Comcast Corp.’s pursuit of Walt Disney Co. is intensifying pressure on some of its competitors to keep pace by seeking major acquisitions of their own.
The bid, which would combine Comcast’s extensive subscriber network with Disney’s wide range of programming, underscores a shift in the cable industry that is driving companies toward producing content — not just distributing it.
“People used to say that content is king,” said Richard Greenfield, managing director of Fulcrum Global Partners. “But the reality is that it’s better to have both.”
Obtaining both is not easy for cable companies that find themselves up against a company as dominant as Comcast. At 21.5 million cable subscribers, Comcast has nearly twice as many as its next closest rival, Time Warner Inc., and more than three times as many as any of the others. A smaller subscription base may make it difficult for Comcast’s competitors to attract the best content companies on their own.
“I don’t think 6 million subscribers is going to be that interesting to a content provider,” Greenfield said.
Comcast’s size also provides other advantages, giving it significant bargaining power when it comes to negotiating programming costs, which are the bane of every cable company.
Now, the possibility that Comcast will acquire Disney — with its key television assets such as ABC and ESPN — means the cable giant could gain even more leverage over its competitors as it sets costs for those channels. Although Disney’s board of directors voted to reject Comcast’s $56 billion offer on Monday, Comcast could still decide to come back and sweeten the deal.
If it doesn’t buy Disney, few expect that Comcast’s hunger for acquisitions will ebb.
A possible Disney-Comcast merger “changes the playing field,” said William Schleyer, chief executive of Adelphia Communications Corp., a cable company with about 5.4 million subscribers that is attempting to emerge from bankruptcy this year. “But the playing field has been changing gradually for the past year.”
Schleyer said the move is on for content and distribution to merge, making the company that sets the programming schedule the same one that sets the dial on Americans’ television sets. Time Warner has already achieved that status by owning HBO, CNN and TBS. Rupert Murdoch’s News Corp. has also turned the double play by acquiring DirecTV, which beams Fox and Fox News Channel into living rooms across the country via satellite.
Schleyer said he’s a proponent of bringing content and distribution together, arguing that consumers will see the benefits through increased access to services such as video-on-demand as barriers between the industries fall. But he acknowledged that his mid-sized company won’t be the one blazing the trail.
“It will become the standard,” Schleyer said. “The big players will lead the way, and it will filter down to the smaller players.”
Meanwhile, analysts wonder whether the ranks of the smaller players are about to shrink, as some of the larger players gobble them up. Time Warner has been hunting for a suitable acquisition target. Cox Communications Inc., which lost out to Comcast in the bidding for AT&T Broadband several years ago, may be interested in buying a competitor as well, analysts say. Cox could also be a target itself, as could Cablevision Systems Corp. and Adelphia.
In a research note published last week, UBS cable industry analyst Aryeh Bourkoff wrote that the proposed Comcast-Disney deal “is likely to spark a new wave of consolidation in the media and cable sectors, specifically among cable companies in order to achieve greater economic benefits of scale.”
Michael Goodman, a senior analyst in media and entertainment with the Yankee Group, however, is skeptical of whether any deals are on the horizon. He noted that Time Warner has still got its hands full integrating AOL, and may not be ready for another major acquisition. The other companies, he said, generally are not big enough to have a hope of keeping up with Comcast.
“The reaction by the rest of the cable industry has to be somewhat muted. Not everyone can afford to do what Comcast is doing,” Goodman said. “(The Disney bid) makes the other players in the industry stop and take notice, but I don’t think you’ll see a plethora of deals.”
Goodman argued that the cable business does not play follow the leader as other industries do because the companies generally stay off one another’s turf by focusing on specific territories.
“They don’t compete with one another,” he said.