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Mega Media Mergers: How Dangerous?


Comcast (CMCSK) CEO Brian Roberts hung up the phone on Feb. 9 and walked out of his office with a plan. Michael Eisner had just spurned a friendly offer to merge Roberts' cable giant with Disney. Two days later, Roberts shook up the media world once again -- this time with a hostile $54 billion bid for Walt Disney Co. (DIS)

It was a brilliant counterpunch to Rupert Murdoch's acquisition in December of satellite service DirecTV, which made Murdoch the world's most powerful mogul. Now, if Comcast Corp. wins the fabled Mouse House, the global media landscape will be dramatically altered. Roberts and Murdoch could rule as the twin supermoguls of media, with Comcast lording it over cable and News Corp. (NWS) ruling the skies. Between them, they'll be gatekeepers to 33 million U.S. homes, top creative talent, and news outlets galore. And they'll have their hands on the newest technologies as entertainment goes ever more digital.

You might not think the soft-spoken exec from Philadelphia is up to the job of rivaling Rupert. But the intensely competitive Roberts, 44, has been making a string of gutsy bets, especially his $54 billion acquisition of AT&T Broadband just 15 months ago. That merger gave Comcast, founded by Brian's father, Ralph, in 1963, the distribution reach he lacked. Now, facing Murdoch's might -- top-notch content delivered via satellite around the globe -- Roberts also needs programming heft. With Disney, he would get it, and then some. "The consumers win here because we will be able to give them access to movies and shows much more quickly," he says. "We plan to accelerate the digital promise."

In addition to operating the largest cable company in the U.S., with 21 million subscribers (about one in five homes), Roberts would add to his existing, paltry programming portfolio Disney's movie studio, the ABC network, ESPN, and the Disney Channel (among other cable channels), and theme parks. "Who has better content than Disney?" says Comcast Cable Communications Inc. President Stephen B. Burke, 45, a former top Disney exec who would be charged with running his old company.

Aside from a brief respite in the post-September 11 economy, the media business has been consolidating steadily for more than a decade. But the deals of the past few months have upped the stakes. It's no longer enough to have more content than the other guy: Now you need distribution to win.

If media execs didn't learn that from Murdoch, they're getting the message this time from Roberts. Viacom International (VIA), Time Warner (TWX), NBC (GE), and others will be doing some serious soul-searching about their own scale and mix of businesses. For years, it has been Eisner's mantra that "content is king." Those words are likely haunting him now. "These deals are all about the ability to deliver entertainment to customers when they want it and how they want it," says Kathryn R. Harrigan, a professor of business strategy at Columbia University's Graduate School of Business. "[The Comcast bid] is such a beautiful, huge vertical play. You have to have this scale to compete."

FEWER VOICES? However logical such deals may seem to the empire builders, they raise new questions about how much consolidation is too much. Concentration of media power in too few hands not only can lead to higher prices for consumers but can hurt variety and quality of programming. It raises the temptation for owners to impose their views on a public with fewer alternatives. And cash-poor independent voices may have trouble getting into vast proprietary networks. Wondered John McCain at a Congressional hearing: "When is the endpoint to all of this? Why not have Rupert Murdoch buy another company, then Comcast another, and on it goes. At some point, you'll have many voices -- and one ventriloquist." Media critics couldn't help noticing that Comcast's bid was announced on the same day a federal appeals court was hearing challenges to the new regime of media deregulation. Adds consumer advocate Jeff Chester, executive director of the Center for Digital Democracy: "Comcast should create the Hubris Channel."

In a political season, the moves could kick off renewed debate about whether the moguls need to be curbed or whether market competition alone can counter their new muscle. "A merger of that magnitude, if it goes through, will have to go through the finest filter," says Federal Communications Commission Chairman Michael K. Powell. Comcast execs don't seem too worried, though, saying that regulators' surprisingly easy approval of News Corp.'s DirecTV last year encouraged them to ramp up their bid.

Paradoxically, though, as the media business has become more consolidated, its offerings have become more fragmented. Look no further than the declining prime-time audience on the broadcast networks, as folks tune in further up their dials to watch targeted cable channels -- or as they eschew prime-time altogether and customize their viewing on TiVos. In a world of splintered audiences, says Leo Hindery Jr., veteran cable exec and chairman and CEO of YES Networks, "this is an extremely clever transaction," positioning Comcast to grab a huge portfolio of programs that appeal to a wide array of tastes.

Comcast executives have always yearned to own more programming, but nobody expected they would move this fast. Ahead of schedule with debt reduction and its integration of AT&T Broadband running smoothly, Roberts and his team of advisers several weeks ago began to consider more seriously whether the time was right to make the move on Disney. "This was the opportunity, and we knew we could move quickly; we did the same thing with AT&T," says one Comcast exec.

