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Has Comcast bet against technology?

IN FORGING HIS media empire Rupert Murdoch never worried much about whether he was spending too much money. He thought it mattered more what businesses he was building. Such as, in 1989, a cash-haemorrhaging satellite broadcaster in Britain called Sky Television. Decades later Brian Roberts, chief executive of Comcast, an American pay-TV giant, proved Mr Murdoch right again. In October he completed a deal to buy Sky, a successor to Sky Television, for £30.6bn ($40bn).

Mr Roberts is also testing the wisdom of profligate spending with his deal. In buying Sky he is taking Comcast into Britain, Italy and Germany, adding 24m customers and $20bn a year in revenue (including Sky, Comcast has a total of 54m customers and $110bn in annual revenues). Critics say he massively overpaid for an antiquated technology at a time when internet video is the future. Four months on Mr Roberts has not articulated a grand strategy for the purchase. Comcast’s shares are trading at over 10% below what even some bears think is their fair value.

Investors may be discounting Mr Roberts too steeply. He has a similar record to Mr Murdoch of striking expensive deals that later look astute. First, he made a modest regional cable business he took over from his father, Ralph, into a media behemoth. In 2002 Comcast took over AT&T’s broadband business and improved its margins. Then came his acquisition of NBCUniversal, a TV network and film studio, at a valuation of $30bn, which some analysts found laughably high. Now it could not be had for twice that price.

Mr Roberts has bought Sky for a hefty premium over what Sky’s management team recently deemed it to be worth: in December 2016 they agreed to sell to Mr Murdoch’s Fox, a minority stakeholder, for £10.75 a share. Comcast paid £17.28, about 10% more than the final bid from Fox (which was backed by Disney, which is acquiring much of Fox). Yet Mr Roberts has become even more confident that his purchase of Sky is a good decision. “I believe we have more long-term opportunities than we originally conceived,” he says.

The bears think Mr Roberts is wrong for several reasons. The most obvious is the continuing ascent of Netflix, which gives customers in Europe a cheaper option for TV and films; in Britain, for example, Netflix has about as many customers—close to 10m—as Sky has satellite customers. Yet unlike in America, Europe’s pay-TV market has room to grow even as Netflix expands. Just one in three homes in Sky’s markets has pay-TV, compared with nearly 80% in America. Italy and Germany are growth markets. Pay-TV is also much less expensive in Europe. New Street Research, a research firm, predicts Sky will add 2.6m of the 78m available homes by 2023.

Another reason for wariness is that Sky could lose much of its best content, making it harder to add pay-TV customers. That is because AT&T, owner of HBO and Warner Bros, and Disney could pull their films and TV shows by 2021 as they launch their own mini-Netflixes—or because Comcast is a competitor. But that understates the value to those firms of Sky’s distribution platform, argues Claire Enders of Enders Analysis in London. From it they can sell their new services to 24m customers.

Comcast also has leverage for its negotiations with Disney in the shape of its 30% stake in Hulu, an internet-video service with 25m subscribers. Disney will own 60% of Hulu after its Fox deal closes, and may want Comcast out. If Sky loses valuable content licences, it will invest more in original European productions to attract subscribers. It can also count on content from Comcast’s subsidiary, NBCUniversal.

As for Sky’s main technology, to some analysts Comcast’s purchase resembles AT&T’s acquisition in 2015 of DirecTV, a satellite provider in America (also formerly owned by Mr Murdoch) that has lost nearly 2m of its 21m customers in less than two years. Sky has been losing satellite customers in Britain (see chart). Craig Moffett of MoffettNathanson, a research firm in New York, argues that Sky will be a write-off within a decade. He says that it represents a massive bet against advancing technology.

But that understates Sky’s investments in tech beyond the satellite kind, and its diversification under Jeremy Darroch, its boss, and James Murdoch, its former chairman. Sky is a leading seller of broadband in Britain, despite having to pay BT, a competitor, for the “last mile” of connection to the home. Its business is estimated to have gross margins of 50%. Sky also built Now TV, an internet-video service that gives users customised options. NBCUniversal will incorporate technology from Now TV into an ad-supported video service that Comcast will distribute free of charge to its pay-TV customers in America and Europe.

Last but not least, Comcast-watchers worry about football. Sky has top-flight football rights, such as the Premier League in Britain, a huge draw for customers. But these are put up for sale every three years, and would become more expensive if a new competitor, like Amazon or Facebook, bid. Yet the tech giants have yet to show real interest in sports rights, and it may be years before they can reliably deliver live events to millions of viewers concurrently. Britain is short on high-speed fibre connections. Mr Darroch says if he tried to deliver Sky Sports entirely over Britain’s broadband infrastructure, “it would simply crash”.

It would be a more exciting gamble if Comcast took on Netflix directly in its markets. But Comcast wins in more boring ways. Chasing Netflix is “a fool’s game”, says Barry Diller, boss of IAC/InterActiveCorp, a media and internet firm in New York. Mr Roberts is ambitious, Mr Diller adds, but he is no fool.

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