Comcast's C-TV: Channeling Disney

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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.

Grover is Los Angeles bureau chief for BusinessWeek.