Inside Comcast’s Bold Attempt to Take on Disney With DreamWorks Animation Buy

Flush with cable cash and unbridled ambition, Comcast Corp. leaders Brian Roberts and Steve Burke pushed to acquire Disney in 2004 with a bold, and unsolicited, bid of $54 billion.

Twelve years to the day after Comcast was forced to pull that offer in a humbling defeat, the cable giant’s NBCUniversal arm unveiled a $3.8 billion deal last week to buy DreamWorks Animation. The pact to bring the popular characters of “Shrek,” “Kung Fu Panda” and other franchises into the Peacock’s plume has set the Hollywood studio off on an aggressive mission: to build a better mousetrap than Disney, the current unrivaled champion of family entertainment.

C.J. Burton for Variety

Jeff Shell, Universal Filmed Entertainment Group chairman, didn’t even try to spin things in discussing the DWA acquisition: NBCU is drawing a bead on Disney’s playbook.

“We’re a big admirer of what Disney has been able to create under [CEO] Bob Iger. They’re this wonderful machine with all the different and well-loved IP,” Shell says. “It’s all driven by tentpole movies — movies that scale. They move across their consumer products business and their television business. We need bigger tentpoles that drive the whole ecosystem. That’s what’s going to separate us from the rest of the bunch and help us compete with Disney.”

It’s clear that Roberts, the 56-year-old chairman and CEO of Comcast, and Burke, the 57-year-old NBCU CEO, are not about to settle for second place.

Further powering their resolve to win is another painful defeat suffered by the Comcast leaders this time last year, when federal regulators torpedoed their hopes of adding even more cable and broadband muscle to their media empire with the rejection of the company’s $45 billion bid for Time Warner Cable. By multiple accounts, the flame-out of that deal was a particularly hard loss for Roberts.

Roberts and Burke exude such a confidence, restlessness and hubris in their vision for their company and for the future of the media business that one executive who knows the execs well describes them as “a click away from arrogance.”

Their rich — some say too rich — agreement for DreamWorks Animation represents the latest expansion push within Comcast. This is a company that believes in the maxim that you gotta spend money to make money.

Comcast is paying almost as much for DWA as the $4 billion Disney laid out in 2012 to buy George Lucas’ Lucasfilm to become the home of “Star Wars.” But for an enterprise of Comcast’s size, $3.8 billion isn’t far from a rounding error.

The speed at which the Comcast-DWA deal came together, within about two weeks, reflects a surprising nimbleness for a company as huge as Comcast, and underscores the steely resolve of Roberts and Burke, who enjoy working shoulder-to-shoulder in the trenches. Together, they picked up the phone to call DWA CEO Jeffrey Katzenberg in early April after hearing that the animation studio was about to be acquired by a Chinese concern — said to be a low-profile investment firm eager to park some of its capital in a U.S. entertainment operation. DWA, according to NBCU insiders, had been on Burke’s radar for some time. The companies had worked together in the past on deals including the licensing of “Shrek” characters for Universal parks.

The marathon sessions to get signatures on paper began in earnest April 22, when Roberts and Burke flew to Los Angeles for a tour of the DWA lot in Glendale led by Katzenberg. Two days later, Shell and Universal Pictures chair Donna Langley slipped into a DWA screening room for a peek at two upcoming movies, “Boss Baby” and “Trolls.” Roberts, sources say, was the force in making the DWA transaction happen so quickly.

“We have to keep putting good shows on, and it is tougher and tougher in a fragmented world to get a rating. But when you do, you do get rewarded for it significantly.”
Steve Burke

By April 27, a day that started with Comcast’s first-quarter earnings release and analyst conference call, SWAT teams of Comcast execs in Philadelphia and NBCU execs in New York wound up pulling an all-nighter in their offices to prep the announcement that went out at about 9:15 a.m. ET.

Comcast’s DWA dealmaking wasn’t held up in layers of strategic planning reviews and financial crunching — in part because it amounts to a relatively small transaction in the grander scheme. But it also reflects the fierce drive of Roberts and Burke, whose close relationship is described as almost brotherly — right down to friendly hollering at each other across the hallway when they’re working in the same office. Roberts, who is based in Philadelphia, shares Burke’s executive assistant when working out of the New York offices.

Both execs were bemused by the level of perks afforded to NBCU executives when Comcast bought the company. The pair come from a down-to-earth school of management and are reserved in public and averse to putting the spotlight on themselves. They declined requests to be interviewed for this story; in fact, even NBCUniversal’s CNBC couldn’t get Burke on camera for an interview the day the DWA deal was announced.

