A new video-on-demand deal is only the beginning of a new era of cooperation between the cable giant and the Magic Kingdom
It was the Walt Disney Co.'s (DIS) annual meeting, known for its bouncy music and armies of costumed characters running through the aisles. For Robert Iger, Disney's new CEO, the Mar. 10 gathering was also time to shake up the digital media world. After clicking off the company's successes, Disney's new top guy unveiled a plan to stream shows from Disney's ABC network such as Desperate Housewives and Lost on the ABC Web site. The Disney faithful, assembled at the Arrowhead Pond in Anaheim, Calif., cheered. Mickey and Minnie loved it, too.
But across the country, at the Philadelphia headquarters of Comcast (CMCSA), executives of the cable giant saw new opportunities dancing in their heads. Comcast's cable customers already had access to Disney and ABC programming, but Comcast execs wanted a way to make the shows and movies available to broadband and video-on-demand (VOD) customers, too. "When we heard that Disney was going to put Desperate Housewives online for free, we wanted it for online and VOD as well," says Steve Burke, Comcast Cable president and the parent company's chief operating officer.
Iger's announcement—and Comcast's efforts to get the shows for itself—were just the latest wrinkle in what had become the media world's longest-running story: when Disney and Comcast would finally nail down an agreement that would extend the cable giant's right to carry Disney's ESPN sports channel. The negotiations had spanned four years, two Disney CEOs, and a nasty hostile takeover battle in which Comcast bid $66 billion in 2004 to buy Disney.
Online TV Allies
The two sides ultimately reached an agreement, announced on Nov. 21, that covers a broad range of rights, including Comcast's ability to use some ABC shows for its massive VOD effort as well as broadband. But that's just part of a far-reaching agreement that may become the model on which the new media world soon operates.
Indeed, BusinessWeek.com has learned that within weeks Comcast is expected to announce a new TV portal, code-named C-TV, that Disney will help promote through the use of film and TV clips that Comcast would use online. Down the road, the two companies may work more closely together to provide ABC, Disney Channel, and other kinds of programs for the portal as well, according to sources at both companies.
What's more, Disney is expected to help Comcast test the notion of showing movies on demand at the same time the movies are available in DVD stores—effectively shortening the lag time before cable gets access to those films. It's a development certain to drive major DVD retailers like Wal-Mart (WMT) nuts. "The deal is all about Comcast wedging itself into an online content company and using Disney as a partner to get there," says UBS analyst Aryeh Bourkoff, who follows both companies.
The notion of the two companies working together would have seemed far-fetched not that long ago, when venomous barbs flew in the wake of the 2004 takeover bid. That bid helped seal the fate of then-Disney CEO Michael Eisner, who resigned a year later and was replaced by his second-in-command, Iger. But the just-announced deal that Comcast and Disney struck shows how far the two companies have come. It represents the change in the media landscape that content at the click of a button has wrought.
Comcast Gains VOD Muscle
Under pressure in the broadband era from the likes of News Corp.'s (NWS) MySpace, which already streams TV shows on its site, and the TV-over-Internet ambitions of telephone companies such as AT&T (T), Comcast needs to beef up its own broadband offerings in a jiffy. And Disney, eager to shed its Eisner-era image of a slow-moving company, has hurried to be the first to embrace new technologies under Iger, who cut the industry's first deals to make Disney-produced movies and TV shows available from Apple's (AAPL) iTunes store.
Still, the deal was no piece of cake for either company. The epic talks kicked off in 2002, when Comcast insisted on renegotiating a year-old deal for ESPN that had several years to run. Why? Comcast had recently purchased AT&T's cable unit, gaining the size under its existing contract to demand a 10% discount to the huge price tag that ESPN charges cable operators to carry its programming. (Kagan Research currently estimates that cable operators pay $2.91 per subscriber each month for ESPN, compared to $1.67 for Fox Sports or 89 cents for TNT.) In the end, Disney, which had been getting an estimated 20% annual hike for the sports channel, accepted far less—about 7% a year—but also won several concessions in other areas, including the terms it got for shows that it will give to Comcast for VOD and broadband use.
