Members of the Walt Disney Co. board encouraged Comcast Corp. to make its controversial $56 billion bid in February for the famed movie, TV and theme-park company, according to Brian Roberts, Comcast’s chief executive, who spoke to Wharton students on campus last week. “We had some back-channel conversations with their board, and the board was kind of looking for a way out. We saw a company going through a transition.” Roy Disney, a former board member who was also Walt’s nephew, and another board member were engaged in a public campaign for the ouster of Michael Eisner, Disney’s chief executive.
In Roberts’ presentation at Wharton, where he earned his undergraduate degree in 1981, he discussed a number of issues that have had a major impact on Comcast’s fortunes, including the future of video-on-demand, the partnership with Bill Gates, the competition with Satellite TV, and the pervasive influence – and clout – of Wal-Mart.
But the experience with Disney was clearly still on his mind. “What happened was that [the Comcast bid] galvanized the board,” said Roberts. “It drew them together instead of splitting them apart.” Disney rejected the bid, and Comcast chose not to go higher. “We didn’t love the company that much. It was a great idea, but it’s not the only idea.” Roberts, predictably, believes the deal would have benefited the shareholders of both companies. Disney would have been able to pair its famed programming, which includes animated offerings as well as ESPN and ABC, with the distribution network of the country’s largest cable operator (22 million subscribers). And Comcast would have added to its library of programming, thereby increasing the attractiveness of video-on-demand, one of its key competitive advantages.
Some analysts and editorialists have suggested that the Disney bid signaled a lack of confidence on the part of Comcast’s management in the future of the cable business. Comcast, this line of thinking says, would not be trying to expand its content offerings if it believed in the durability of cable. As of Oct. 15, Comcast’s shares are down more than 12% for the year.
In his talk at Wharton, Roberts made it clear that he believes his company’s future hinges on video-on-demand. That, he argues, is why the Disney bid made sense. On-demand allows customers to choose not only what they want to watch but also when. It also lets them control their viewing via functions such as pause and replay. Satellite TV, cable’s biggest competitor, offers abundant programming but not two-way communication.
The need for Comcast to combine on-demand technology and content was underscored when Rupert Murdoch’s News Corp. purchased a controlling stake in DirecTV, a leading satellite company, Roberts noted. News Corp. already owns Fox Broadcasting.
For video-on-demand to beat satellite, it has to provide lots of programming, whether it’s Disney cartoons or, as Comcast has begun offering lately, the NFL Network. The NFL channel provides 10- to 15-minute replays of the highlights of all the prior weekend’s football games. Comcast also recently announced a partnership with Sony and MGM to offer their libraries of movies and TV shows via on-demand video.
But the failed attempt to buy Disney has commanded far more attention than those efforts. In the business world, Mickey Mouse looms far larger than any NFL lineman. Disney, of course, is one of the most durable names in American commerce. Besides owning such famed entertainment icons as Donald Duck, Goofy and Snow White, it has lately scored a string of hits with such movies as Toy Story and Finding Nemo. And yet, despite these successes and its storied history, the company’s earnings lately have zigzagged.
Against that backdrop, Comcast tried to make its unsolicited bid as unthreatening as possible. “We did the best we could to never make it personal,” Roberts said. “Roy Disney is out there saying all these terrible things about Michael Eisner, and we didn’t say anything [about him].” What’s more, right before launching the bid, Roberts called Eisner to sound him out about doing a friendly deal. “I said, ‘Do you see any scenario by which we could put these two companies together,’ thinking that, before we do this, he and I could sit down. And he just read a script [rejecting a bid]. The way I phrased the question, I don’t think he should have read the script. I didn’t say who would be CEO, who would buy whom. I think he should have said, ‘Sure, I’ll meet with you.’”
Eisner didn’t, of course. And shortly after the bid, he had to endure the embarrassment of watching as 44% of his company’s shareholders voted for his removal at Disney’s annual meeting, which, coincidentally, was held in Philadelphia, Comcast’s hometown. He has since announced that he will retire in September 2006.
