Comcastic or Comcastrophe?

Comcast could hardly have picked a more inauspicious date to close its takeover of what is now known by just the single word, NBCUniversal. The end of January is almost exactly 10 years to the day AOL also won regulatory approval to acquire Time Warner, promising a similarly irresistible mesh of new and old media assets. And we all know how that transformative $164bn ‘deal of the century’ turned out.

But in the intervening decade, the media world has turned inside out. Broadband internet access has become such an embedded part of people’s social and business lives that to talk of anytime-anywhere entertainment no longer seems such a far-fetched pipedream. In the Facebook era, it is not a case of Hollywood content being needed as bait to lure customers to a shiny new distribution platform — but rather a case of Universal latching onto Comcast’s pipes to secure its digital future. Comcast ended 2010 with 22.8 million video customers, 17 million high-speed internet customers, and 8.6 million voice customers. The world’s only broadband service providers with more customers are China Telecom and China Unicom.

A triple threat

This time around, it seems the stars are much better aligned. As a triple threat with network, studio and cable assets, Comcast is as well placed as anyone to explore game-changing new business models which will help prevent its many millions of cable customers from finally cutting the cord. Its universe now encompasses English and Spanish-language broadcast networks, an endless array of cable channels, a movie studio with a 4,000-title back catalogue and two of the six largest online video sites in the US in Fancast and now Hulu.

In the Facebook era, it is a case of Universal latching onto Comcast’s pipes to secure its digital future

Which explains why this merger has created such a ruckus across the movie landscape, particularly among producers who fear being shut out of a critical ecosystem. With tentacles wrapped around so much, the enlarged Comcast is seen as a malevolent octopus ready to squeeze the life out of indie competitors at precisely the moment the online world seemed to answer their distribution prayers. Their fear too is that the merger will prompt a new era of media consolidation which will see broadband players such as AT&T or Verizon also engulfing content providers such as Disney.

“The Comcast-NBCU joint venture opens the door to the ‘cable-isation’ of the open internet,” fears Michael Copps, the only member of the five-panel Federal Communications Commission to vote against the deal, even with the conditions attached preventing Comcast from strangling the video marketplace. “The potential for walled gardens, toll booths, content prioritisation, access fees to reach end-users and a stake in the heart of independent content production is now very real.”

Jean Prewitt, president of the Independent Film & Television Alliance (IFTA) offered an equally doom-laden scenario when she told Congress: “The public loses when they are limited to ‘major conglomerate brands’ and cross-promotable programming produced by the gatekeepers, and are not exposed to the diversity and breadth that independent programmers offer.” Or as media reform advocate Josh Silver simply puts it, this deal is a “Comcastrophe”.

In offering her testimony to the House Judiciary Committee, Prewitt urged decision-makers to “insist on specific and enforceable requirements on the minimum number of programme slots that must be filled with independent programming, or a percentage of the overall acquisition and production budget for content that must be allocated to independents”.

In the end, the only concession her IFTA members managed to wring from Comcast was a promise to allocate $6m over four years to a development fund for independent productions.

But it is not all grim news for producers, even those from outside the US. SnagFilms, the online video distribution site, recently persuaded Comcast’s venture fund to participate in a $10m financing round which will allow the company to move beyond just documentaries and into the distribution of both US and international narrative films. And Hulu, now part-owned by Comcast, has won the rights to stream films from the prestigious Criterion Collection.

SnagFilms already enjoys a video-on-demand agreement with Comcast — and so too does Eurocinema, under a recent agreement allowing four to five new festival-calibre international titles to be offered each year to Comcast’s customers who would otherwise be unable to find such fare at local theatres.

Availability of movies

Though you would never know it from NBCUniversal’s new internal logo, which has quietly dropped the studio globe, movies are a critical component of Comcast’s growth strategy. After dipping his toes in the video-on-demand waters these past few years, Comcast CEO Brian Roberts is convinced the thing stopping the premium VoD market from growing significantly is the limited availability of new titles. Hence his persistent courtship of Universal, having been previously jilted by Disney.

“Broadband sales have been the fastest-growing part of our company for five years,” Roberts told the CNBC network last year. “Faster speed means more content on more devices. That can be great. The brands and the content gets created and the dollars follow.”

In the case of movies, this is particularly true of on-demand titles advanced up the distribution chain and offered in the same window as their DVD releases. On Comcast’s own on-demand service Xfinity, day-and-date films accounted for nine out of the service’s 10 most popular titles among subscribers, prompting it to double the number of DVD-concurrent titles to 200 in 2010.

‘The Comcast-NBCU joint venture opens the door to the “cable-isation” of the open internet’

Michael Copps, Federal Communications Commission

Helping to spur such a move has been the success of Netflix, the movie rental service which has been gaining traction as an online streaming service — in many cases using Comcast’s very own cable systems as their conduit into the home. “Netflix is gaining momentum every day as a competitive platform as viewers bypass the traditional pay-TV platforms,” suggests Krysanne Katsoolis, co-founder of indie producer-distributor Cactus Three Films. “Certainly we can foresee a time when Netflix viewers outnumber the pay-cablers.”

‘TV everywhere’

Not that the studio conglomerates are sitting on their hands. Taking their cue from Time Warner’s CEO Jeff Bewkes, Comcast and others are fighting back with a ‘TV everywhere’ strategy — the idea that customers who pay for a cable subscription once should be able to watch on any screen, whether from the couch in widescreen splendour or in the supermarket checkout line on their iPad.

Bewkes believes the only way to win the digital war is to ‘keep it simple, stupid’. “You shouldn’t have to have a PhD as a consumer to be able to figure out how to get this stuff,” he told the Consumer Electronics Show.

Some predict the battle will not end there. “I’m hearing that Comcast is already preparing to pull NBCUniversal’s programming from Netflix when it’s next up for review,” claimed senator Al Franken, the former TV comedian-turned-politician who is a vocal critic of the merger. “They aren’t stupid and they want to shut it down.”

True or not, Comcast does seem worried by the strain that Netflix, which accounts for one fifth of all US traffic on the internet, is putting on its infrastructure. When Level 3, one the world’s largest internet ‘backbones’, struck a deal last year to deliver the Netflix service, Comcast responded by demanding more money from Level 3, prompting an outcry about online strong-arming and ‘net neutrality’ violations.

The Netflix threat is such that prominent media analyst Rich Greenfield, in a recent report issued by New York investment brokerage BTIG, is recommending Comcast’s next move should be a pre-emptive $3.2bn strike. In his view, Comcast should buy the pay-TV channel Starz from Liberty Media, and shift Universal’s output to Starz when its deal with HBO lapses in a few years.

“We believe the value of movie content in the pay-TV window will rise over the next few years,” says Greenfield, despite the popular perception that original series are what drives pay subscriptions. Hollywood movies, he insists, “still represent the largest percentage of weekly viewership for HBO”.

The big question is how much of all this will translate into additional revenue for movie suppliers, especially now DVD revenues are falling off a cliff. The short answer, it would appear, is not much. As Jeff Zucker, the NBCUniversal CEO who lost his job soon after Comcast laid hands on the studio conglomerate, famously put it, streaming or downloading episodes is tantamount to “trading analogue dollars for digital dimes”.

As preoccupied as Big Media is right now with reinventing distribution strategies, the digital revenues are still too small to move the Wall Street needle on stock prices. Most conglomerates do not even bother to separate out their digital earnings on their public balance sheets. Even Disney’s CEO Bob Iger, who has shown himself more willing than most to experiment with new windows and distribution platforms, admitted to analysts this February: “We haven’t discovered yet the silver bullet or the business model that’s going to prevail.”