Disney Opportunity Could be Distraction

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Comcast Corp.'s landmark proposal to absorb The Walt Disney Co. will, no doubt, have wide repercussions in the technology space should the deal get consummated.

But exactly what technologies and new services Comcast will show more, or less, interest in was the subject of much recent debate.

One hot topic was Comcast's voice over Internet Protocol telephony rollout plans.

The MSO said its plans to roll out VoIP service in four markets in 2004 followed by a nationwide rollout in 2005 remains unchanged.

Comcast Cable president Steve Burke added Comcast's plans to make half its plant VoIP ready in 2004, in preparation for the 2005 launch.

DISTRACTION FACTOR

But the massive attention needed to secure and pull off a Disney merger left some wondering last week whether Comcast's executive manpower would remain committed to telephony deployments, for instance, given more pressing matters on its plate.

"Comcast has not been a technology leader," and has lagged behind other MSOs in digital-video-recorder and VoIP deployments, said analyst Gary Arlen. "VoIP could be just slowed down," he said, if the Disney deal becomes a distraction from other businesses.

"Comcast is in a great position to be a VoIP leader and really make it happen," Arlen continued. "But the Disney resources don't add anything to that."

Asked about VoIP, Roberts said: "The goal is to stay focused this year on our business plan. I don't think we'll lose our focus at all during the year."

Although Roberts acknowledged the Disney deal will take up some of senior executives' time, Comcast's management is decentralized, and thus able to handle several projects at once. "That's what we've been doing for the last 15 years.

"VoIP is where we always felt most comfortable," he continued. "We have more cable phone customers than any company in this space today [because of the AT&T Broadband acquisition]. We have a real business and it's going to evolve."

NEW-SERVICE FOCUS

Comcast will continue to focus on video on demand, HDTV, digital video recorders and high-speed Internet, he said, "while we continue to make VoIP a reality and I don't think today's announcement will do anything to change that."

Wall Street analysts seemed to back that view. "We do not anticipate Comcast's Disney offer to impede the next stage of growth for the combined cable operations," Merrill Lynch's Jessica Reif Cohen said in a research note. "Comcast's management team is top notch, in our view, and capable of simultaneously shepherding the transaction and harvesting the reshaped [AT&T] systems."

Even if Comcast wanted to slow its telephony rollout, outside forces could pressure the operator to stick to its timetable. The company lost 172,000 phone subscribers in 2003 from circuit-switched operations. Comcast gave Wall Street guidance of up to 50,000 telephony additions in 2004, indicating a reliance on the four VoIP markets to deliver growth.

Competition from digital-subscriber line providers, which Wall Street won't let Comcast forget, is growing and remains a potent incentive for Comcast to continue its telephony plans.

"They come into VoIP market to maximize the assets they already have," added Andy Paff, president and chief executive officer of Cedar Point Communications Inc., which is in VoIP trials with Comcast. He sees no indication Comcast will slow down.

"The long-term benefits of this are many," he said.

Comcast estimates for digital cable and high-speed data growth for 2004 look a lot like 2003, with 700,000 to 1 million digital cable additions — largely fueled by digital video recorders and HDTV — and 1.5 million to 1.6 million new data subscribers.

Roberts said Comcast is adding 10,000 to 20,000 HDTV subscribers per week, which will help digital growth and revenue per subscriber. "We've seen a huge surge in HD around the Super Bowl and other events."

"We will continue to be very aggressive in pushing new products," Burke emphasized. "We need to get new products out for both offensive and defensive reasons."

Comcast expects to spend $1.9 billion in variable capital in 2004, about the same number as 2003, which correlates to modems, new set-tops and phone MTAs.

Overall capital spending will drop from $4.1 billion in 2003 to $3.3 billion to $3.4 billion in 2004, a function of reduced upgrade costs as most of the AT&T rebuild is complete.

ALL-DIGITAL MOVES

Comcast has been an industry leader in focusing on the all-digital network. It has also successfully completed a test of Sony Corp.'s Passage technology, announced three weeks ago, which probably heralds Comcast going-forward role in cable-technology leadership: If it's a strategic priority to Comcast — or if there is a compelling business opportunity (such as new subscription VOD packages) — the MSO will stake out a leadership position.

For instance, Time Warner Cable has staked out a leadership position with the OpenCable Applications Platform. Comcast marketing executives believed HDTV, DVR and VOD, plus the overall bundle, is more important in fighting off the immediate direct-broadcast satellite threat than the ITV efforts related to OpenCable.

While Comcast was a leader in VOD, and especially free on demand, it's been behind the curve in launching DVRs, compared with No. 2 U.S. MSO Time Warner. It's just now getting ready to roll out Motorola Inc.'s DVRs.

Still, the Disney deal could mean Comcast zooms ahead in some areas.

Burke talked openly about new SVOD packages built around ESPN, Disney and ABC News product that could greatly enhance VOD.

Similar Disney content could find its way to Comcast Web portal.

Given the MSO's estimates, it would have 7 million HSI subscribers by the time the deal closes in late 2004.

Burke also talked about ESPN ITV applications.

DRM: BIGGER PRIORITY

Perhaps the most intriguing of all technology issues is digital-rights management. A Comcast purchase of Disney could speed Comcast's desire to create a secure content environment for its newly acquired Disney content in a digital/plug-and-play/high speed, peer-to-peer broadband world.

Just days before the deal was proposed, Disney signed a DRM licensing agreement with Microsoft, similar to the deal Microsoft signed last year with Time Warner. If Comcast is successful, it will look a lot like Time Warner (a cable-system, studio and cable-network owner), with businesses on both sides of the content-vs.-platform debate.

"They've got to care about DRM [if the deal goes through]," Arlen said. "It's the critical issue for Hollywood."

And they would also have to care about the broadcast flag and how to use their digital spectrum, as an owner of ABC, he added.

Comcast also would own Moviebeam, the nascent Internet movie-delivery service Disney has launched in several markets.

"Disney has a big stake in Moviebeam," Arlen said. "How does that compete with Comcast's VOD plans?"

But under Comcast, Moviebeam would likely be shut down, eliminating another vestige of an era in which — in Comcast's eyes — Disney was more interested making an end run around the cable industry than in working with it.

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