The deal almost immediately makes Comcast an even bigger power in the VOD world. With more than 8,000 programs available each month—most of them free—Comcast says it has served up more than 3 billion programs in the last two years. Until now, however, Disney was the lone holdout among major media companies and wasn't providing its programs to Comcast—despite a must-see lineup that includes not only its top-rated ABC shows but popular shows from Disney Channel and its soap-opera channel, SoapNet.
Test to Deliver Movies Sooner
More important from Disney's point of view, the deal gave it access to more than 24 million Comcast TV subscribers and another 11 million high-speed Internet customers. Disney intends to sell ads for most of its shows. (Disney reported that it had streamed more than 11 million episodes of Lost, Desperate Housewives, and other shows in the first month the ABC site was up and running). Disney sells ads for those streams, but to make sure, it got a guarantee from Comcast to cover a minimum amount of ad sales of the ABC shows.
Even more interesting is where the agreement goes from here. Disney has told Comcast it is willing to participate in a test in two markets, in which it would offer movies on demand three or four months after the movies show up in movie theaters—the same time DVDs are shipped to retailers such as Wal-Mart. Disney has already ruffled feathers among retailers like Wal-Mart and Target (TGT) by offering its movies on Apple's iTunes site at prices that the large retailers believe are below their wholesale price (see BusinessWeek, 9/11/06, "The Empire Strikes Back"). But this could send folks to Comcast instead of Wal-Mart to buy the DVDs. For Iger, who has said he wants to experiment with narrowing the "windows," it is a toe in the water.
For Comcast, Disney presents a formidable ally in taking on telcos and others in the battle to deliver movies and TV shows over the Internet. C-TV, the new TV portal due in the coming weeks, is expected to help consumers organize their videos—be they consumer-generated or shows that they have streamed or downloaded from other sites. But down the road, Comcast wants to make episodes of TV shows available online, giving it the ability to offer custom-made channels for shows like Lost or Desperate Housewives. ABC hasn't agreed to that, but the lines of communication are open since both companies are eager to experiment in the broadband world, according to sources with knowledge of the deal.
Getting the Deal Done
So how did these two companies get so chummy after their knock-down, drag-out takeover battle in 2004? Part of it is the practicalities of doing business—ESPN still needed Comcast's subscribers to sell advertising for its sports shows while Comcast would likely see some of its subscribers flee to satellite if it didn't carry Monday Night Football games on the channel. But the partnership owes as much to the diplomatic skills of new CEO Iger, who has charmed onetime adversaries like Apple CEO Steve Jobs, who clashed repeatedly with former CEO Eisner. At one point in the talks, Iger made available to Comcast ESPN's high-definition coverage of the World Cup soccer games, which Comcast used to market to new subscribers.
Moreover, Iger and Burke were friends before Burke left Disney in 1998 for Comcast. And, while the two didn't talk during the takeover battle, they reconnected soon after Iger became Disney CEO at the annual Allen & Co. media conference, where they went fly-fishing at Idaho's Salomon River. There they talked about the deal's hard-to-negotiate details. And when the talks bogged down, says Burke, Iger would step in to get stalled talks back on track. "Whenever there was a deadlock, Bob was the guy we went to," says Burke, "and he was always a voice of reason."
Where will this deal take Comcast and Disney? Hard to tell. Comcast has all kinds of plans. Someday it wants to be able to show first-run movies to its customers—maybe for $30 a pop—the same day that they play in movie theaters. Iger has ruminated in the past that perhaps it will happen that way, and was promptly excoriated by major theater owners. Don't expect to see Pirates of the Caribbean III playing at a Comcast system near you anytime soon. Still, for a pair of companies that were once at each other's throats, their recent chumminess is remarkable. And it may end up profoundly changing the media world.