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Disney deal lacks 'pipes'
July 23, 2001: 3:45 p.m. ET

Magic kingdom buys Fox Family but needs distribution, analysts say
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NEW YORK (CNNfn) - Walt Disney's Co.'s $3 billion cash purchase of Fox Family expands Disney's content, but the magic kingdom is facing pressure to ramp up its distribution, analysts said.

Disney's purchase of Fox Family Worldwide will give it a cable network that reaches about 81 million cable and satellite television subscribers in the United States. The purchase also will make it Disney's second most-viewed cable station and give the media firm a strong cable platform for its broadcast and other family-oriented content.

At the outset, the purchase sets up a fight for the coveted family market, which generates about $2 billion a year in advertising revenue.

Nickelodeon, which offers kids' programming during the day and then family shows at night, generates $1 billion in ad revenue a year, half of the market, analyst Jordan Rohan of Wit SoundView said.

However, Viacom's Nickelodeon is feeling the pinch from AOL Time Warner's Cartoon Network.

"If Disney adds additional pressure, giving itself more ad money targeting kids and family, this could create a three-way battle between AOL, Viacom and Disney," he said.

Content but little pipes

While the Fox Family purchase gives Disney content, the transaction doesn't give it a "pure" distribution outlet that will help it compete against its much bigger rivals like AOL Time Warner.

AOL (AOL: down $1.31 to $43.00, Research, Estimates), which is parent of, has both "pipes and distribution." Its cable unit, Time Warner, is second to AT&T Broadband in number of subscribers, and AOL reaches 30 million households through its online unit while also offering content via Home Box Office, CNN, and its film and music divisions.

News Corp., which has both networks and access, presents another threat to Disney. Rupert Murdoch's News Corp. (NWS: up $0.67 to $36.17, Research, Estimates) is in talks to acquire Hughes Electronics from majority shareholder General Motors Corp. (GM: down $1.75 to $63.25, Research, Estimates).

Hughes owns DirecTV, the No.1 satellite-television broadcaster, which has 10 million subscribers. Murdoch hopes to combine DirecTV with his own Sky Global Networks, the world's largest satellite television company, and create a $50 billion satellite company.

News Corp. which sold Fox Family to Disney, already owns Fox Broadcasting Co. The Hughes purchase is an attempt by Murdoch to create the world's largest satellite system, giving it both networks and access.

Disney didn't get the pipes it needs with the Fox Family purchase, analysts said.

"The [deal] is not effectively the same as distribution," said John Frelinghuysen, vice president of Booz Allen & Co. "But this is another way they can ensure that their product gets in front of eyeballs."

Unlike AOL, which can ensure how its shows are placed, Disney will not be able to guarantee that their channels get top priority in front of consumers, Frelinghuysen said.

Disney would serve itself well if it began searching for some distribution assets, analyst Spencer Wang of ABN Amro said.

"Disney is purely a content play, excluding TV stations," Wang said.

Disney has enough "must have" content, like ESPN, Toon Disney and Lifetime, to influence its positioning but it doesn't control its own destiny, Wit SoundView's Rohan said.

"They still needs to negotiate on distribution," he said. "But if they program their channels well, then viewers will demand their programming."

The most obvious acquisition for Disney would be AT&T Broadband, the largest cable TV operator, with about 16 million customers. AT&T Corp. (T: down $0.85 to $20.05, Research, Estimates) rejected Comcast's unsolicited $44 billion bid to buy the unit but is looking at other offers.

News Corp. is close to clinching a deal for DirecTV which leaves EchoStar, which is apparently out of the running for DirecTV. News Corp. also is awaiting final regulatory approval for its $5.4 billion purchase of 10 television stations owned by Chris-Craft Industries Inc. (CCN: up $0.65 to $70.15, Research, Estimates).

But Disney doesn't need to buy AT&T Broadband or any cable unit immediately, analysts said.

"[It] makes more financial sense for Disney to do substantial but smaller acquisitions," Rohan said. graphic


Disney buys Fox Family for $3B - July 23, 2001

FCC set to approve Fox's $5.4 billion buy of Chris-Craft - July 20, 2001

AT&T rejects Comcast Bid - July 18, 2001