For one thing, Eisner was embattled by board troubles and a succession quandary. As the controversies continued to swirl and make headlines, Roberts gathered a team of lawyers and investment bankers, including his longtime adviser, Quadrangle Group's founder Steven Rattner and former Comcast board member Felix Rohatyn, for several intense meetings in Philadelphia and New York. After marathon sessions in the week before Feb. 9 in the Manhattan offices of Comcast's outside law firm, Davis Polk & Wardell, and at Roberts' favorite hotel, the St. Regis, Roberts headed back to Philly to make the call to Eisner at his office in Burbank. He would propose the merger ahead of Disney's annual meeting on Mar. 3, to be held, ironically, in Philadelphia. When Eisner rebuffed the bid, Roberts quickly reconvened his team of advisers, who were pacing nervously in a conference room at Comcast's headquarters. They decided to go ahead with their bid immediately. "How could we have reported our numbers to the Street and come back a week or so later and say, 'Oh, by the way, we plan to buy Disney.' We had to do it on the 11th," says one high-ranking Comcast executive.

Eisner was certainly making himself vulnerable. For all of his missteps -- driving away Steven P. Jobs's hit-making animation factory, Pixar Animation Studios (PIXR), or watching a parade of top executives head for the door -- his biggest mistake was to miscalculate just how strong a hand he could build by collecting only entertainment brands. He spent $19 billion to buy Capital Cities/ABC in 1996 -- not for the network, he later professed, but to get his hands on the money-minting ESPN sports franchise.

But the tide had turned, and distribution, not content, was becoming king. At the same time, Eisner nickel-and-dimed his own distribution assets. Even as media giants such as Viacom and News Corp. scooped up TV stations and benefited from their mountains of cash flow, Disney held pat with 10 TV stations -- covering only about 24% of the country while his larger opponents built groups that covered nearly twice as much territory. "It was a tactical mistake," says former Viacom and Universal Studios top executive Frank J. Biondi Jr.

INVITING TARGET. On top of that, Eisner for years had faced criticism for having a compliant, handpicked board, making him the poster boy for weak corporate governance. To appease his critics, the Disney CEO in the past year made several changes, including adding more independent board members. Those changes and others left Disney open to a hostile bid. Roberts and his strategists sensed an opening. "They became a much more inviting target, if not a pushover," says one Comcast adviser.

Now, with Comcast's bid to buy Disney, the future of the media world firmly tilts toward those companies that control access to America's homes. Today, the three giants -- Comcast, Time Warner, and News Corp. -- collectively can reach more than a third of U.S. TV households. The bigger the audience, the better to lure marketers and launch new channels with a breakeven prospect. "If you're a Lifetime or a History Channel, you're starting to look a little puny," says Josh Bernoff, principal analyst at Forrester Research Inc. (FORR). "You need a large company that can guarantee you eyeballs."

Who's likely to bulk up next? Almost certainly, Time Warner, with 10.7 million cable subscribers and a host of popular cable channels such as TNT and CNN, intends to get bigger. One likely possibility is that the cable operator will bid for Bethpage (N.Y.)-based Cablevision Systems Corp. (CVC), whose 3.0 million subscribers fit well with Time Warner's New York area systems.

But Time Warner faces constraints in how much dealmaking it can do. The company is embroiled in a federal investigation into accounting practices at its America Online unit, and resolving the inquiry is the top priority of CEO Richard D. Parsons. The company also has to contend with a slew of shareholder lawsuits related to the AOL and Time Warner deal in 2001. "We've got a lot on our plate right now," says one senior Time Warner exec. If Comcast's bid ultimately puts Disney in play, Time Warner won't be taking a look.

The biggest deal could involve Viacom, which is the company most exposed to swings in advertising, which has been in a miserable slump over the past few years. That said, the Sumner M. Redstone-controlled media empire, with its hot MTV and Nickelodeon networks, gets as much as 45% of its revenues from advertising. And the cable-channel fees aren't immune to pressure: Last year, Murdoch's 34%-controlled British Sky Broadcasting (BSY) PLC in Britain forced MTV to cut its rates by about 10%.

Viacom is busy doing some restructuring of its own, trying to unload its Blockbuster Inc. (BBI) unit in what could end up being a tough sell to investors, since DVD sales and rentals are expected to level off in coming years. It has also been rumored that Viacom is still interested in acquiring Univision Communications Inc. (UVN), the U.S.'s largest Hispanic media company, as an entr?e into a fast-growing market in the U.S. But the price tag in the past has been too rich for Viacom's prudent execs. Of course, Univision would give it more of what it has plenty of -- programming.

