In a major strategic move, Comcast Corp. (CMCSA), the largest cable MSO in the U.S., has inked a 10-year long-term comprehensive programming distribution deal with Walt Disney Co. (DIS) for its Xfinity TV customers. Xfinity TV subscribers can now watch live or on-demand contents of 70 Disney, ABC, and ESPN services on their TV sets, PCs, smartphones, or tablets. However, the financial terms of the deal are not yet disclosed. Xfinity TV is basically a TVEverywhere service, which Comcast offers its pay-TV subscribers for both video programming and Internet access. An authenticated pay-TV subscriber of Comcast can now watch a vast library of Disney contents any where, any time, and in any devices.
Synergies for Comcast
(1) The primary focus of this deal is the out-of-home access to most popular Disney programs by subscribers. A 10-year deal with Disney will enormously benefit Comcast and act as a shield in the cord-cutting and over-the-top video competition. For the last one year, the online video streaming service providers such as Netflix Inc. (NFLX), Hulu, and uTube became a serious threat to traditional multi-channel pay-TV operators. In the first nine months of 2011, the six largest pay-TV operators lost a total of 711,000 subscribers, of which Comcast alone lost 165,000 subscribers.
(2) Comcast will be able to charge higher to its customers in the next one decade since the cable operator is now bundling premium Disney contents with its existing offerings. Disney’s sport networks, especially ESPN is considered an esteemed channel of Disney throughout the world.
(3) A 10-year long-term deal with Disney will help Comcast to reduce its programming costs volatility. Programming costs constitutes the majority of any pay-TV operators operating expenses. Year-over-year acceleration of programming fees very frequently results in channel blackouts, which is detrimental to both content developers and its distributors. With a stabilized cost structure, Comcast can give more emphasis on technical improvement of video distribution.
(4) Access of ESPN programs by Comcast subscribers will be immensely beneficial to the company. The Disney deal will place Comcast head on with its closest video rivals such as Time Warner Cable Inc. (TWC), Bright House Networks Inc., and Verizon Communications Inc. (VZ). These companies are already offering premium sport channel and therefore this may reduce the company’s churn rate.
Synergies for Disney
(1) Although the financial terms of the deal are not disclosed, several analysts believe that Disney will get multi-billion dollars from Comcast. Some analysts estimated that the deal size may well cross $20 billion mark for ESPN channel alone for a period of 10-year.
(2) Comcast had 22.4 million video subscribers and 17.8 million high-speed broadband subscribers as of September 30, 2011. This huge number of customers will now able to watch Disney productions, which will be highly beneficial for the company to uplift its viewership ratings.
Recommendation
At present, both Comcast and Walt Disney hold short-term Zacks #3 Rank (Hold). We currently provide a long-term Neural recommendation on both Comcast and Walt Disney.
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