At the Mouse House, A Nervous Big Cheese
By Ronald Grover
Media titans who have been jetting into Friedman Memorial Airport in Hailey, Idaho, must have been scarcely able to contain themselves. While they were flying to the annual Allen & Co. media gabfest in Sun Valley, the latest hot deal in the media world was already making big news. That, of course, was Comcast's proposed $54 billion acquisition of AT&T's troubled -- and wildly underperforming -- cable and satellite operations.
Each year, big deals are cut, chewed over, or rejected while Allen & Co. chief Herbert Allen moves through the resort, inviting the really heavy hitters up to the house for private dealmaking. Look at the history of the affair: It was at Allen's annual Sun Valley shindig in 1995 that Walt Disney Chairman Michael Eisner ran into Tom Murphy, then the chairman of Capital Cities/ABC, setting in motion Disney's acquisition of the company a month later. A few years earlier, Ted Turner got the idea of buying New Line Cinema over bourbon in one of the bars. As for Rupert Murdoch, it's hard to count the number of deals he has broached on his way to the cheese puffs.
LITTLE FISH, BIG APPETITE.
This time around, however, the assembly is likely to focus on who can stop Brian Roberts, the beanpole-thin, 6-foot-5-inch Comcast president. His father, Ralph Roberts, started Comcast with a single cable system in Tupelo, Miss., in 1963. The odds on Comcast winning AT&T are probably 50-50. But whatever happens, you have to admire the chutzpah of the father-son team. AT&T Broadband, with nearly 16 million cable subscribers, is almost twice the size of Comcast, which has some 8.4 million subscribers. This really is a case of the minnow swallowing the whale.
I would imagine that many of those assembled in Sun Valley are sneaking sideways looks at Liberty Media Chairman John Malone, who dropped off the AT&T board after Comcast's bid was announced and always has to be considered in any media equation. Sure, his people say he isn't likely to bid. But this is John Malone, after all. And he didn't jet in from his vacation home in Maine for the cracked crab.
Neither did Vivendi Chairman Jean-Marie Messier, who was making his first trip to Idaho. (Getting out of Paris in July seems sensible enough.) Vivendi, with large film and TV holdings in Paris and the U.S. through its year-old deal to buy Universal, is said to be contemplating how to make a bid for AT&T.
Word around Sun Valley, however, is that the guy feeling the most pressure (other than AT&T's Michael Armstrong, who understandably canceled his own trip to Allen-land) is Disney's Eisner. I have it on pretty good authority that Eisner has been trying to figure out ways to break up this deal ever since Comcast's July 8 assault on AT&T.
In one bold play, Eisner has been calling up similar companies with large programming interests but no proprietary cable or satellite operations to deliver them, hoping to put together a consortium for AT&T Broadband. One power player who said he was contacted gives such a plan long odds of succeeding, but it shows how desperate Disney is to avoid being left out of what looks like a fast-consolidating media world. Disney declined to comment.
Only two years back everyone thought Disney had all it needed to be a world-class media company. It controlled major brand names like ABC and ESPN, which ensured its ability to get programming to consumers. Disney itself was a pretty great brand, and the company's theme parks were minting money, both in the U.S. and overseas. Its movie studio, while still not always hitting them out of the park, was usually first or second among Hollywood's top box-office players.
So why would Eisner suddenly covet AT&T? The world has changed mightily since he bought ABC in 1996. Back then, new TV networks like the WB and UPN were in their infancy, and while cable TV was growing, it was hardly the dominant force it is today. And, perhaps most important, we had yet to see the real impact of the Internet, wireless technology, and all kinds of ways for programmers to get TV shows, sports, and Lord knows what else into our homes.
Eisner has always maintained that if Disney can make great content, the world will line up to buy it, see it, or download it. Still, even he understands that gatekeepers out there might make it difficult for that programming to be available -- either by simply not offering it or by cutting such a one-sided deal that it would dent Disney's profits too deeply.
Eisner acknowledged as much back in 1993, when he wrote a now-prophetic letter to his shareholders. In it, he said the march of new technologies was making him concerned that "no business entity be allowed to control access to new systems." Disney, he wrote, "must protect our access to the home."
That concern brought him to CapCities, which owned both ABC and a majority stake in ESPN at the time. With those outlets under Disney's control, the thinking was that he would always have a place to beam Disney-made TV shows, films, and whatever to customers. No one, after all, could possibly block ABC from the airwaves. And ESPN was an American icon, delivering 24-hour sports for the red-blooded U.S. male.
