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Telecom Companies May Have an Edge Over Cable

Comcast's controlling stake in NBC Universal will turn the cable company into a major content provider. But it still faces tough competition from telecom moves in the TV and broadband market.

Comcast CEO Brian Roberts finally closed his acquisition of a 51 percent controlling stake in NBC Universal from GE. The largest cable company spent 13 months winning approval from federal regulators, who were concerned that the company would emerge with an ability to overcharge rival distribution companies for NBC content such as Bravo, USA and E!

The deal fulfills a long-standing ambition for Roberts, who has been trying for years to turn the company into a major content provider. Comcast made an unsuccessful bid six years ago to acquire Disney. On Saturday, Roberts marked the closing of the NBC Universal deal by calling the new Comcast “the ideal entertainment and distribution company.” Comcast has moved to take management control of the new joint venture.

Comcast COO Steve Burke announced on Monday that he was giving up that title at Comcast to focus on his new role as CEO of Comcast Universal.

Now it’s up to Roberts to prove that his long-sought merger of content and distribution will live up to expectations. Comast will have considerable assets — NBC Universal’s content and theme parks, as well as 23 million cable customers and 17 million high speed Internet customers, a telecom offering and a business services unit. But he must overcome lingering skepticism among institutional investors, who largely opposed the effort to buy Disney.

“I question the Comcast move here,” says Dave Novesel, a fixed-income analyst with Gimme Credit, a research group in Chicago. Time Warner, Viacom and other distribution companies have tried to merge content and distribution in the past. “I am not sure they will be able to achieve synergies here. In a lot of ways, there are separate businesses. They have not really explained why they think they will be successful when their peers have not.”

Cable’s pursuit of content stands in stark contrast to the strategy of telecom companies such as Verizon and AT&T, which have expanded distribution to high speed Internet access and TV, but have avoided ownership of content. DirecTV also has avoided ownership of content, preferring to distinguish its offering by striking commercial agreements for exclusive sports programming.

Novosel rates Time Warner Cable and Comcast a “sell,” but has a “buy” on the debt of telecom companies AT&T and Verizon. He says that the core operations of Time Warner Cable and Comcast actually are doing well, but questions their potential from an investment perspective.

On one level, Comcast may view NBC Universal simply as an attractive business investment. It acquired control of NBC Universal at a low point in the market, when advertising revenue was down and valuations had dropped. The advertising market is picking up now. But Novosel says those gains might not last more than a few quarters.

Comcast and Time Warner Cable already have relatively high leverage levels — about 2.7 times EBITDA in the case of Comcast, and 3.25 times in the cast of Time Warner Cable. AT&T and Verizon have leverage levels in the 1.6 percent range. Novosel says Comcast’s leverage level has the potential to go higher, should the company attempt to buy the GE’s 49 percent stake in NBC Universal.

The cable companies also face increasing competition from DirecTV on one side and the telecom companies on the other. AT&T expects its high-speed Internet and TV offerings to turn profitable on an EBITDA basis some time in 2011 and Novosel says the profit picture for Verizon “is similar.” Both companies are taking share in the TV and broadband markets. He says Verizon can achieve a 35 percent share and that a 30 percent share for AT&T is doable.

And Novosel says there be “some support” for claims that Verizon’s high-speed fiber network has an edge over rivals when it comes to picture quality.

Comcast and Roberts finally have what they want — a major content and media business. In theory, there should be synergies between the content and the cable unit, which provide the cost benefits of in-house distribution. And the high-speed Internet business can help Comcast develop an online distribution channel for content sent to computers, smart phones, tablets and other devices, as media consumption moves beyond the TV.

It’s certainly possible for Comcast to make that model work. There is a first time for everything.

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