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The Upcoming Walt Disney-Google War

Dana Blankenhorn|Contributor
Tuesday, 19 Jun 2012 | 1:02 PM ET
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While most people are focusing on battles between technology companies or between entertainment companies, a more important skirmish is shaping up between Walt Disney, the leading entertainment company, and Google, the biggest Internet search firm.

While most people think of Disney in terms of movies and theme parks, the big driver of its revenue over the past several years has been sports, specifically ESPN. The company has a tight relationship with cable operators such as Comcast (parent of CNBC and CNBC.com), with escalating rights fees allowing the cable operator to keep raising its prices.

Analysis firm SNL Kagan estimates cable subscribers now pay $4.69 a month for ESPN alone. That doesn’t count ESPN2, ESPNU, ESPN Desportes, ESPNClassic, or ESPNews. Captive cable subscribers have allowed ESPN to buy rights to all sorts of sports it doesn’t have room for on these channels. These often go to ESPN3, a website that also charges cable Internet subscribers a monthly fee for carriage — whether or not subscribers want sports at all. The Wall Street Journal has estimated 40 percent of cable bills go to sports, primarily ESPN.

Meanwhile, Google’s YouTube unit is exploring the possibility of charging for content. Just as the Department of Justice starts looking at how cable companies (like Comcast) may be hampering the online video sector, YouTube is talking up the idea of fees for “channels” — read cable channels — so consumers can buy what they want, rather than what their cable operator decides is “basic.”

What I find most interesting about this is that Google is about five years behind rivals such as Netflix in terms of bringing content closer to customers. The company has long offered partial versions of itself, delivered in boxes ranging from briefcase-sized to railcar-sized, that can be mounted at business customer sites or in phone company offices, turning most Internet requests into local calls.

Individual shows, even whole channels, can be brought close to the consumer in this way. Google could even push subscribed content to customer DVRs at night, when lines are less busy, actually reducing what ISPs use as an excuse for charging per-bit for Internet services. (The problem isn’t the bits themselves, but the way lots of requests at the same time can cause bottlenecks, as on freeways during rush-hour.)

In other words, Google has the technology to make the threat of unbundling real, and to make ISP’s political arguments against Web video crumble into dust.

If you’re a sports nut, like I am, this is no big deal. Guys want their games, and we’ll pay for them. But not even all guys are “guys.” If your taste runs to channels like AMC, Turner Classic Movies, or any other set of entertainment choices, Google should be able to give you many such offerings for a fraction of what you’re now paying for cable, because of those ESPN rights fees. It could even pay these cable networks more, per subscriber, than cable operators can afford. (If it comes to a bidding war, Comcast is going to dump Lifetime and OWN well ahead of ESPN. Sorry, ladies.)

YouTube is already scoring solid gains from its own video investments. It put $35 million into one non-cable network, Machinima, just last month.

Sports will continue to drive cable bills higher. As individual teams, even colleges like the University of Texas, get their own basic cable channels, bills are going to go up. So the cost advantage for non-sports viewers Google now enjoys is also going to go up. The incentive for existing cable channels to do business with Google is also going to go up.

Disney, as the largest TV sports operator in the business, is in Google’s crosshairs.

—By TheStreet.com Contributor Dana Blankenhorn

Additional News: Cramer’s 6 in 60 Seconds: Walt Disney

Additional Views: Is It Too Late to Get in on This Bullish Disney Bet?

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Disclosures:

TheStreet’s editorial policy prohibits staff editors, reporters, and analysts from holding positions in any individual stocks. Dana Blankenhorn owns shares of Google.

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