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Comcast shines again in Starz! deal

Mon, 09/22/2003 - 8:00pm
Staff

Copyright 2003 TheStreet.com, Inc.

TheStreet.com

September 23, 2003 Tuesday 12:30 PM Eastern Time

Comcast (CMCSA:Nasdaq) said Tuesday that it reached a "win-win" resolution of its lawsuit against a unit of John Malone's Liberty Media (L:NYSE).

That's a laugh.

In fact, the agreement announced Tuesday between Comcast and the Starz Encore Group movie programming service represents a clear victory for the cable operator — one that was foreshadowed by Liberty's downward revision of financial guidance earlier this month. The disclosed terms of the settlement emphasize once more the awesome power wielded by Comcast now that it is the nation's largest operator of cable TV systems.

Following the announcement of the lawsuit's settlement and a new agreement between Comcast and Liberty, Comcast shares rose 54 cents to $31.10 Monday, while Liberty's shares fell 11 cents to $10.39.

At issue in the lawsuit — which Comcast filed within a day of its acquisition of AT&T's (T:NYSE) cable systems last November — are programming agreements that Liberty reached in 1997 with its then-parent, Tele-Communications Inc., a cable company controlled by Malone. AT&T inherited the programming agreements when it purchased TCI, and Comcast inherited the agreements when it bought the AT&T systems.

That agreement between Liberty and its parent, TCI, was unusual in two major respects, according to one cable industry veteran: It had a 25-year term, when programmers would be fortunate to reach a 10-year agreement. And it guaranteed that the cable operator would pay Liberty a fixed amount per year to carry Starz Encore, though most cable programming agreements are structured on a per-subscriber basis. Under the terms of the agreement, Starz Encore was also able to pass along programming cost increases to TCI.

AT&T, which acquired TCI after the TCI-Starz Encore deal was reached, began complaining about the terms of the agreement in 2001, but the dispute remained unsettled when Comcast bought the AT&T systems.

Under the terms of the agreement announced Tuesday, Comcast will pay for Starz Encore services on a per-subscriber basis rather than a flat fee, and there is no provision for the pass-through of additional programming costs. The companies didn't disclose exactly how long the new agreement would last, though they called it "multiyear."

Under the terms of the new agreement, Comcast will also distribute Starz and Encore subscription video-on-demand services and will transmit the new high-definition version of Starz.

Financial details of the agreement weren't disclosed, but Liberty has already been hurt by the Comcast dispute. Liberty, in its 2002 annual report earlier this year, noted that Comcast was paying for Starz Encore carriage on the former AT&T systems using the cheaper pricing formula that applied to Comcast's previously owned systems. Liberty also said that Comcast "have limited their cooperation with Starz Encore on various matters, including, for example, promotion of Starz Encore's channels."

Citing the Comcast dispute, Liberty lowered financial forecasts earlier this month, sending its stock tumbling.

In a note Tuesday, Merrill Lynch analyst Jessica Reif Cohen called the deal "a big win" for Comcast, one that reflects "in part Comcast's newfound clout as the nation's biggest distributor of television programming."

In comparison with the terms of the old AT&T deal, Cohen estimates, Comcast will save $100 million in 2003 and $200 million in 2004. But because Comcast had already cut the amount it was paying to Liberty, she says she isn't revising any estimates for Comcast's earnings before interest, taxes, depreciation and amortization. Cohen has a buy rating on both Comcast and Liberty; her firm has done banking for both companies, and she or an associated analyst holds stock in each company.

In a sign of the tangled web of interests in the media and entertainment industries, Liberty only recently purchased Comcast's interest in the QVC home shopping channel, which the two companies had owned jointly. Comcast is also involved in a separate dispute with billing system provider CSG Systems (CSGS:Nasdaq) over another 1997 contract signed by TCI — a contract inherited, in turn, by AT&T and Comcast.

In a move similar to the filing of the Starz Encore suit, Comcast took CSG to court soon after the AT&T Broadband deal closed last fall.

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