Disney-Comcast Agreement a Positive for Content Owners & Video Providers

9 Jan

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The Walt Disney Company’s (Disney — rated ‘A'; Outlook Stable by Fitch) and Comcast Corporation’s (Comcast — rated ‘BBB+'; Outlook Stable) announcement that the two companies have secured a long-term comprehensive distribution agreement is a positive for Disney and other content providers, according to Fitch Ratings. Fitch views the deal as evidence of its belief that providers of in-demand, high quality content will continue to monetize it in incremental ways and thrive amid, rather than be pressured by, the proliferation of alternative distribution platforms.

Disney and Comcast agreed that Comcast’s Xfinity customers will be able to access live and on-demand content from the ABC Broadcast Network as well as Disney’s cable networks, including ESPN on video, online and mobile applications. The agreement generates for Disney new affiliate fees for the digital and mobile platforms that are incremental to what Disney had received previously. Further, Disney secured retransmission payments for its ABC network.

Fitch views the deal as a positive for Comcast as well. The company has leveraged its size and scale to secure unique content rights that will differentiate its video service from competition which along with improving user interfaces will strengthen Comcast’s competitive position among other multi-channel video programming distributors (MVPDs).

The agreement provides live and on-demand content on an authenticated basis to Comcast Xfinity customers. Further, reports indicate that Disney’s digital content may become available only to paying subscribers for a specified window (similar to News Corp.’s arrangement with Dish Network). Fitch views this as a strong positive for both the content providers and the MVPDs. Media consumption is increasingly moving towards Internet distribution, in addition to traditional video distribution, and this agreement will serve as a means of subscriber retention by the distributors, preventing subscriber defection to online only aggregators such as Netflix and Amazon.

While details of the transaction were not disclosed, the fact that the deal was reached amicably without an acrimonious public battle indicates to Fitch that Disney received higher fees from Comcast that cover increased programming costs. Recall that Disney recently renewed its contract with the NFL for $15.2 billion for eight years, versus the previous $8.9 billion contract. Fitch does not believe Disney would agree to long-term distribution deals that pressure its profitability.

There has been growing investor concern about the ability of cable networks to command ever-increasing fees from the distributors amid escalating programming costs. In Fitch’s view, this deal indicates that the model currently remains intact, at least for those with valued content. Fitch believes that the cable MVPDs, who have seen modest compression in video margins, will continue to pay higher affiliate fees for the in-demand top-tier networks, such as ESPN. Fitch does not believe that continually higher fees will be tolerated by the distributors across the board, as they cannot be fully passed on to customers, and expects to see a divergence in the fortunes of cable networks over the next several years. Those networks that continue to be demanded by consumers will remain very profitable and generate substantial free cash flow, while some of the second- and third-tier networks will lag.

Importantly, Fitch views the signing of an omnibus deal as a significant positive for the cable networks. Fitch believes it validates the view that bundled packages of cable networks will remain the industry standard, and that a la carte pricing is not a risk at this time.

The longer-term risk to this model, and one which is outside of Fitch’s expectations, is a significant acceleration in video subscriber defection from MVPDs, given a perceived high monthly bill. This would indicate that customers no longer value the content enough to continue paying for it, and that a substitution of Internet-only aggregated content is a good enough substitution. This would clearly be detrimental to the cable networks and distributors.

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