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Deal or No Deal

Comcast's Brian Roberts is a tough negotiator but hasn't made a big acquisition in years. Is he trigger-shy?

Ever since Brian L. Roberts abandoned a hostile bid for Walt Disney (DIS) four years ago, Wall Street has wondered when the Comcast (CMCSA) chief executive and serial acquirer might make a play for another big media prize. The chatter picked up last fall, just before America's largest cable company confessed that it would add fewer subscribers than expected in the fourth quarter. Some investors worried that, with growth slowing, Roberts might try to pick off Yahoo! (YHOO) or NBC Universal (GE)—diversifying away from cable by wading into the murky waters of "content."

In January, dissident shareholder Glenn H. Greenberg warned Roberts to stick to what he knows best: distributing TV, Internet, and phone service over Comcast's 125,000 miles of pipe. As far as Greenberg was concerned, buying a Web site, cable network, wireless outfit, or other "noncore" business would "fritter away" the more than $2 billion in cash that Comcast generates annually. Greenberg, the boss of Chieftain Capital Management, a $5 billion investment fund that owns 2% of Comcast's stock, brazenly questioned whether Roberts should be running the company. The broadside jolted the normally unflappable Roberts into action. In a mid-February conference call with investors, he vowed to reinstate Comcast's dividend after a nine-year hiatus and repurchase $7 billion in stock by 2009, two moves designed to put more of Comcast's money into shareholders' hands. His 88-year-old father and Comcast founder, Ralph, even gave up his hefty compensation package. And Roberts promised that Comcast "was not spending any time on any of the large, transformative acquisitions" that Wall Street had been buzzing about.

Roberts went further, embarking on a charm offensive to soothe investors even more. He met with Greenberg at New York's St. Regis hotel on Feb. 28 to talk about the company's future. Greenberg, for one, has softened his stance only slightly since. "We'd still like to discuss with the board the need for adult supervision," says Greenberg. "He's done some bad things to the shareholders."


Brian Roberts, at 48, faces a choice that could define the rest of his career. Should he bow to Greenberg and other like-minded investors and run Comcast more or less like a slow-growth utility company, parceling out excess cash to shareholders at regular intervals? Or should he risk Wall Street's wrath, acquire a big entertainment company, and take one more shot at media moguldom? Comcast still derives a much smaller percentage of its revenues from content—defined as any nugget of media people can watch, read, or listen to—than rivals Cablevision and Time Warner, which own such lucrative properties as CNN, TNT, and TBS. Roberts has let similar opportunities slip through his fingers in the past, turning down programming deals that, in hindsight, would have paid off handsomely. And on a personal level, one Roberts confidant says, Roberts has long admired Rupert Murdoch, whose media and entertainment colossus News Corp. (NWS) pulls in revenues from advertising, DVD sales, subscriptions, and more.

Roberts is reluctant to admit he's at a fork in the road. "I'm happy with the hand we have," he says. For now Comcast is growing briskly by selling cable customers on phone service and pricey upgrades such as digital video recorders, and plans to sell phones and data service to businesses. But there's little doubt that growth will slow as customers max out on services as telephone companies eat into market share. John C. Malone, a cable pioneer who now controls rival satellite broadcaster DirecTV (DTV), has been telling Roberts for years that he needs programming. "He has a great hand," Malone allows. "But he needs to add content." Media analyst Richard Greenfield, one of the few on the Street who argue for acquisitions, says Comcast is in "strategic limbo" and that Roberts should be moving more forcefully into programming, the Web, and even to buy a wireless carrier like Sprint Nextel (S).

There are plenty of potential targets that might tempt Roberts. Cablevision is mulling a sale of cable channels including AMC and We: The Women's Channel. General Electric could peddle its NBC Universal network and studio after the Summer Olympics. MGM's owners want to cash out. Even Viacom (VIA) could one day come onto the market. Despite Roberts' recent assurances, investors want to know: Deal or no deal?

The Roberts clan is hardly averse to acquisitions. Starting with a tiny Mississippi cable network that Ralph Roberts bought in 1963, father and son have become adept at buying small cable outfits and folding them into an ever-growing empire. As a young executive, Brian sat at the negotiating table, where he learned his father's modus operandi: paying top dollar for cable systems with huge growth potential and then hitting tough return-on-investment goals. "They set high hurdle rates," says former Comcast President Robert Clasen, who now heads Malone's Starz programming unit. "Then they found the toughest managers they could."

It was at his father's side that the younger Roberts became the exacting negotiator he is today. "We'd let Brian get the last nickel right before the deal was done," recalls Julian A. Brodsky, Ralph's right-hand man for decades and a member of the board. Adds one executive who has done business with the Roberts family: "Negotiating with Comcast is like bargaining with some old guy in a clothing store. When you tell him how much the suit costs, he'll say, Fine. But you're throwing in the tie as well, aren't you?'"


In 2002, Roberts bagged the biggest prize of his career, paying $50.8 billion for AT&T Broadband, then the nation's largest cable operator and twice Comcast's size. Moving with uncommon speed for a cable company, Comcast sent 150 executives to AT&T to overhaul its woefully inefficient bureaucracy. Within two years, Roberts and operations chief Steve Burke had doubled operating margins to 40%. Today, Comcast dwarfs its closest rival, DirecTV, by 7 million subscribers and Time Warner's cable operation by nearly 10 million.

