Comcast head presses the fast-forward button
By Peter Thal Larsen
December 20, 2002 Financial Times
Brian Roberts (pictured), makes an unlikely mogul. Sober and soft-spoken, the bespectacled 43-year-old observes the US media landscape from the 35th floor of an office tower in Philadelphia. The office next door is occupied by his father, Ralph.
He could not be more different from globe-trotting masters of the universe such as News Corporation's Rupert Murdoch or Viacom's Sumner Redstone. "He's got the one wife and three children and lives in Philadelphia," says one of his close advisers. "He's a normal guy."
Yet last month, Mr Roberts joined the select group of people who are in a position to shape the development of the US media and communications industries. The merger of Comcast, the cable operator he runs, with AT&T Broadband creates an industry giant with close to 22m subscribers and a foothold in almost every big city in the US. The enlarged company is not just the dominant pay-television broadcaster; it is also likely to become the leading provider of broadband internet access and interactive television.
However, the enlarged Comcast has come into existence in a different era from the one in which it was conceived. Since Mr Roberts surprised Wall Street with a $45bn (£29bn) offer for AT&T Broadband in July last year, mergers - especially between media companies - have been discredited. AOL Time Warner is struggling with missed forecasts and questions over its accounting. Vivendi Universal is being dismantled in an effort to pay off the debt Jean-Marie Messier accumulated in the pursuit of his grand vision.
Mr Roberts bridles at the comparison. The purchase of AT&T Broadband does not require a strategic shift to be successful, he argues. It is the logical extension of what Comcast has been doing since Ralph Roberts founded the business 40 years ago by buying a cable system in Tupelo, Mississippi: getting bigger in the business it is already in. "Managing a subscriber in Boston is the same as managing a subscriber in Philadelphia," he says.
The leap of faith in buying AT&T Broadband, he explains, was a financial one: Comcast paid AT&T a price per subscriber equivalent to its own valuation, even though Comcast's cable systems are a lot more profitable.
The task facing Mr Roberts, then, is one of management - to raise AT&T Broadband's operating margins of about 24 per cent to the level enjoyed by its new parent - more than 41 per cent: "What we hope to prove to investors is that we can improve their margins to look more like our own."
Comcast also needs to stop customers leaving. In the year to the end of September, AT&T Broadband lost 521,000 subscribers - most of them to satellite TV, which is cheaper. Comcast added 62,000 over the same period.
Mr Roberts certainly knows AT&T Broadband's systems. In 1999 his company was close to a deal to buy the cable operator MediaOne when it was outbid by AT&T. MediaOne became the centrepiece of efforts by Michael Armstrong, AT&T's chief executive, to create a national telephone network using cable. But the strategy foundered amid poor demand and the technical complexities of upgrading cable networks.
Since then, the US cable industry has suffered a severe loss of investor confidence. After financing a $65bn upgrade of US cable networks over the past decade with the promise of the riches of broadband, many shareholders doubt whether that investment will ever generate a return. Fraud and accounting problems at smaller operators such as Adelphia and Charter have also shaken an industry where family ownership and opaque financial disclosure are still the order of the day.
The questions over corporate governance extend to Comcast. Although the founding family gave up control in order to win AT&T, Mr Roberts and his father still have a 33 per cent voting stake in the company - enough to block any unwanted suitor - and the power to appoint half the members of the board. Despite the strategic U-turn being carried out at AT&T Broadband, Mr Roberts says relations with Mr Armstrong, now Comcast's chairman, are good: "I'm pleased with where we are today."
Meanwhile, he hopes investors will concentrate on growth opportunities. To illustrate the possible upside, he uses an example that Comcast executives drew up on a paper napkin last year.
It requires three basic assumptions: that Comcast raises AT&T's margins from 25 to 36 per cent in three years; that the combined company will have $500m of cost savings by the third year of the merger; and that Comcast's growth in operating cash flow slows to no less than 11 per cent annually, from 14 per cent this year.
"If we do those three things and those three things only, we have a 20 per cent compound rate of growth in ebitda [earnings before interest, taxes, depreciation and amortisation] over the next three years," he says. "That would make us the fastest-growing media company by a lot."
It is an example well suited to the more sober business environment. There are no predictions about downloading music on to mobile phones or reinventing television. "The last thing this company needs right now is a vision," Mr Roberts says, quoting Lou Gerstner's motto when he took over at International Business Machines. "We don't need to invent anything new; we just have to block and tackle well."
Amid all the talk about sticking to the business plan, however, it is clear that Mr Roberts is already thinking beyond the integration. Comcast has a foot in the content business through the QVC home shopping channel, its Hello!-style entertainment channel, E!, and the Golf Channel. Its latest project is G4, a channel for video gamers.
With its enlarged customer base, Comcast will become a powerful partner for those looking to launch new services.
"The beauty of having 21.5m customers is for ourselves or other companies or entrepreneurs to enable their business plans," Mr Roberts says.
While this may include new channels, Comcast is eagerly launching other services, such as video on demand, that satellite TV rivals cannot match. The more immediate growth is likely to be in broadband internet connections. In the third quarter of the year, Comcast signed up an average of 13,000 high-speed internet subscribers every week, each paying more than $40 a month, and Mr Roberts says it can barely keep up with the demand.
He claims not to know what proportion of Comcast subscribers will ultimately be willing to part with $500 a year for faster internet access. "It would be like coming to my dad in 1962 and saying how many people are going to take cable TV," he says. "He didn't have to know that answer but he knew that he'd rather own more than less and wanted to keep going and that's how we feel right now."
Rival media executives are watching closely to see how Comcast will exercise its new muscle. Some speculate that the company will take on the TV networks by selling national advertising. Others expect it to put pressure on cable channels, such as Disney's ESPN sports channel, to lower their rates. This is dangerous ground for Comcast, which successfully lobbied antitrust authorities to approve its deal but may draw regulators' ire if it becomes too powerful. "Brian needs to keep his head very low in Washington," says one prominent investment banker.
Even so, Comcast's new power may strain some old relationships. John Malone, the veteran media investor and a long-time Roberts family ally, is threatening to trigger an option that would require Comcast to buy the minority stake in QVC owned by his investment company, Liberty Media - a purchase that could cost the cable group more than $4bn. If Comcast did not take up the option, Liberty could buy Comcast's 57 per cent stake, or the business would be sold to a third party.
Mr Roberts declines to comment, other than to say that relations with Mr Malone are good. But industry observers suggest Liberty's sabre- rattling is a signal Mr Malone may be pushing to be given an investment in Comcast while its shares are cheap. Others believe he is reacting to a lawsuit that Comcast recently filed against Starz/Encore, the film channels owned by Liberty, which challenges the amount AT&T Broadband pays to carry Starz on its cable systems.
Perhaps it is still too early for Mr Roberts to start throwing his weight around; given investors' nerves, any stumble by Comcast would be heavily punished. Or maybe his approach is a template for the budding media moguls of the new millennium. It may not be as exciting. But it probably has a better chance of working.
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