge it needed to beat Time Warner in the derby for MGM, analysts are near-unanimous in their belief that the deal is likely to be a big win for Comcast.

The chief reason: Comcast can now realize its goal of marrying content with distribution without having to pony up the big dollars involved in an acquisition of a studio the size of Disney-or enduring the headaches of having to justify such a purchase to its investors, who slammed the company after it announced its interest in buying Disney.

Indeed, when Comcast made its unsolicited $54 billion bid for Disney, its stock tumbled and speculation erupted on Wall Street that the cable titan, which boasts 21.5 million subscribers, was acknowledging that content-not distribution-was king in the entertainment world. Comcast later withdrew that bid amid investor howls and a series of rebuffs from Disney.

But the dream of leveraging content and distribution didn’t die there. Comcast has inked several smaller pacts since the Disney bid, including an agreement with the National Football League to show highlights from games on an on-demand service, that when taken in total provide “evidence that Comcast is pursuing a more incremental approach to achieving the same two strategic objectives of its bid for Disney”-to obtain sports programming and studio content to support its VOD service, said Lara Warner, an analyst at Credit Suisse First Boston.

Analysts believe the alliance with Sony could be particularly compelling. Under the terms of the deal, Sony will release several hundred Sony, and possibly MGM, titles a month that will be available free to Comcast subscribers.

It marks the first time a cable operator has struck a deal to distribute a major film studio’s content over VOD, and in the end will not only further bolster cable’s digital product offering amid stiffening competition from satellite operators but also position Comcast to grab a piece of the very lucrative home video market.

Craig Moffett, a cable analyst at Bernstein Research, said Sony agreed to test the earlier release of some VOD titles as part of the venture with Comcast, including releasing some VOD titles the same day the films are released on DVD.

“Earlier release windows, for Sony and for the rest of the industry, would make a huge difference in cable’s ability to capture what is today a $10 billion home-video rental business,” Mr. Moffett noted.

The potential launch of new channels by Comcast could change the types of conversations Comcast has about programming fees. Analysts said that if Comcast were to launch a new network using old Sony or MGM movies, it would boost Comcast’s position when it comes time to hold carriage talks with channels such as Cablevision’s AMC or Time Warner’s Turner Classic Movies.