Many consumers associate Comcast (NASDAQ: CMCSA) with cable and Internet, but it’s rapidly becoming a media giant. The company has made a number of moves in recent years to diversify its business into entertainment, such as its $16 billion deal in 2013 to buy the remainder of NBCUniversal it didn’t already own.
At the time, the rationale was clear. The “cord-cutting” phenomenon is very real, and it’s causing cable companies like Comcast a great deal of distress. Consumers are rapidly ditching high-priced cable packages in favor of streaming options such as Netflix (NASDAQ: NFLX) and Hulu, as well as cheaper “skinny bundles.”
As a result, Comcast knew it had to be nimble to stay on top, and it decided a major push into entertainment was the best way to do it. Hence the recent announcement that it is paying $3.8 billion to acquire DreamWorks Animation (NASDAQ: DWA).
Why This Media Merger Makes Perfect Sense
Comcast deserves a lot of credit for seeing the writing on the wall of the cable and Internet communications industry. Consumers simply don’t want to pay high prices for a huge lineup of channels, 80% to 90% of which they don’t even watch.
In this day and age, it’s all about on-demand content. The reason why consumers have flocked to Netflix in lieu of traditional cable packages is because it’s far cheaper, and it allows viewers to watch content on their own schedule. Netflix gave rise to the binge trend.
While cable companies suffer from falling subscribers, Comcast is pursuing entertainment in a way that will make it less vulnerable to cord-cutting. Even if consumers want to go streaming-only, they still need Internet access, which Comcast provides. Or, if consumers want to go for skinny bundles – in which they pick among a smaller group of networks for $20 or so per month – Comcast is ensuring it won’t be frozen out.
That’s because Comcast, through NBCUniversal, owns the flagship NBC network, which comes with a number of valuable television and sports properties. In addition, buying NBCUniversal gave Comcast a movie studio and a theme parks and resorts business.
Buying DreamWorks is the natural next step in the process, because DreamWorks gives Comcast entry into the one remaining area of entertainment it doesn’t have: animation.
What DreamWorks Can Do for Comcast
Buying DreamWorks puts Comcast on much more even footing with The Walt Disney Co. (NYSE: DIS), which owns major television networks – including ESPN and ABC – as well as theme parks and a movie studio. It has enjoyed tremendous success with its movie studio, largely due to animation studio Pixar, which it bought in 2006 for $7 billion.
Disney’s movie studio is a behemoth. It generated $7.3 billion of sales last year, and is poised to do even better in 2016. In the first quarter, movie studio revenue soared 86% year-over-year, thanks to the smashing success of “Star Wars: The Force Awakens.”
Comcast’s own movie studio hasn’t kept pace with Disney recently. Revenue in its filmed entertainment business fell 4% in the first quarter of 2016.
Disney has had hit after hit: its latest juggernaut, “The Jungle Book,” has dominated the box office since its debut on April 15. In its first three weeks, it has raked in just under $687 million in combined domestic and international box-office sales.
Buying DreamWorks gives Comcast’s movie studio a much-needed boost in a critical area. Animated movies are often massive hits. And DreamWorks has had its own share of success in movies, with hit film titles such as “Shrek” and “Kung Fu Panda.”
Too Steep a Price?
On the surface, a $3.8 billion price tag looks too steep. It’s more than four times DreamWorks’ trailing 12-month revenue, and it’s about as much as Disney paid for Lucasfilm, creator of the “Star Wars” franchise.
But for a massive company like Comcast, it’s not a hard pill to swallow. At the end of last quarter, Comcast held $5.6 billion in cash on its balance sheet, and another $3.6 billion in long-term investments. With interest rates still stuck near zero, this money is doing nothing for shareholders and is burning a hole in Comcast’s pockets.
Comcast has money to spend, and it has proven that it has every intention of putting it to work to keep the company at the top of the ever-changing media and entertainment business. Buying DreamWorks makes perfect sense.
DISCLOSURE: Bob Ciura personally owns shares of The Walt Disney Co. (NYSE: DIS).
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