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Disney to buy Starwave

The Walt Disney Company exercises its option to buy technology investor Paul Allen's remaining interest in Starwave.

The Walt Disney Company has exercised its option to buy technology investor Paul Allen's remaining interest in Starwave, Disney chief executive Michael Eisner said today.

As reported by CNET's NEWS.COM, Starwave had scheduled a special company-wide meeting tomorrow, fueling speculation that a deal was in the works. Industry analysts had said that the announcement of a Disney-Starwave deal was imminent. The news was not expected until Friday or Monday, however.

"The addition of Starwave's demonstrated talents, expertise, and technological resources strengthens our ability to reach more people everywhere through a medium already powerful though still in its infancy," Eisner said in a statement. "It positions us to take advantage of the Internet's potential."

Terms of the deal were not disclosed.

Last April, Disney purchased a significant equity stake in Starwave, along with an option to buy the rest of the company during the next five years. Starwave also partnered with and ESPNet SportsZone to form ventures that produce original interactive programming in sports, news, and entertainment to millions of online consumers. Last year's deal called for Disney to assume operating control of Starwave.

"We've had a fabulous year since we acquired that initial interest," said Jake Winebaum, chairman of the Buena Vista Internet Group, Disney's online media arm. "And we felt that the sooner we made it one company, the better."

Disney's desire to exercise its option to buy the rest of Starwave in only one year instead of five years also stems from its desire to rapidly expand its Internet presence and leverage its powerful brand name against the likes of MSNBC, America Online, Time Warner, Viacom, and others, analysts said.

The competition is mounting, however. MSNBC, the cable television alliance of NBC and Microsoft, bills itself as "the only news organization to embrace three media technologies--broadcast, cable, and the Internet." Time Warner is marrying cable TV and the Net by joining CNN with Sports Illustrated to create CNN/SI, a 24-hour sports news network.

In a speech Tuesday night, Disney chief Eisner said the company plans to aggressively compete on the Internet. Eisner's comments--among his most detailed to date on Disney's Internet strategy--were a sign of the media and entertainment giant's increasing commitment to the Web, as well as to television, publishing, and movies.

According to published reports, Eisner also said Disney is planning to create an Internet "portal" to feature news, sports, and children's content.

Starwave will be folded into Buena Vista and, during the next year, the company's staff will work to create a single software platform that will serve both Disney's and Starwave's Internet sites, Starwave president and chief technology officer Patrick Naughton said.

In addition, Buena Vista will expand beyond news, information, and entertainment, and focus more of its efforts on e-commerce.

"Our challenge is to be as nimble and focused as the rest of our competitors," Naughton added.

Disney will retain key members of Starwave's senior management. Starwave chairman and CEO Mike Slade will become president of Disney's Buena Vista Internet Group, and Naughton will become Buena Vista's chief technology officer.

In recent weeks, speculation had intensified that Disney was negotiating to buy the remaining stake, a deal that would bring Starwave's workforce into its fold.

A memo emailed to CNET's NEWS.COM discussed the company meeting tomorrow. "Please clear your calendars for an 'All Starwave' company meeting May 1," read the memo, which listed Starwave president Naughton as the author. "This is the presentation that you've all been waiting for. We're very excited about the progress we've made in the last few months, and will share all of the details with you at this meeting."

The memo added that the afternoon meeting would last for about two hours. Another meeting is scheduled in New York on Tuesday for the company's Manhattan and Bristol, Connecticut, workers, it stated.

Analysts had speculated that the Disney deal was right around the corner.

"They have all their production eggs in one basket, and it only makes sense to own the basket," said David Simons, managing director of Digital Video Investments. "They can't afford anything other than to have absolute control."

Kate Delhagen, an analyst with Forrester Research, agreed: "It makes total sense. Disney has a history of owning rather than outsourcing."

Since its buyout of ABC/Capital Cities, Disney has added now-popular Web sites for ABC and ESPN to its empire. Disney also operates a subscription-based online service for children, dubbed Daily Blast. Its strategy has been to increasingly cross-promote its editorial content and to centralize its management.

A private company founded in 1993 by Allen, Starwave had been jointly owned by Disney and Microsoft cofounder and technology investor Allen. Besides the Disney sites, Starwave also produces others, such as Mr. Showbiz, and sites for the National Basketball Association and the National Football League.

When Disney bought a stake in Starwave last April, neither company disclosed the size of the stake or the amount paid. Analysts estimate that it was a one-third share worth $100 million, making an outright purchase potentially worth hundreds of millions of dollars.

Earlier this month, Allen announced a deal to buy all the limited partnership interests of Marcus Cable, the nation's tenth-largest cable operator, for $2.775 billion--joining fellow Microsoft cofounder Bill Gates in making a cable TV investment.

One analyst speculated that the potential for Disney, through Starwave, to provide interactive programming to Marcus Cable might be a future possibility. Allen has been a big proponent of the "wired world," which he thinks will transform information, entertainment, and communication.

Allen is an investor in CNET: The Computer Network, publisher of NEWS.COM.

Jim Hu and Dan Goodin contributed to this report.