Where could Viacom go for distribution clout? One logical partner would be EchoStar Communications Corp. (DISH), the second-largest satellite operator after DirecTV, with 9 million subscribers. Analysts such as Forrester's Bernoff figure the two would make good partners and that "[Echostar CEO Charlie Ergen] would sell out in a minute to the right company." In that scenario, with his own satellite distribution, Redstone might even be so bold as to yank MTV from DirecTV or Comcast, preferring instead to keep it on Echostar's DISH Network.

General Electric Co.'s NBC, meanwhile, was counting on its own blockbuster acquisition of Vivendi Universal's TV and movie businesses to elevate it into the realm of media heavyweights. But since it announced the then-bold deal in October, its foray has already begun to pale next to those of Comcast and News Corp. But analysts warn to not count out NBC down the road, particularly since GE CEO Jeffrey R. Immelt, unlike his predecessor, Jack Welch, has banked a share of the company's growth on a media strategy.

The Comcast-Disney combo will also test the country's mood on media power.Even without he Comcast bid, the FCC's Powell has been on the hot seat defending new rules he and his colleagues passed last July to enable more media mergers. The sweeping set of regs allows TV networks to own local stations reaching up to 45% of the nation's audience, up from a previous 35% limit. They also permit one company to own up to three local TV stations in a local market and allow newspapers to own broadcasters. Already, Congress has rolled back one rule in January, trimming the TV networks' ability to own local stations to those covering only 39% of U.S. viewers.

For the FCC's Powell, Feb. 11 was a three-ring circus. There was the hearing by judges at the U.S. Appeals Court in Philadelphia over his new rules lifting restrictions on media ownership. Meanwhile, on Capitol Hill, lawmakers were grilling him and Viacom President Mel Karmazin for Janet Jackson's "wardrobe malfunction" during the Super Bowl halftime show. The display of alleged indecency, many claim, was the direct result of media megaconsolidation that leads to a mindless chase for bottom-line results through racy programming.

WINKS AND NODS. Still, for all the controversy stirred up by media's rush to bigness, chances are FCC watchdogs and U.S. trustbusters would bless a Comcast-Disney deal. Thanks to a Washington Court of Appeals decision in 2002, which lifted a longtime ban against cable companies from owning TV broadcast stations, the new media giant would pass muster. Moreover, the two companies own few overlapping assets. While Comcast controls primarily cable distribution systems, Disney owns broadcast and cable programming and broadcast TV stations.

But the deal could still raise a ruckus. Opponents of the Comcast-Disney deal will argue that the combination would enable the nation's media oligopolists to raise rates on cable and satellite subscriptions while diminishing the diversity of their programming. "In a world where a few entrepreneurs control the media, they can wink and nod at each other, rather than cut prices and offer a diverse set of views and entertainment," says Gene Kimmelman, co-director of Consumers Union.

TIME FOR DEBATE. At the same time, huge cable and satellite distributors, such as Comcast and News Corp., would have a big incentive to feature their in-house programs on their systems, squeezing out less well-pedigreed programmers. "Smaller independent channels would be forced into cable Siberia, the premium tiers, whereas the Disney channels would get on the basic tier," says Jonathan Rintels, executive director of the Center for Creative Voices in Media, representing independent screenwriters and production houses. "They'll shrivel up and die or be forced to merge with a media colossus."

The end result: Viewers see more homogeneous programming with fewer fresh points of view. Some would argue that less diversity in TV entertainment may not shake the foundations of American democracy. Yet, if the courts bless the FCC rules now under review, one day, broadcasters and cable companies could own newspapers in the same communities. The power of such a company to shape the views of the public would make Citizen Kane look like a pussycat. "Yesterday's unthinkable deal becomes tame in comparison with what's coming next," says Center For Digital Democracy's Chester.

The genie may well be out of the bottle. Now that Murdoch has purchased DirecTV, Comcast feels it has no choice but to snap up a programming powerhouse like Disney. Then, it may be Viacom's turn, or NBC's, and so on down the line. The new supermoguls may yet spark a fresh debate about how far consolidation should go -- and this time, they may not get to script the ending.

Corrections and Clarifications

In "MegaMedia" (Cover Story, Feb. 23, 2004), pending new Federal Communications Commission rules would allow one company to own as many as three television stations, not four, in the nation's 10 largest markets. Also, the rules were passed in June, 2003, not July.

By Tom Lowry in New York, Ronald Grover in Orlando, and Catherine Yang in Washington, with Steve Rosenbush in New York and Peter Burrows in San Mateo, Calif.


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