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Published: October 5, 2009 at 08:17 AM GMT
Last Updated: October 5, 2009 at 08:17 AM GMT
The proposed deal that could merge NBC Universal with Comcast's entertainment properties, creating a new entity, has been met with pessimism on Wall Street even though there are significant synergies that make the combination a compelling one. A preliminary analysis of the challenges, potential conflicts and opportunities conducted by Jack Myers Media Business Report suggests a generally positive prognosis for the long-term overall economic viability of the potential venture. In this week's report, I share my observations about the emerging Comcast and NBC Universal relationship and answer six questions:
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Jack Myers Media Business Report Economic Analysis:
Proposed joint venture deal being discussed by Comcast, GE and NBC Universal.
Question #1: Is the deal likely to happen?
On a scale of one to ten, I give this deal's chances a seven, primarily because Comcast is, at best, a secondary player in content and GE wants to exit the network and entertainment business. While the obstacles are significant they are surmountable. There are regulatory issues that could derail the deal, but probably not. Vivendi's current stake in NBCU must be worked out to that company's satisfaction. It's highly possible another potential suitor or suitors will throw their hat/s into the ring, although it's very difficult to identify as natural and complementary a partner for GE. At this point, I doubt Time Warner has the appetite although NBCU would be the perfect complement to a restructured Time Warner -- post AOL spin-out and after a divestiture of the Time Inc. magazine group. It's premature, but CEO Jeffrey Bewkes could decide to show his hand early and make a bid. For GE, however, Comcast is a much more attractive and likely suitor, and I expect Wall Street's attitude will become more positive as analysts realize the deal's positive aspects.
Investment groups such as Elevation Partners, Providence and Thomas H. Lee Partners would probably love to jump into the fray, but they offer none of the value added contributions that make a Comcast partnership so attractive to General Electric. And with the media marketplace at its most depressed state in history with the economic future of the industry questionable at best, neither the obvious investment companies nor established media companies are in a position to take on the myriad businesses that come with NBCU. Barry Diller no longer has the appetite and the few ego-driven media moguls still out there no longer have the power base to mount a challenge to Comcast. Cablevision might be inclined to explore its options but does not have the financial leverage or the chops. NBC acquired Bravo from Cablevision and Cablevision's content assets (AMC, WE, Fuse) would be an interesting supplement to Comcast's and NBCU's.
The dark horse is, as always, Google. But Google would be required to pay a substantial cash premium, has no assets to contribute to a joint venture and would approach it as an acquisition (which has tax consequences), would offer little in the way of value-add enhancements, and for Google it would be a high risk forced entry into the traditional media universe. Google and NBC-TV have worked together to advance Google's TV marketplace initiative but success has been limited and Google's new management does not appear to have as strong a commitment to traditional media expansion as the former team. With a bid for NBCU, Google would likely see its stock price tumble.
NBCU's ownership of broadcast stations take international players out of the mix, and with GE looking to exit the business because entertainment does not fit in with its core strategy, it's unlikely other non-media companies would find a deal attractive. At one time, nearly two decades ago, General Motors considered purchasing one of the major broadcast networks. That idea today is laughable. The only companies that ever entertained similar fantasies were Anheuser-Busch and Coca-Cola. A-B couldn't even successfully launch its own online media venture and is now owned by a Belgium-based company. Coca-Cola would probably be an excellent partner and has proven to be adept at media-related and entertainment focused businesses. But the odds on the company departing from its core business are nil.
From a Wall Street perspective, both GE and Comcast gain by shedding advertising dependent content businesses and focusing on core assets. Assuming the government does not stand in the way, which it should not, this relationship has more positives than negatives. While the eventual structure of the deal is likely to change, a Comcast and NBCU joint venture is very promising.
Question #2: What is the future of NBC's owned and operated television stations?
NBC could be forced by regulatory oversight to spin out the TV O&O's in markets where there is overlap with Comcast cable systems and NBCU could decide to sell off the full radio and TV group, or spin the owned stations out into their own separate company. Broadcast station valuations are at a low ebb with no rebound in sight (although in 2010 and 2012 local TV and radio stations should see positive ad revenue growth due to political spending). Part of any deal to sell the stations should be long-term agreements from Comcast for retransmission payments; local news and programming collaboration; local ad sales combinations; digital multicast signal distribution; technology pass-through for telescoping, instant ordering, versioning, voting and other interactive features; plus economic support for advanced mobile applications.
The challenge will be finding a value-added buyer for a station group since the local broadcast station business is depressed and most of the obvious players are already over-leveraged. Hearst Argyle could emerge as a viable candidate for the TV stations and NBC's existing relationships with Hearst through its participation in the A&E/Lifetime ownership trifecta (with Disney/ABC) makes an expanded relationship possible. With the right deal, the stations could be an attractive target for equity investment groups, and a collaborative effort such as the one that acquired Univision could emerge to support the deal.
Question #3: Who are the programming winners and losers?
The single biggest question mark will be how Jack Donaghy (Alec Baldwin) responds on 30 Rock, and if that series adopts the story line. It certainly impacts Jack's future at GE!At Comcast's flagship E! Entertainment Television, president Ted Harbert has never been given the financial support to build a truly competitive network, although working with limited assets he has created a profitable enterprise. Comcast's E! and Style, along with the Daily Candy online venture acquired for a reported $125 million from Bob Pittman's Pilot Group, would fit neatly into Lauren Zalaznick's portfolio that includes Bravo and iVillage.