But Comcast has all but exhausted the number of cable outfits it can cobble together. New federal rules restrict companies to 30% of the national market. Comcast sits at 26%.

For now the company is focusing on selling more services over its pipes. Nearly two-thirds of its 24 million subscribers pay for high-definition and other digital services; 13 million more are paying an average of $42 a month for Internet access. And though Comcast got into the phone business later than most of its competitors, it is starting to get some traction, with sales of $1.8 billion last year. While its stock has shed a quarter of its value since last July, that's better than Cablevision's 35% slide.

Web access, phone service, video on demand—all of these work on Comcast's existing cable system, and the margins are huge. Last year the company boosted revenues by 24%, to $30.9 billion, and operating income by 21%, to $5.6 billion. It's little wonder why many on Wall Street want Roberts to focus solely on cable and milk it for all it's worth.

Video on demand is a crucial part of the puzzle. Roberts, long passionate about new cable technology, is particularly proud of a new on-screen guide that makes it easier for subscribers to surf for VOD movies and TV shows. And he has shown himself willing to play hardball to lock up content for his VOD service. Before agreeing to pay $300 million for 20% of MGM in 2005, he invited his joint-venture partners, including Sir Howard Stringer, then chairman of Sony (SNE) USA, to his second home on Martha's Vineyard. There, Roberts said he would do the deal only if he could get the VOD rights to Sony's movies. Stringer, who says he was startled at the time, is now sanguine. "It turned out to be a good deal for both of us," he says. "The deal wasn't going to get done without Brian, and I think he knew it." Roberts ended up paying $10 million, a relative pittance. Now Sony is a key part of Comcast's library of 10,000 films and TV shows. Since then, Comcast has struck deals with other studios as well.

Yet people close to Roberts say he has been generally wary of programming deals over the years. The company owns several cable channels, including E! Entertainment Television. It also owns all or part of nine regional sports networks and recently joined forces with two studios to create Fearnet, an online horror channel. But Comcast's content has never generated more than 5% of its revenues, compared with 22% for Time Warner and 14% for Cablevision last year. Back in 2002, before the AT&T deal closed, Roberts told BusinessWeek: "We don't have a clearly defined content strategy."

The Disney deal, of course, would have brought a smorgasbord of movies, television programs, and cable networks, including juggernauts ESPN and The Disney Channel. But Roberts, who declined to comment on the deal, walked away after badly miscalculating shareholders' enthusiasm and Disney's willingness to negotiate.


Many investors insist that's for the best. Roberts, they say, is a cable guy at heart, the dutiful steward of a steady and predictable business. Subscribers, especially once they have signed up for the triple play of TV, phone, and Web service, typically stick around. The content realm, in sharp contrast, is hit-driven and hence much riskier.

Roberts certainly doesn't carry himself like a mogul. Unlike Murdoch, who once lived in Los Angeles and still enjoys a good movie premiere, Roberts shuns the Hollywood scene. He isn't flashy (he still travels to New York by train from Comcast's home city of Philadelphia) and doesn't do parties (he labors to be home in time for dinner most nights). Though friendly with Harvey Weinstein, who founded Miramax Films, and Frank Biondi, who used to run Universal Studios, Roberts is uncomfortable in their crowd. At Weinstein's recent wedding to model and designer Georgina Chapman, Roberts was seated at a table with a group of models. People who were there say he seemed ill at ease. "I don't think he was in his element," says Steve Rattner of the media investment fund Quadrangle, who is Comcast's investment banker and also attended the celebration.

Roberts' uneasiness with Hollywood was laid bare in 2003, when he contemplated buying Universal Pictures. Insiders say he was taken aback by studio chief Ron Meyers's $12 million salary (at the time almost twice what Roberts was being paid). As he does with every major transaction, Roberts asked his top executives to vote Yes or No on pieces of yellow paper, according to people who were there. They say the vote went against the deal because owning a studio was deemed too risky. Roberts never made an offer. (He declined to comment on the deal.) Had the vote been different, Comcast would now control USA Network and the Sci Fi Channel, both of which boast highly rated shows and charge lofty ad rates.

Yes, programming is expensive to produce, and the margins can't compete with Comcast's cable business. But movies and TV can generate revenue in several ways, including fees other cable or satellite companies pay to carry programs, advertising, and DVD sales, which have become money-makers for the likes of AMC and A&E. And if Comcast has to pay the higher program costs, better to pay them to itself. Moreover, says Malone, if Comcast owned quality programs it could sell them overseas, where the appetite for cable channels is growing.

Will Brian Roberts make that big transformative acquisition? Malone says the Street's negative reaction to the Disney bid may have made Roberts more cautious. "I think he got a little spooked," he says, adding that he pressed Roberts to hike the Disney bid. But Comcast's recently retired Chief Financial Officer Larry Smith says, "Something is going to come down the road that makes sense" for Roberts. The question is whether he will ignore the naysayers on Wall Street and press the play button.

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