So imagine Eisner's surprise when, scarcely four years after closing the ABC deal, Time Warner tried to do just that. In a ham-handed attempt to lowball the price it would pay to carry Disney's channels, the cable giant tried to kick ABC off several of its systems.
Eventually, Disney won and got ABC back on Time Warner cable systems through a technical knockout: Time Warner had violated an Federal Communications Commission rule about taking off ABC during a sweeps period. Disney also won great support from those of us worried about the First Amendment and a free media, and from a heck of a lot of angered ABC viewers who worried that they wouldn't get their fix of The Practice or Dharma and Greg.
HOOKED TO A BOX.
Still, the point clearly had been made: Under the right circumstances, even a great brand like ABC could be vulnerable to a gatekeeper. And there are plenty more gatekeepers around today than in 1996. Back then, about 66 million people got their TV through either cable TV or satellites -- roughly two of every three viewers in the country.
Today, with satellite taking off, around 80% of the country gets either cable or satellite, meaning that only 20% of the country doesn't have to worry that some middleman might block ABC from entering their homes. By 2003, according to Schroder's investment bank, nearly 90% of the country will be hooked up to some box or other that delivers their TV signal.
None of which can possibly be good news for Disney, one of the few major media companies that doesn't own a direct path into the home. Rupert Murdoch will soon land Hughes' DirecTV satellite service, while AOL Time Warner can get to you either through the Internet or cable. If Disney wants to keep rolling out new TV channels and other goodies to us schlubs at home, it's going to find the going getting rougher, I figure.
Recently, in a far less visible case than its Time Warner dust-up, Disney was faced with the likelihood of taking off one of its channels under pressure from Paul Allen's cable operation, Charter Communications. The issue centers on some language in a contract by which Charter transmitted Disney's new sports-news channel ESPNews to 1.36 million of its customers. The bone of contention: ESPN was also streaming videos of some of the same news over the Internet on its espn.com site.
Charter argues that it was paying for the right to show the new ESPN channel while Disney was putting it on the Internet for free. The two companies are trying to negotiate the issues right now, but Charter has already lined up new programming for about 250,000 of those customers -- meaning there's no room on the dial for Disney's ESPNews for those folks. The other 1.1 million are getting ESPNews right now on a month-to-month basis, but could lose it any day.
And that shows just the kind of power Charter wields in these kinds of dealings. It may well have woken Disney up to the fact that there are plenty more Charters out there.
"A LITTLE NERVOUS."
The Disney folks, at least for now, say they aren't worried. "Go into a Circuit City some time and tell them to turn off all their programs," says one. "Who's gonna want to look at a blank screen for very long." The point, of course, is that the world wants the kind of compelling programming that Disney produces. But already Eisner is starting to sound a might concerned.
"I'm a little nervous," he told New York Times reporter Seth Schiesel in a recent interview. "I am nervous of the monumental pressure of The L.A. Times and The New York Times and Variety and all that stuff. 'How come Disney is not buying Telemundo?' 'How come Disney is not buying NBC?' 'How come Disney isn't fighting Rupert to get DirecTV?' 'How come Disney doesn't own 12 million cable homes?' 'Why doesn't Disney buy AT&T Broadband and get in the pipe business?"
Good question, Mike. Why, indeed, isn't Disney buying AT&T? Later in that same interview, Eisner said he wanted his company to stick to what it knows best -- making the sort of world-class entertainment it has turned out ever since Uncle Walt first came to L.A. from Kansas City.
Eisner's actions in Sun Valley speak loudly to his new concerns. That's why he has quietly sounded out Viacom, which also doesn't own a cable or satellite service, about joining his consortium. He has also talked with Vivendi and USA Networks, the Barry Diller operation that owns the USA and Sci-Fi cable channels and also has a direct pipeline to the deep pockets of John Malone. Eisner is hoping to find other simpatico companies with similar worries that someone out there will one day put up roadblocks, just as Paul Allen's Charter is doing right now.
The odds on Eisner getting a room full of media executives to line up behind him, or anyone else, must be reckoned as fairly remote. These guys don't easily share power. Hollywood history is littered with joint ventures that went down in flames, thanks to conflicting agendas and warring egos.
Still, this issue won't quickly fade. And you can bet that Eisner and a bunch of other media execs were chewing on that while they hit the buffet lines in Sun Valley.
Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BW Online
Edited by Patricia O'Connell