Clearly, NBC Universal's strength is content and NBC would emerge as the dominant player in content management, online development and programming investments. NBC's programming troika of Jeff Gaspin (chairman of NBC Universal Television Entertainment), Bonnie Hammer (USA, Syfy), and Zalaznick clearly will remain in charge, but since they are somewhat more East Coast centric, Harbert could emerge with more influence and opportunity than might be expected if he agrees to a new reporting structure and development responsibility.
Comcast's Versus Network, Golf Network and local sports programming services could easily merge into NBC Sports under Dick Ebersol, and would give NBC an expanded sports portfolio to better program and monetize future Olympics coverage and make NBCU more competitive in future bidding for major sports rights. As USA Network has extracted itself from U.S. Open Tennis coverage and other sports content, Versus would fill a current NBCU vacuum.
For NBCU's Telemundo, the Comcast relationship is a home run, giving the network a significant distribution advantage and potential funding support. Comcast would be expected to leverage Telemundo to increase its own presence, competitiveness and role in the Hispanic community.
It's unlikely that either CNBCor MSNBC will be significantly impacted in the short-term, although local cable affiliations could generate expanded local content opportunities for both if the joint venture decided to invest more aggressively in the news assets. With Comcast involvement, there could be a more aggressive combination of NBCU's broadcast and cable news assets.
NBC Universal also brings into the joint venture investments in A&E, Lifetime, The Weather Channel and their respective siblings. The opportunity to quietly expand their presence and value through the Comcast relationship is significant.
The Universal Studio, headed by Ron Meyer, and theme park business could be enhanced with the distribution and promotional juggernaut that Comcast could provide. In addition to promotional support, Comcast has the ability to enhance DVD sales and film aftermarket distribution through its pay-per-view and VOD platforms. In the long-term, however, this division can be expected to be either sold off or expanded through acquisitions.
Question #4: Who runs ad sales?
NBCU's chief ad revenue officer Mike Pilot joined NBC from General Electric more than two years ago, and observers tell me he can be expected to return to the GE fold. If Pilot stays, he would be the best choice to lead the ad sales group in order to avoid inevitable leadership conflicts. Day-to-day sales operations at NBC-TV Network are managed by Marianne Gambelli and Ed Swindler, two of the network TV community's most respected sales leaders. At Comcast, Dave Cassaro has added online responsibility to his oversight of the network ad sales operations and has a well-liked and experienced sales team in place. Cassaro spent his formative years at CBS-TV network sales, but NBC also has a strong team running its own cable entertainment ad sales group. It's unclear who would emerge, but Cassaro is a favorite of Comcast's Steve Burke and Brian Roberts. Also at Comcast, local and regional ad sales head Charlie Thurston has done a consistently strong job and could factor into the organizational model. Advertising sales is becoming an increasingly complex and sophisticated business, and NBC has been at the forefront in exploring innovative new technology-based models as well as research initiatives under research chief Alan Wurtzel. Traditional dependence on relationships and outdated supply/demand formulas cannot be expected to deliver for the new Comcast/NBCU venture the ad revenues that the company will require.
Question #5: What happens to Hulu, Canoe Ventures and Online Initiatives?
The combination of content with multi-platform distribution represents the type of integrated "Michael Milken" vision that led to the creation of the modern media industry – an industry that is in the throes of an economic recession and dramatic restructuring. This venture would most likely to be the last great media conglomerate created in that model and, in that context, is a throw-back. Yet it's also a good time for the creation of a content-focused business with ties to the nation's largest content distribution company.
Whether Comcast embraces Hulu and Jeffrey Bewkes' TV Everywhere model remains to be seen, but Comcast and this new venture will have a low threshold for throwing money into businesses that offer little long-term return. Hulu is the best of the online video content distributors, by far. Its revenue model is questionable, however, and with Disney now joining NBC and Fox, it will need to validate that the investment can pay off sooner rather than later. The good news is that Comcast understands the importance of distribution, and can be expected to throw as much weight as it possibly can into supporting Hulu. This deal is good news for Hulu and its partners.
Canoe Ventures is still struggling to identify its role in the industry. With the opportunity to gain support from NBC-TV and the NBCU cable networks, Canoe can be more assertive in pushing a clear interactive TV agenda. David Verklin and his team need to more clearly define the organization's role and vision, prove they can coalesce multiple cable operator partners around true implementation of its vision, and demonstrate there is sufficient interest among advertisers to fund that vision. Just because Canoe builds something does not mean the advertisers will come. It's not inconceivable that at some future time, Canoe Ventures could become the technology development arm for the new Comcast/NBCU venture if it comes together.
One of NBCU's quiet strengths is a strong online management, content and revenue team. Adding in Daily Candy and Comcast's online assets to the iVillage group, plus the opportunity to expand NBCU's news, sports and other online content initiatives offers a significant upside that Wall Street will value.
Question #6: What happens to Jeff Zucker?
That's obvious to me. I expect Jeff Zucker will run the whole thing although he continues to be counted out by the press. Those who perceive GE's exit (or partial exit) from the business as a failure for Zucker haven't looked at the facts. Jeff has transformed NBC from a company that was consistently behind the eight ball to one that is well positioned for a merger or acquisition. He has surprised the experts who have consistently questioned his leadership. He has a strong and highly experienced management team in place. Concerns about NBC-TV network still being in fourth place is a 20th century issue, is irrelevant today and will more even more irrelevant in the future. Building new economic models and successfully transitioning NBCU from GE ownership into a new structure will be Zucker's next formidable mountain to climb.
Jack Myers consults with media, agencies and marketers on transformative business models and revenue growth strategies. He can be contacted at email@example.com.
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