For Brian Roberts, the problem may boil down to this: What do you do with the Magic Kingdom? Roberts is chief executive of Comcast, the Philadelphia-based cable company, and two weeks ago, he made a nearly $48 billion bid for embattled Walt Disney Co. Disney’s board rejected the offer on Feb. 17. By then, Comcast’s stock had fallen while Disney’s had risen, extinguishing the bid’s initial 7% premium.


No one expects Roberts’ effort to end there. Chances are he’ll bid again. Whether he should is another matter.


Experts at the Wharton School are divided on that issue. Some, such as public policy professor Gerald Faulhaber, say buying the kingdom that Walt built would give Comcast much-needed leverage as it negotiates with competitors such as Rupert Murdoch’s News Corp., which already controls both distribution and content. Others, including marketing professor Peter Fader, fail to see how Disney’s content complements Comcast’s distribution. Plus, even if Roberts wins, he’ll be stuck with Disney’s theme parks, which do nothing to advance his perhaps ill-conceived aim of marrying cable and content.


Of course, Roberts may not succeed. He put Disney in play, but competing bidders could emerge. Other media companies may be interested, although two obvious potential suitors — News and Viacom — have said they are not. Or Disney may seek out a white knight such as Interactive, run by Barry Diller, a friend of Disney CEO Michael Eisner and an antagonist of Roberts. Or Disney might turn to Warren Buffett’s Berkshire Hathway. After all, Disney has a storied brand, and Buffett, a value investor, loves a good name. Some analysts even say that Microsoft might be interested in Disney, though professors at Wharton discount that as mainly amusing speculation.


“You never know what Bill Gates is going to do,” Faulhaber says. “But what does he know about content? Microsoft can’t even make the Xbox [video-game player] work. A lot of people have tried to get into the content business and broken their pick on it.” Faulhaber counts himself among those who believe Comcast is right to vie for Disney and, assuming the company bids again, likely to prevail.


Valuable Content

Two of Comcast’s main competitors in the distribution business — Time Warner, which owns cable systems, and News, which recently acquired the DirecTV satellite system — also control lots of content. For Comcast to negotiate with them on an equal footing, it needs the same thing, Faulhaber argues. Say Comcast wants to run News’s programming on its cable systems. It has to have valuable programs of its own to offer in exchange. Otherwise, News can extract high fees. “If you’re Comcast, and Rupert has Fox and Fox News, [you may be asked] what have you got? You need to be able to say that we’ve got ESPN and the Disney Channel.”


ESPN, especially, is a valuable coin. Analysts have speculated that Comcast’s desire to own it is the real motivation underlying the Disney bid. ESPN started in 1979 as a single cable channel and has grown into a franchise of its own. Today, it encompasses multiple cable channels, a print magazine that rivals Sports Illustrated for influence and readership, and even a chain of sports bars. Disney doesn’t break out ESPN’s results, but it is estimated to generate $1 billion a year in profits and could be worth $15 billion to $20 billion, standing alone.


ESPN also gives its owner access to a group of viewers that’s normally tough to reach – younger men, according to Joseph Turow, a communications professor at the University of Pennsylvania’s Annenberg School. “Comcast and News believe sports is a ‘killer app’ on a worldwide basis,” he says. “You can charge for it. You can have niche networks,” the way ESPN does. Comcast already has demonstrated its commitment to sports programming with its ownership of two Philadelphia pro sports teams — the 76ers in basketball and Flyers in hockey — and enthusiast channels such as the Outdoor Life Network and the Golf Channel. But none of those has the reach of ESPN. 


Comcast’s Risks

Where Faulhaber and Turow see logical extensions of Comcast’s current business, Fader, the marketing professor, sees peril. “This is a mistake,” he argues. “Comcast is good at developing and managing subscription models. And that’s a great business – people are held hostage. Comcast has figured out the right stuff to add in, and we subscribers keep saying, ‘Fine,’ and paying the monthly bill. But that’s different from trying to be in a creative business.”


