I have a new opinion piece up on The Information, The Upfronts Model Isn’t Dead Yet.
I wrote about how even the networks concede that the upfronts model is essentially obsolete in an increasingly digitized ad marketplace. But presentations and handshake deals still answer questions for advertisers that algorithms cannot.
Applying the Disney Interactive Precedent to Comcast & EA
It shouldn’t be a surprise that legacy media companies like Comcast are looking to diversify their portfolio of digital businesses in this rapidly changing marketplace.
It is a surprise that Comcast was looking at a gaming company, and especially one as successful as Electronic Arts, Inc. And it isn’t a surprise to me that the proposed deal “ultimately fell apart within the last month due to disagreements over price and structure”, as Dylan Byers reported for Puck.
Why?
I think a description of why Disney failed with its efforts to bring gaming in-house applies:
Disney knows how to make movies, TV shows, and theme parks. The company also knows how to run media businesses, from ESPN to ABC to Pixar.
When it comes to video games, Tech Insider was repeatedly told that a lack of institutional knowledge kept the company from ever really investing. "There wasn't really much — if any — institutional knowledge regarding video games there" [former Disney Interactive senior VP and general manager Alex] Seropian said.
A "lack of institutional knowledge" is my concern for the future of WB Games under incoming Discovery management, and if Disney’s past is precedent, it would be my concern if EA ended up within Comcast, too.
There is clearly mutual interest in this moment. But how do we think about how they fit together given the rocky precedent?
It's worth taking the lessons from the Disney Interactive precedent to better understand what Comcast may be seeing, and not seeing, in seeking to acquire EA.
The Disney Interactive Precedent
A Business Insider piece on the shutdown of Disney Interactive offered an unusual amount of transparency into Disney’s operational and financial shortcomings:
"Any big company has a finance department, will have financial folks embedded in the product units, or business units will take the finances of the business very seriously, etc." Seropian said. "But I found at Microsoft that there was a little more of a focus on the product, at least from the business decision-making aspect, with a little bit more of, 'If we make the right thing the profits will come.'"
Not at Disney.
With film, TV, and other mediums where Disney already excels, the process of getting a project from idea to product was more streamlined, Seropian said. Disney knew how to predict the payoff of investment in those mediums. It couldn't do the same for video games, and that inability to predict success led to major problems in game development.
Specifically, it forced Disney to "make decisions with a little bit more of an eye towards the spreadsheet than towards the product," according to Seropian. "You can look at that in many different ways, but it's just a very different environment in which to make a tech product or a software product," he said.
There are three lessons here that are worth teasing out:
A Focus on Finances vs. A Focus on Product
Predicting Payoff of Investment in Gaming vs. Traditional Media
The PARQOR Hypothesis
1. A Focus on Finances vs. A Focus on Product
This point plays into a common theme of PARQOR mailings: media executives tend to be more risk averse than technology or software executives. The nuance here is that all executives tend to be constrained by the finances of the business, but executives focused on product development have more leeway with the “If we make the right thing the profits will come” logic.
Comcast is interesting because it’s not quite clear how EA would have fit into its broader business. Dylan Byers writes that EA “would have given NBCUniversal a significant stake in the gaming world. An acquisition of EA would also have created opportunities for synergies between NBCUniversal’s vast catalog of sports rights and Electronic Arts’ popular EA Sports franchise, including Madden.”
The implication here is that the acquisition of EA would have been strategic (putting a foot in the gaming world) and/or more product-oriented, finding synergies between sports rights and gaming.
The Disney Interactive precedent raises a question of whether Comcast’s operational culture is closer to Disney’s or Microsoft’s. The deal would have placed EA within Comcast’s Entertainment division NBCUniversal which is closer to Disney’s (more on that below).
Two of Comcast’s most prominent initiatives - Peacock and Xfinity software - are product development initiatives, and Peacock falls within NBCU. It is losing money quarterly on Peacock (a loss of $465MM on revenues of $472MM), and the software has had trial by fire in the marketplace. It is still subscale relative to the competition - 13MM paid subscribers and 28MM active accounts - but it is growing at a time when Netflix is flatlining.
NBCU is generally not a product development-oriented business - meaning no line items other than Peacock rely on the success or failure of product development - and it is objectively managed more towards the spreadsheet. But Peacock is an exception and one in which Comcast CEO Brian Roberts has had more direct involvement. That may imply the degree to which NBCUniversal is not a product development-oriented business (and also may reflect how Matt Strauss, Chairman of Direct-to-Consumer and International at NBCU, may need political support from Comcast management for his less spreadsheet-oriented, more entrepreneurial and product development-oriented initiatives in DTC).
Meanwhile, Comcast’s Cable Communications division is slowly rolling out the latter through partnerships with Cox and Charter and building its own Smart TV with manufacturer HiSense. That division seems to have a more product development-oriented business.
So, EA within Comcast would have ended up within a division less oriented towards product development and constrained more by the finances of the business. That said, Comcast management has demonstrated patience and savvy with product development in streaming and in broadband.
So, the answer to the question of how EA would have fit into Comcast is, it depends.