But behind the walls of Philadelphia’s 58-story Comcast Center and 30 Rock, Roberts and Burke are fierce and cunning in their focus on besting competitors and driving Comcast-NBCU to the top of the media food chain.

Today, Comcast is the closest competitor to Disney in the size and scope of its sprawling operations. (As of April 29, Disney’s market cap stood at $168.48 billion, to Comcast’s $147.36 billion.) Comcast’s NBCUniversal unit is the only major conglomerate to rival Disney in the theme park arena, through its growing Universal Studios portfolio. Comcast also has what no other U.S.-based media conglom has: the fat, two-way pipe that extends directly into 23.8 million homes — repping almost 20% of the households in the country.

Massive investments in cable systems, technology and NBCU are paying off handsomely for Comcast. The stock has shot up 259% since 2010. As documented in the first-quarter 2016 earnings released April 27, Comcast’s operating performance is defying the conventional bearish wisdom about Big Media these days.

Chris Meledandri (above) is expected to become chief of the beefed-up Comcast animation unit, replacing founder Jeffrey Katzenberg. Katzenberg: Keith Mayhew/Newscom; Meledandri: Alex J. Berliner/AP

The Philadelphia-based conglomerate, still firmly controlled by its founding Roberts family, has transformed itself over the past 15 years into a media powerhouse. It started in 2002 when Comcast became the nation’s largest cable operator and high-speed Internet provider with its $72 billion purchase of AT&T Broadband. Roberts’ and Burke’s dream of owning a Hollywood major was fulfilled in January 2011 when Comcast closed the initial $30 billion deal to buy (insiders say “rescue”) NBCUniversal from General Electric.

As much as NBC veterans hail the fact that Comcast saved the company from GE’s penny-pinching, some have expressed frustration that Burke is rarely heard acknowledging that prior Peacock regimes “ever did anything right.”

Weak spots in the Comcast-NBCU orbit include its activities in digital content and international TV. NBCU moved to bulk up its digital presence last August with matching $200 million investments in hot-shot publishers BuzzFeed and Vox Media, the latter the parent of such outlets as Re/Code, The Verge, SB Nation, Eater and Polygon.

On the international front, NBCU lags behind rivals such as Fox, Disney, Viacom and Sony in operating lucrative TV channels around the globe. That’s a result of GE’s stinginess and its reticence to beef up NBC as the rush to grab international TV real estate began more than a decade ago. Pre- and post-Comcast, NBCU has invested in international TV production assets, including U.K.’s Carnival Films, home of “Downton Abbey” and other highly exportable shows.

The scope of Comcast and Disney holdings dwarfs that of other entertainment behemoths. There’s a reason Rupert Murdoch attempted to merge 21st Century Fox with Time Warner in 2014 — the mogul correctly recognized that this is an era of media leviathans, and now more than ever, size matters. As Disney and Comcast grow, it will presumably pressure smaller rivals to join forces or snap up content companies still ripe for acquisition. Lionsgate, the last pure-play publicly traded studio, saw its stock soar in the wake of the DWA acquisition announcement.

At a time when distribution models are shifting, Disney and Comcast know that along with content, brands are king. Both companies believe that imprints such as DWA, Marvel and Pixar are what ultimately weather the tectonic changes roiling the entertainment business. Regardless of whether films are seen at the multiplex, streamed online, downloaded from the cloud or watched on cable, audiences want to see the new “Shrek” or “Star Wars” movies. As more content clutters the market, having strong brand recognition enables companies to cut through the noise and find their fans.

Despite all the focus on the cord-cutting phenomenon, Comcast’s cable systems are adding video subscribers, something MoffettNathanson analyst Craig Moffett termed “a remarkable turnaround.” Its broadcast networks (NBC and Telemundo) are on a roll from a ratings and financial perspective. And its theme parks have surpassed the most optimistic expectations — thank you, the Wizarding World of Harry Potter.

There have been unpredictable post-NBCU merger results that underscore how much the business landscape has changed in just the five years since Comcast closed the NBCU deal.

“Comcast can utilize DreamWorks better than anybody else because of the theme parks and
other tie-ins.”
Hal Vogel

NBCU’s cable networks — USA Network, Syfy, Bravo, Oxygen — were the big drivers of Comcast’s interest in buying the Hollywood studio in late 2009, when the agreement was first inked. Those established brands made for a logical fit with Comcast’s cable holdings at a time when big entertainment cable channels were seen as 8%-10% annual growth vehicles.