Content creation is a far more fickle industry. A look at Disney’s history shows that. It was once the dominant maker of animated movies. Lately, its animation division has atrophied, and the company has, in effect, outsourced much of its creative energy to Steve Job’s Pixar Animation Studios, maker of such blockbusters as Toy Story, Monsters Inc. and Finding Nemo. Pixar recently cut off discussions to extend the partnership, and now Disney is faced with the problem of both replacing Pixar and competing with its future releases. If Comcast acquired Disney, that would become its problem.


Instead of trying to become a content company, Fader believes Comcast should look to acquire other distributors. It has already taken a step in that direction with a promotion deal it signed with Rhapsody, a digital music distributor. “That’s exactly what Comcast should be doing. Rhapsody is an online streaming subscription service, and Comcast is trying to come up with a way that people will pay for it through their Comcast bills.”


A company that’s similarly compatible is Netflix, which distributes DVDs to its subscribers via a website and the mail. Or, if Comcast wants to do a big deal, it should buy Google, suggests Fader. “They could change it to a subscription model, and people would pay for it for sure.”


But these are strategic arguments, and Fader suspects that ego, not strategy, is at least partly motivating Comcast’s push to buy Disney. After all, plenty of studies have shown that big, diversifying mergers seldom pay off for the shareholders of the acquiring company. Yet CEOs continue to pursue them.


Faulhaber puts it differently: “People get into the media business because they get the sequins in their eyes and want to be seen with starlets on their arms.” But this is not true of the executives at Comcast, he insists. “They’re very solid guys. We always tell our students to focus on the blocking and tackling. They do it. They never pay too much for their acquisitions.” The Disney fight may test how strong their discipline is. 


Eisner and His Ego

Faulhaber concedes that ego is playing a leading role in the Disney drama. He just happens to think the oversized ego belongs to Disney’s boss, Eisner, not anyone at Comcast. “The guy is a megalomaniac,” he says. “He rescued Disney, but he’s overstayed his welcome. He’s gutted the company of its core strength in animation.” Eisner has been widely criticized as a micromanager who has failed to select and groom a credible successor. He has also been faulted for stacking Disney’s board with cronies who have rubberstamped his decisions. 


Over the five years ending Feb. 23, Disney’s stock lost 23%, and its earnings have leveled off at about 60 cents a share. In its 2003 fiscal year, Disney reported diluted earnings of 61 cents a share, or $1.3 billion, on sales of $27 billion, compared with 60.5 cents, or $1.2 billion, on sales of $25.3 billion for the prior year.


If anything, the combination of Disney’s poor record of corporate governance and its relatively weak performance created an opening for Comcast to make its bid, says Michael Useem, a Wharton management professor. “The cruel line would be that Eisner had it coming,” he notes. “I wouldn’t use that line myself, but if you put poor governance with poor performance, it’s a lethal mix for a CEO.”


Assuming that Comcast does bid again and eventually prevails, what could happen then? Wharton professors think Eisner will probably have to step down. One possibility is that the board will ask him to resign to quell shareholder unrest; Roy Disney, Walt’s nephew and a former board member, is already conducting a public campaign for his ouster. Alternately, as part of an acquisition, Eisner could be paid a lot of money to step aside. His hands-on style simply does not mesh with the more decentralized and understated approach of Comcast’s top executives.


Then Comcast will have to meld Disney’s businesses with its own, and that could prove tougher than its relatively smooth integration of AT&T Broadband, which it acquired in 2002. Among the challenges would be fixing Disney’s ABC network, which lags its competitors, and figuring out how to release its movies through all of the varied means, says Jehoshua Eliashberg, a Wharton marketing professor.


The current movie-release sequence is theaters, home video, then cable, with some cable companies – Comcast is a leader in this area – beginning to offer video-on-demand. “If a combined Comcast-Disney decides to release movies simultaneously in theater and video-on-demand, that will have tremendous implications for its combined revenues and its relationships with theater-exhibitors and home-video retailers. In fact, it would change completely the way the industry currently operates,” he says.

And, of course, Comcast will have to figure out what to do with the Magic Kingdom and Epcot.