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Why Comcast-Disney looks a lot like AOL-Time Warner
By David Kirkpatrick
FORTUNE.COM
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(FORTUNE.COM) -- Having lived through the debacle of the purchase of Time Warner by AOL, I'm acutely aware of the many stupidities of that deal.
FORTUNE is owned by Time Warner, which is also CNN's parent company. So my bull detector went into overdrive upon hearing about Comcast's hostile bid for Disney.
The bid seems to be on hold, as Disney's stock price continues to trade above the value of Comcast's offer, despite the growing shareholder revolt against Disney CEO Michael Eisner. (The roots of the displeasure with Eisner go much deeper than the Comcast deal.)
But while writers like the impressive Floyd Norris of the New York Times and my media-savvy colleague Marc Gunther ( in the recent issue of FORTUNE,) have mentioned analogies between Comcast-Disney and AOL-Time Warner, I think some of the most important similarities have been overlooked.
AOL's Steve Case was seeking a "floor" for his stock. He suspected AOL might be heading for a stock market fall and knew also that the company was not well-positioned for the coming era of broadband. Its customers were viewing AOL over slow dial-up phone lines. He wanted a hedge -- to use his highly valued and precarious asset to gain real solid value. Time Warner offered both distribution via its cable networks and, more relevantly, high-quality content that both Case and Time Warner CEO Gerald Levin thought could be efficiently leveraged by sending it to AOL's Internet customers. All this is well-known.
Comcast's stock, too, is highly valued. Its market capitalization is $67 billion while Disney's is $55 billion, even though Disney has 50 percent more revenues. Comcast CEO Brian Roberts says, as did Case, that his desire for Disney is driven by his belief that there are synergies to be found by flowing Disney content through his cable distribution network.
I believe, however, that Roberts's real motive lies elsewhere -- just like Case, he knows he needs a hedge against technological change. And just like Case, he sees it in content, which is in a sense evergreen -- it's never rendered irrelevant by technology's evolution. A good TV show, movie, or song will stand on its own no matter what happens to technology.
Comcast has won kudos and the affection of investors in part because of its unique success in developing broadband Internet access over its cable lines. That business generated $2.3 billion of Comcast's $18.3 billion in revenues last year. Many seem to think that cable broadband has nowhere to go but up.
I disagree. What Roberts should be worried about, if he isn't already, is that newer, more efficient, and cheaper forms of consumer broadband Internet access are on the horizon. Several competing approaches to broadband are worth mentioning. The most promising is WiMax, a wider-scale and more powerful version of wireless networking. Unlike Wi-Fi, which covers distances of no more than several hundred feet, WiMax systems can deliver a powerful signal from as far away as 30 to 40 miles.
Their price today is high, but watch out -- prices will surely drop fast. And when a large-scale backbone of these very powerful systems is mated with shorter-haul and cheaper wireless systems to get into individual homes, one can imagine not just conventional Internet access flowing over these pipes, but video as well. That not only replaces cable broadband access, but also cable TV.
Another broadband technology to watch is the use of power lines, both for the backbone infrastructure and distribution to the home. Such services will be operational this year, and are expected by many to be at least competitive with cable and DSL in quality, price, and bandwidth. Satellite broadband is yet another currently expensive technology that could quite possibly become an option for the ordinary consumer.
Any of these technologies might eventually be able to deliver broadband for significantly lower prices than cable charges consumers today. That would either erode margins or chase away customers. Any damage for cable here will come, admittedly, in the long term, but that's just the kind of thing a smart strategist like Roberts worries about today.
Any communications business that relies on capital-intensive installed infrastructure is potentially at risk because of the relentless pace of Moore's Law. Faster and cheaper semiconductors lead to faster, cheaper, and more efficient computers, storage, and networking devices, both wired and wireless. That continually generates new communications technologies that can render the old ones, well, old.
So Comcast ought to try to use its high-valued currency now, before too many investors realize that cable systems might be bypassed by other broadband systems. Brian Roberts, go ahead and buy Disney if you can.
But don't talk to me about synergy. Another lesson of the AOL-Time Warner merger, and the Time and Warner one, and many others, is that the supposed synergies that seem to come from melding content and distribution are usually chimerical.
Many argue that owning content means a cable company has advantages in sending it through its own pipes. But that argument intrinsically devalues the content while putting more emphasis on the distribution business. If content has value it should be sold to the highest bidder. If Comcast buys Disney and gives itself an advantageous price for ESPN, as so many analysts predict it would, that hurts ESPN. It means that the content business is sacrificing revenues it could have otherwise received on the open market in order to improve results for the cable network.
Truly synergistic businesses are ones in which both sides of a business benefit. If Roberts expects to horse-trade away valuable Disney content, then investors shouldn't give a combined company a high valuation. The new company would be less than the sum of its parts.
I have yet to hear a convincing argument why combining content and distribution in media is essential. To me it seems like a fad, and a dangerous one because it devalues the importance of content. Almost any supposed synergy could be similarly achieved via an arms-length partnership between the two companies.
The only mitigating issue in Comcast's bid for Disney is that Roberts seems more gung-ho than Eisner (and other leaders of major entertainment companies) about using technology to leverage content properties. I'd love to see a more aggressive effort to bring content on demand to consumers, for example. It's great that Comcast talks so eagerly about that. The opportunities here are much bigger than the studios today seem to appreciate.
In my house we've been buying pay-per-view movies from Time Warner Cable regularly ever since they became available a year or so ago. The only thing holding us back from spending more is that so few movies are offered.
It would be sad to think that Comcast has to buy Disney in order to force it to appreciate the obvious: that there are enormous new opportunities to monetize entertainment content using the Internet and cable.
So Michael Eisner, go ahead and resist Comcast, but get more aggressive with online and on-demand distribution of your content. Maybe that would even make your shareholders a tiny bit less mad at you.
E-mail David Kirkpatrick at dkirkpatrick@fortunemail.com.
