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Comcast Bid for Disney Highlights Dream of Owning Media Content, Distribution

Posted on: Wednesday, 11 February 2004, 06:00 CST

Feb. 12--The $51 billion bid Comcast Corp. made for The Walt Disney Co. on Wednesday has at its core an age-old media tycoon dream: Owning media content and the pipe it travels down.

Hold both cards, the thinking goes, and you can control your destiny. The content-producing side -- movie studios, TV networks, music labels -- gains a ready means to get its wares to the public. Meanwhile, the distribution arm -- cable, satellite and broadband systems -- wins the rights to show stuff people want to watch.

Lured by that vision, Comcast made a rare public takeover offer to Disney's board of directors after being rebuffed by chairman and chief executive Michael Eisner. The tax-free proposal would give Disney shareholders 0.78 Comcast shares for every Disney share they own, or about 42 percent of the combined company.

"The combined company would be uniquely positioned to take advantage of an extraordinary collection of assets," Comcast's president and chief executive Brian Roberts said in a letter to Disney.

Comcast is the nation's largest cable and broadband company, with 21 million cable subscribers, 7 million digital cable subscribers and 5.3 million high-speed Internet users. Disney is the second-largest media conglomerate after Time Warner Inc. and owns movie studios, theme parks, ABC, ESPN and other cable networks.

But several experts questioned whether a merger would produce the synergies and benefits Comcast is holding out, or would it simply produce a bigger media giant.

They point out that the quintessential content and distribution merger, AOL's 2001 purchase of Time Warner, has not resulted in higher profits, cost savings or groundbreaking products.

"There are far more examples of miserable failures than massive successes," said Danny Briere, chief executive of TeleChoice, a consulting firm.

But other experts said that the AOL-Time Warner merger failed because the Internet provider didn't bring anything truly special to the marriage. AOL didn't own the lines to consumers' homes it needed to be a true distribution company, and Time Warner already owned sizeable cable systems.

Comcast's bid also comes as politicians, consumer advocates and others are voicing greater concerns about media concentration. If Comcast acquired Disney, some critics argued, consumers would have fewer choices and the combined company greater power over other content producers and distributors.

"When you think about a marketplace dominated by these small number of entities, you are allowed to worry about good, effective competition," said Mark Cooper, research director for the Consumer Federation of America.

On Wednesday, the U.S. House and Senate committees discussed the subject during a hearing on broadcast indecency.

"A merger of that magnitude will undoubtedly go through the finest filter at the commission as is possible," Federal Communications Commission chairman Michael Powell said in response to a question.

Comcast officials were confident they could secure FCC and Justice Department approval because their proposal is similar to News Corp.'s recent takeover of DirecTV, the nation's largest satellite service.

In December, regulators approved that deal with certain conditions, including one that sends disputes between News Corp.'s Fox TV networks and cable companies to arbitration. DirecTV must also offer local channels in 30 more markets.

"What the DirecTV deal showed people is that it's possible to get it done," said Jim Penhune, an analyst at Strategy Analytics.

That deal may also have goaded Comcast to make its bid for Disney, lest it lose clout relative to News Corp. and chairman Rupert Murdoch.

"Murdoch has catalyzed a restructuring in the business and has caused a lot of people to think that the long awaited convergence of content and conduit is at hand," said Reed Hundt, a former FCC chairman.

As distributors, cable and satellite companies pay media producers such as Disney, Viacom Inc. and local TV stations for the right to carry their channels. The two sides negotiate in an intricate dance in which the pipe companies seek to lower their costs and the media companies try to get more channels on the dial by lowering prices on some others.

Companies that own both content and distribution have more leverage because they can retaliate by withholding channels they own or refusing to carry a competitor.

"If you are Comcast, your biggest expense is programming," said Larry Irving, a Washington-based consultant and former assistant Commerce Department secretary. "This is a way to control your programming costs."

Federal laws and regulations require programmers to provide their content on a "non-exclusive and non-discriminatory basis" to all distributors. Local TV stations also have some protections that help them get on cable and satellite services.

Though Comcast says it would comply with those rules. But many small programmers and local stations may legitimately fear greater concentration, said Gary Arlen, an interactive services consultant in Bethesda, Md.

"What is this going to do to the nature of the media consolidation?"

In addition to overcoming those issues, Comcast will have to convince Disney it can do a better job managing the company than Mr. Eisner. Two board members recently resigned from the company and have publicly called for Mr. Eisner's removal, but the board has backed the embattled executive.

The Disney board issued a statement saying it "will carefully evaluate the unsolicited proposal" and telling shareholders they didn't need to do anything.

Wall Street didn't appear to endorse the offer. Disney shares rose $3.52, or 14.6 percent, to $27.60. Comcast shares fell $2.70, or 8 percent, to $31.23, reducing the offer from $54 billion to $51 billion.

During an interview on CNBC, Mr. Roberts wouldn't say if Comcast was willing to raise its offer. He cited the company's record of acquiring troubled companies and improving their performance and intimated it could do the same with Disney.

"This is a very fair $5 billion premium based on last night's close," he said referring to Comcast's closing price Tuesday. Mr. Roberts also said that together the companies could create new cable-TV channels and interactive services.

Experts say if anyone can pull off an acquisition of Disney, it would be Comcast and the Roberts family. The company started in 1963 with a cable system in Tupelo, Miss.

In 2002, it paid $50.8 billion for AT&T Broadband, a collection of cable systems that AT&T paid more than $100 billion for only a few years before. Comcast has gained kudos for upgrading those networks, including Dallas, and adding customers.

"Investors will say there are a handful of acquiring companies that we trust to create value, that are well-oiled machines," Mr. Hundt said. "And Comcast is absolutely one of them."

--Technology writer Crayton Harrison contributed to this report.

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