Dinner with Bill
Comcast, for its part, faces challenges of its own. Not everyone shares Roberts’ optimism about the industry’s future or about the technologies that he believes will secure it. Consider, for example, cable modems, which allow Comcast to act as an Internet Service Provider (ISP). Roberts told a story about his attendance in 1997 at investment bank Allen & Co.’s famed annual conference in Sun Valley, Idaho, a gathering of moguls from the entertainment and information-technology industries. During a panel discussion at the conference, Andy Grove, chairman of chip-maker Intel, was asked what he thought of cable-modem service. “It will never work,” Roberts remembered Grove saying. “Cable is a one-way technology. It can’t be two-way, or it will get clogged up.”
“It just so happens that Comcast and Intel were pioneering a cable modem at the time,” Roberts said. “So I am sitting there really [annoyed], thinking, ‘It’s not possible that this guy is saying this.’ And you start seeing people get up to leave and call their broker.” The next day, Bill Gates, Microsoft’s chairman, spoke at the conference, and someone posed the same question. His response: “I think [cable modems] are going to be fantastic.”
That wasn’t Gates’s only endorsement of cable. Several years ago, Roberts and a delegation of cable executives visited Redmond, Wash., where Microsoft is based, to talk with Gates about cable’s technological future. At the time, Roberts recalled, “we had made a decision to rebuild all of our cable systems and put in fiber optics. Wall Street thought this was a terrible idea. Our stock hit an all-time low.”
At a dinner hosted by Gates, the software billionaire asked Roberts what he and Microsoft could do to help the cable industry advance. “I said, ‘I think you ought to buy 10% of everyone in the room.’ My colleagues at all the North American cable companies were [there] and they all looked down at their shoes. Gates said, ‘How much would it cost? You know I have $10 billion.’ I said, ‘$5 billion.’ Another CEO said, ‘So, Bill, where are you going for your next vacation?’ because he wanted to change the subject. Maybe it was embarrassing that I was asking Bill Gates to bail us out.”
Two days later, Roberts received a call from Microsoft’s CFO, who said that Gates had asked him to explore Roberts’ idea. “Thirty days later, they put $1 billion into our company just to send a message that they thought broadband was the future. It was a shot heard round the world in our business.” Microsoft later raised its stake to $5 billion. Since then, the cable industry has invested $85 billion in the installation of fiber optics. Today, it provides 55% of the country’s broadband service.
Comcast has turned to trying to deliver the best services possible through that infrastructure. “We think that with this new platform, we have to reinvent television,” Roberts noted. “Television today is a one-way experience. It seems totally clear to me that the personalization of television is the future. Everybody wants to do what they want, when they want. And we happen to have a platform for that, where our competitor, satellite, doesn’t. So all of our energy is to give our customers, on demand, the ability to get as much content as possible.”
Doing that depends on convincing content creators such as Disney to share their programming. In some cases, that’s proving to be a challenge. Despite Roberts’ lobbying, many of them have been unwilling to let Comcast deliver their programs via on-demand video. “We go to movie companies and say, ‘We’ve got this great on-demand in five million homes, and it will be ten million by the end of this year.’ And you know what they say? ‘The problem is DVD sales are so good right now that we can’t tick off Wal-Mart.’ The single largest revenue source for Hollywood is Wal-Mart. How did they get themselves in that situation? And they say, ‘I know, I know. We have got to stop giving it to Wal-Mart. They squeezed us on the price last quarter, but we have got to make budget.’ That’s what’s happened with the music business. They were making all of this money on CDs, and one day Napster just took it away.”
For now, therefore, the cable industry is teetering on a razor’s edge between the old economy and the new. It has, for example, steadily eroded the ratings of broadcasters such as ABC, CBS and NBC. “Today, more people watch cable than broadcast television,” Roberts pointed out. “This is the first year that’s been the case.” But the broadcasters’ advertising revenue still exceeds cable operators’. “It’s not even close. Broadcast advertising dollars are still double or triple cable’s.”
Roberts conceded that the broadcasters do still have strengths. “On Thursday night, even though NBC’s ratings are down, it is still the number one destination for eye balls. And if you have a car you are launching, you want to get those eyeballs in the fastest way possible. Twenty years ago, [the broadcasters] had 90% of the viewing. Today, they have 20% or 30%, and they get more dollars for selling less. How long can you get away with that? I don’t know.
“With on-demand, we have servers with virtually unlimited content. We don’t care what you want to do, we just want you to do it a lot. And you can’t do any of that on satellite or broadcast.”