2. Predicting Payoff of Investment
I think it is worth noting that Comcast is assuming an unusual risk here due to the nature of the gaming business. As EA wrote in its most recent 10-Q financial report:
Competition in our business is intense. Many new products and services are regularly introduced, but only a relatively small number of products and associated services drive significant engagement and account for a significant portion of total revenue. Our competitors range from established interactive entertainment companies to emerging start-ups. In addition, the gaming, technology/internet, and entertainment industries have converged in recent years and larger, well-funded technology companies are pursuing and strengthening their interactive entertainment capabilities. We expect new competitors to continue to emerge throughout the world. If our competitors develop more successful and engaging products or services, offer competitive products or services at lower price points, or if we do not continue to develop consistently high-quality, well-received and engaging products and services, or if our marketing strategies are not innovative or fail to resonate with players, particularly during key selling periods, our revenue, margins, and profitability will decline.
It’s no secret that games is a hit-driven business. But so is NBCUniversal’s theatrical business. The difference in the two businesses is the ability to predict the payoff in investment. Theatrical has evolved towards managing risk across the supply chain for hit movies, while gaming requires a mix of larger and smaller investments with less predictability as to what will “hit” with audiences.
I wonder if this is the question which forced Comcast management to realize it wasn’t comfortable with the risk of owning EA. Because, ultimately, it doesn’t have “institutional knowledge” of gaming or of the gaming supply chain, and both contributed to sinking Disney’s past efforts in gaming.
That said, EA reported net cash of $1.9B for fiscal 2022. For Comcast, which accounts for free cash flow differently [1], that would be about $1.66B in net cash. Not a major difference, but $300MM less than appearances would suggest.
3. The PARQOR Hypothesis
In PARQOR Hypothesis terms, Comcast scores close to Disney. The PARQOR Hypothesis argues that the media businesses most likely to succeed in streaming and beyond must meet five attributes, and highlights any missing pieces they (arguably) may need to solve to optimally succeed. Disney meets all five of those attributes, and Comcast meets four of them:
❌ an Aspirational Brand
✅ Existing user base at scale
✅ Multiple Avenues to monetizing the same IP, and
✅ Daily value proposition (something new for fans to consume daily)
✅ Sales Channels: Online (digital) and offline (physical) commerce
It’s not clear how EA would have solved for an aspirational brand, as EA is not an aspirational brand in itself. Perhaps there were narrower opportunities around some of its titles, but if Byers’ reporting is accurate Comcast was seeking broader opportunities around sports, only. It’s an interesting debate as to if and how a sports brand is aspirational - one could argue all sports brands are aspirational, as one reader has suggested to me. Another is that F1 and FIFA are more aspirational for reasons related to inelastic ticket demand and global star power.
But, generally speaking, Comcast acquiring EA would not have put it in a position to be a better 21st century media business. In some ways that is a counter-intuitive conclusion: EA has over 580 million unique active accounts. So Comcast would expand its direct-to-consumer database perhaps by as much tenfold with an acquisition of EA, but it’s less clear how that database would plug into the NBCUniversal ecosystem.
It could deliver an enormous benefit to the Universal Theme Parks business: how many more potential visitors can it get spending a few hundred dollars per person with EA’s consumer database? Does it have the "institutional knowledge" to do so?
For this to all happen, Comcast would need to aspire to PARQOR Hypothesis-type outcomes (it doesn’t seem to) and would need to see EA’s value lying beyond its gaming business, only.
Initial reporting suggests that is not the case.
Conclusion: Activision with Microsoft & not Comcast
Byers reported that Brian Roberts wanted Activision, too. But Microsoft ended up acquiring it for $68.7B.
If the quotes above from former Disney Interactive senior VP and general manager Alex Seropian still hold true six years later - and I believe they do - Microsoft is a better fit for a gaming business like EA than Comcast. The simplest explanation is that it has “institutional knowledge” of both product development and gaming via its XBox division. Meaning, it will be less risk averse than Disney and presumably Comcast in running that business.
But, the other part of the Disney Interactive precedent is that Comcast may be better off partnering with EA around particular titles than owning EA outright. Then-CEO Bob Iger told investors on an earnings call, “We’re good at making movies and television shows and theme parks and cruise ships and the like, we’ve just never managed to demonstrate much skill on the publishing side of games.”
That led to Disney licensing its properties to outside developers and publishers instead of developing them in-house. Its Star Wars titles have generated more than $3B in revenues for EA, and even though Disney may not break out its gaming licensing revenues, whatever share it has is more profitable to Disney than had it kept Star War in-house.
That’s what makes the Comcast interest in EA so surprising. If Disney is its closest analogue in terms of its business structure, then Comcast is better off not owning a gaming company. It also better off simply duplicating Disney's gaming model for Universal IP, passing off the risk of product development and pocketing the profit.
Footnotes
[1] From its most recent earnings release: "We define Free Cash Flow as net cash provided by operating activities (as stated in our Consolidated Statement of Cash Flows) reduced by capital expenditures and cash paid for intangible assets."