But that was before the pay TV industry began to feel the pinch of cord-cutting, and channels including Disney’s mighty ESPN began experiencing slow but steady subscriber erosion — meaning lowered long-term outlooks for affiliate revenue. And cable advertising revenue, like broadcast TV, has been squeezed by ratings declines and the spike in multi-platform viewing.

In its first-quarter 2016 results, NBC and Telemundo delivered a stronger growth story than the cable group, even against tough comps from NBC having had the 2015 Super Bowl. The broadcast unit’s bottom line has been helped by about $800 million in retransmission consent and reverse-affiliate comp revenue, which is up from about zero when Comcast took over, according to Burke.

“I would not have predicted this 10 or 20 years ago, but it feels like broadcast is getting stronger and stronger in this period,” Burke told investors on April 27. “We have to keep putting good shows on, and it’s tougher and tougher in a fragmented world to get a rating. But when you do, you do get rewarded for it significantly.”

But it’s Universal’s theme parks that have proved the biggest sleeping giant in the NBCU portfolio. Burke and Roberts have acknowledged that they were leaning toward selling the division at the outset — surprising, given the pair’s fixation on competing with Disney. After getting more familiar with the parks, however, Comcast did a 180-degree turn and bought out Blackstone, its private equity partner in Universal Studios Florida, for $1 billion. Investments in new attractions, technology and improved hospitality options followed.

Last year NBCU bought up full control of Universal Studios Japan for $1.5 billion. Operating cash flow for the parks wing has tripled since 2010 to $2 billion in 2015, thanks in part to NBCU taking full ownership of both Florida and Japan. China is the next frontier, with a park in Beijing in the planning stages to compete alongside Shanghai Disneyland, which is scheduled to open in June.

“Comcast investors have continuously warmed to the idea that the company’s theme parks are more than just a sideline business,” Moffett wrote last week. “But few have really internalized just how reliable they have become as a growth engine for the consolidated business.”

The DreamWorks Animation acquisition, expected to close later this year, promises to provide fuel for NBCU to hit the gas in the kidvid and family arena that Disney has owned for decades. At $41 a share in cash, NBCU is paying a huge premium to land DWA — nearly 51% above DWA’s recent trading price.

Burke, who spent 12 years with Disney/ABC before joining Comcast in 1998, and Roberts see DWA as an investment in the long-term future of NBCU’s movie, theme park and consumer products businesses. Undoubtedly, they remember that Iger took a lot of grief from Wall Street for what was viewed as overpaying to grab Pixar for $7.4 billion in 2006. Given all that Pixar and its braintrust have brought to Disney, that deal looks smart (if not cheap) at the price 10 years later.

Like Harry Potter’s Hogwarts (right, at Universal Studios Hollywood), DreamWorks Animation’s properties will help Universal theme parks compete with Disney’s Magic Kingdom.

Taking another page from Disney’s playbook, Universal’s Shell says Chris Meledandri, head of the studio’s successful animation company Illumination Entertainment (producer of the “Despicable Me” and “Minions” hits), will also oversee DWA’s movie unit, playing a similar role to what Pixar co-founder John Lasseter fulfills at Disney.

While some Wall Streeters, including Cowen & Co.’s Doug Creutz were critical of the price tag Comcast paid for DWA — he called the deal “not necessarily a wise or value-creating move” — others see the long-term play.

“Comcast can utilize DreamWorks better than anybody else because of the theme parks and other tie-ins,” says veteran media analyst Hal Vogel. “They can integrate them with their current operations. It’s what allows them to justify paying more than other people would.”

Macquarie analyst Amy Yong cites the potential to further boost Universal on the film side as yet another reason to do the deal.

“Comcast’s film business has been growing well, and they’ve surprised investors with how quickly they’ve been able to create franchises,” she says. “The studio is a good area for them to grow their business.”

NBCU insiders say that in the past two years, with the headwinds facing the industry at large, top brass have been pleasantly surprised at seeing quarterly results exceed internal conservative expectations. Roberts said as much April 27, in talking up Comcast’s first-quarter performance.

“I am amazed at what we’ve accomplished in a short period of time as a combined company just five years in,” Roberts said on the earnings call. “I think we are not only five years wiser and stronger, but really better together.”

Given the empire-building drive that Roberts and Burke have demonstrated during the past five years, one can only imagine what Comcast-NBCU will look like in another five years. Watch out, Disney.

Brent Lang and James Rainey contributed to this story.

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