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NEW YORK – Wall Street analysts on Thursday morning shared their analysis of a 10-year carriage deal that cable giant Comcast Corp. and Walt Disney unveiled a day earlier, with most seeing benefits for both companies.
Observers lauded the increased availability of content in digital forms as attractive to consumers. But they took different views on how much of a positive the new long-term deal would be for Disney sports juggernaut ESPN.
Davenport & Co. analyst Michael Morris in a report estimated that annual affiliate fee increases will be in the 6 percent-8 percent range, “consistent with our current model.”
However, he said that the deal is “positive for sports fans, [but] doesn’t mitigate our subscriber concerns.” He is concerned that “current pay TV subscribers who pay for but do not use ESPN (the most expensive cable network group at more than $5 per household a month) will move away from the service over time.” This could come through moving to lower-tiered cable packages that exclude ESPN and/or disconnection of traditional pay TV service, he said. “We expect this change to be gradual, but we view ESPN as most at risk given its high rates,” Morris said.
Morgan Stanley analyst Benjamin Swinburne took a different stance, arguing that the carriage deal “highlights the value of Disney’s broad programming portfolio — anchored by sports and broadcast networks — and the importance of multi-device access to that content for pay TV operators like Comcast.”
For Disney, this is the first agreement following its NFL Monday Night Football renewal and could become a template for future agreements “that ultimately will help Disney effectively monetize those rights,” Swinburne said.
He maintained his “overweight” rating on Disney’s stock “due in part to our view that affiliate revenue growth will accelerate as the company renews contracts with distributors in fiscal years 2012-2014.”
Wunderlich Securities analyst Matthew Harrigan highlighted that Comcast customers will now have the ability to watch ESPN online with the WatchESPN app for the first time, something that Time Warner and Verizon FiOS homes already have available. This could help keep subscribers glued to ESPN.
“The provision for expanded access improves the consumer proposition for higher sport network fees and likely neuters the notion of a stripped-down, no-sports tier at Comcast,” Harrigan said.
Comcast also benefits from the deal, analysts suggested. “Visibility into programming cost growth is a positive, while expanded rights (including on-demand and authenticated multi-device viewing) drive incremental value to subscribers,” Swinburne explained.
Barclays Capital analyst James Ratcliffe echoed that “the deal is an incremental positive for Comcast as it enables consumers to stay within the current pay TV model.”
But he also highlighted that the new carriage deal will still lock in content cost increases that have put pressure on pay TV operators. “Although financial terms were not disclosed, we believe the deal doesn’t break the trend in which programming costs have and are expected to continue to grow faster than video revenues, resulting in compressing video gross margins but stable video gross profit per sub,” he said.
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