IP: Comcast from Monday's WSJ

[David Farber <dave () farber net>]

> > Manager's Journal:
> >   Comcast 's Pyrrhic Victory
> >   By Andy Kessler
> >
> >   12/24/2001
> >   The Wall Street Journal
> >   Page A10
> >   (Copyright (c) 2001, Dow Jones & Company, Inc.)
> >
> >  Two distantly related media deals were announced last week: Brian 
> > Roberts's Comcast buying AT&T Broadband to become the number-one U.S. 
> > cable provider, and Vivendi-Universal hiring Barry Diller by folding in 
> > his USA Networks and investing $1.5 billion for him in Echostar. Which 
> > one was the better deal, the one focused on distribution or the one 
> > focused on content? Depends on how far into the future you're looking.

For now, distribution rules, holding up consumers everywhere. The root of 
this evil is dated government rules on broadcast TV oligopolies and local 
municipalities rewarding cable franchise monopolies. Media empires are 
built on these exclusionary licenses. Cable is the most offensive, as it 
started out without any content, just rebroadcasts of local TV stations. A 
consolidation began almost immediately, until cable reached critical mass 
to create its own content. Well, actually, it was mainly stale movies 
bundled as HBO and Showtime, but that was enough.

Leverage came from owning bigger cable systems, and anyone who wanted 
carriage had to give up equity to get it. John Malone got a huge chunk of 
the Discovery Channel for TCI/Liberty Media by just promising to carry it. 
The FCC until recently forbade any cable company to control access to more 
than 30% of the nation's homes, or control more than 40% of its 
programming. This created the game of mutual extortion between cable giants 
-- I'll carry yours if you carry mine.

Great content has nothing to do with it. This is a government-mandated, 
closed and cozy system. Animal Planet, Bravo, the Golf Channel -- you and I 
pay for these things that only seem to get in the way when we are surfing 
for something else to watch. And cable raises prices at will, usually well 
above the rate of inflation.

So Comcast has leapfrogged AOL TimeWarner and is now the number-one cable 
company in the U.S., with 22 million customers, passing 38 million homes, 
and the ability to bundle voice, video and data. Brian Roberts has locked 
up distribution, figuring he can lock up content.

The lock won't last. It takes a megabit-per-second data connection to run 
watchable compressed video, whether a cable channel or an Internet 
connection. Today, the cost of cable service and the cost of a megabit data 
service are about the same -- $50 per month. But cable is swimming upstream 
against the deluge of cost declines that technology delivers. A megabit 
connection will halve in price in two years, and be 25% of what it is today 
in four years.

Today, cable delivers lame modems that barely pump out half a megabit of 
data. Why would Comcast or TimeWarner or any such franchise offer 
high-speed data connections that allow their customers to watch something 
besides Animal Planet or the other drool they force-feed us for $35-$100 
per month? But someone else will.

Probably not satellite. Satellite TV services like the cable pricing 
umbrella, and being forced to carry local stations in each and every U.S. 
city will chew up their excess capacity. Phone companies? At some point 
they will quit protecting their increasingly worthless voice franchise and 
go gung-ho after cable by offering better data feeds. Fiber? Once the 
latest round of bankruptcies is complete, we need new rules to attract a 
new entrant with enough capital to string fiber to homes.

Wireless? Now we're talking, but not the much-heralded third-generation 
"3G" mobile phone networks. Wireless data networks are popping up in weird 
places like coffee shops and bakeries and airports and Aspen, Colo. Today's 
shared 11-megabit Wi-Fi connections will go to 55-megabit next year. Late 
next year will see the roll-out of wireless mesh networks hanging off of 
telephone poles that can guarantee two to five megabits to nearby homes, 
for under a few hundred bucks per home. Imagine what this will do to 
Comcast , which just paid $4,500 per cable subscriber.

Comcast had better strong-arm lots of content over the next year, because 
distribution is a declining asset. It didn't get any from AT&T, which let 
its content slip away when Mr. Malone and Liberty Media flew the coop. 
Actually, Comcast is now stuck through 2022 with Malone-written contracts 
for meaningless cable programming like the Romance and Western channels. 
The test pattern is more exciting. Comcast has QVC, the Golf Channel and 
E!, as well as the Philadelphia 76ers and Flyers. Hey, I like watching 
Allen Iverson, but not that much.

What about the rest of the media moguls? AOL TimeWarner has yet to prove 
there is any real synergy between cable and dial-up online access, and 
Gerry Levin's retirement leaves this tough task to his successors. The 
TimeWarner side has tons of cable programming tied to their number-two 
cable operator status. And the entire cable industry thanks them for HBO, 
which is only available on cable, forcing all of us to pay $50 per month 
for "The Sopranos," which won't even have new episodes until late 2002.

With alternate paths to homes, great content will leak off of cable. 
Michael Eisner's Disney, outside of owning ABC TV stations, is pure 
content. Disney arm wrestles with distribution partners all the time, and 
they wait in the wings with a cache of content, from ESPN to Toon Disney to 
the Family Channel. Sumner Redstone and Viacom similarly have content assets.

The Federal Communications Commission has made noise that the Comcast deal 
can go through; apparently there is nothing wrong with owning a third of 
cable subscribers. But with 80% of subscriptions in the hands of just five 
companies who also have a choke hold on most of the cable programming, 
something may have to give. This country has a long history of separating 
content and distribution: Theaters were stripped from studios in the 1948 
Paramount consent decree; MCA/Universal's talent agency and production 
studio were split in 1962; television programming was stripped from TV 
networks in 1970 via rules that were repealed in 1996.

My personal belief is that content is a more durable business over time, as 
opposed to a strategy of tying up distribution. I've watched the 
devastating effects of technology, which can undercut distribution's value 
proposition year in and year out. How this plays out is tough to call, but 
usually the market sorts it out by gradually reducing the amount of capital 
available to strategies it finds dated. Comcast 's stock may fade slowly 
into the sunset.

---

Mr. Kessler, a former hedge fund manager, is at work on a book about 
technology and markets.




Copyright © 2000 Dow Jones & Company, Inc. All Rights Reserved.





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