Comcast-Disney: Let the Future Begin
This attempted merger isn't about cost-cutting. It's about truly creating the long-awaited convergence of communications and media
Hostile takeovers always tell us something important about the direction of a market or industry. They often seem to unfold as dramas of one aggressive company with a vision of the future going after a passive target chugging along in the present. Witness the era of hostile takeovers in the '80s, defined by private-equity buccaneers intent on creating a leaner, meaner corporate world. Costs were wrung from businesses like water from a wet sponge.
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Now comes Comcast's (CMCSA ) $66 billion bid on Feb. 11 for media powerhouse Disney (DIS ), and a similar tug between the present and the future is playing out again. Only this time, the vision of the future is a bit more subtle than it was in the '80s. It's less about synergy and cost-cutting than it is about how companies produce growth in a low-cost, high-output environment.
This battle isn't about barbarians crashing the gates of Corporate America. It's about how Comcast, having taken the TV-distribution business about as far as it can go, builds a new model for both communications and media.
FROZEN MARGINS. With 21 million customers, Comcast's cable-TV business is about as big as it likely can get. Having swallowed AT&T Broadband in a $60 billion deal in late 2002, Comcast probably couldn't win trustbusters' approval for more cable acquisitions. And what would be the point of trying? Comcast is so big that it has taken out as much price discounting from its equipment suppliers as it probably can. Simply adding more cable customers wouldn't do much to improve its operating margins.
Worse, Comcast's core cable business faces tough competition from satellite TV, which will only intensify as new rivals rise from the worlds of the local-phone business, wireless telephony, and the Internet. If you want to know what the video-distribution business will look like in 5 or 10 years, take a look at today's fiercely competitive local- and wireless-phone markets.
Today, Comcast and its fellow cable-TV operators must pay ever-higher prices for the TV shows that ride on their networks. Those costs must be passed along to customers, which angers them, regulators, and politicians.
"LOGICAL NEXT STEP." In short, the economics of the TV-distribution business have been under siege for some time. That's why many of the business' smartest operators, like Liberty Media's (L ) John Malone and Viacom's (VIA ) Sumner Redstone, started shifting their investments into media years ago. Under Redstone, Viacom has been transformed from a cable operator into a media hothouse that includes everything from MTV to CBS. Buying Disney "shouldn't be a surprise. It's the logical next step," Comcast CEO Brian Roberts said at his Feb. 11 press conference at the St. Regis Hotel in New York, announcing his bid for the Mouse House.
It isn't enough to be just a media company, either. Most content providers benefit from having a certain amount of distribution, which helps lower their costs. That's why, in the future, media and communications will be dominated by hybrids such as News Corp. (NWS ), which recently acquired satellite-TV operator DirecTV.
Comcast's Roberts has embraced this future. The question now is whether Disney CEO Michael Eisner -- who spurned an offer for a friendly deal -- can accept the same future. For decades, Disney and other programmers have held the balance of power in distribution deals. That's changing. The cable-TV business isn't just a collection of small family companies running regional outfits anymore. Comcast, which began life in Tupelo, Miss., in 1963, now has national reach. It has a greater market cap than Disney.
And it's competing with satellite-distribution companies like DirecTV that are also national in scope. Now that DirecTV is under Rupert Murdoch's control, it would be folly for Disney to pretend that it can still compete without a distribution partner of comparable stature. Comcast fits the bill.
TELEPHONY AND TV. A Comcast-Disney hybrid won't be the last, either. If this deal goes through, it'll force other media companies like MGM (MGM) to find a partner. And it could even force telecom companies to hasten their deployment of video services. Local-phone giants SBC (SBC ), Verizon (V ), BellSouth (BLS ), and Qwest (Q ) all have distribution deals with satellite, and SBC even contemplated acquiring DirecTV.
Several years ago, Bell Atlantic, the predecessor to Verizon, came close to merging with John Malone's Tele-Communications Inc. cable business. AT&T (T ) went ahead and bought TCI and cable operator MediaOne. That combo eventually fell apart under the financial strain of too much debt, and AT&T sold the assets to Comcast. But in retrospect, the pairing appears to be just ahead of its time. Now by seeking to acquire Disney, Comcast could actually provoke a new alignment of telecom and satellite or cable (see BW Online 2/11/04, "The Early Betting Is on Comcast").
None of these developments have escaped regulators, who have been watching the convergence of media and communications nervously for years. Some have spoken bravely about trying to manage this trend, but it's often just talk. For the most part, policymakers still treat media, cable, local-phone service, and wireless as separate businesses. A Disney-Comcast combo would surely test their resolve to stay wedded to that notion.
CONCENTRATED POWER. A deal for Disney would also likely raise the blood pressure of consumer advocates, who tend to view all consolidation as evil. They sound today pretty much as they did 20 years ago, when cable and phone monopolies were at the height of their power. They, too, may have to refresh their thinking.
Without question, combinations like Comcast-Disney will put a lot of power in one company. Such enterprises need to be watched carefully by regulators, consumer groups, and the press. But both the industry and the watchdogs need to confront what this hostile bid is telling them: Media and communications are converging in the digital era. |
