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Time is now for NBC to innovate

Apr 9, 2001  •  Post A Comment

Despite uncertainty over when the current advertising lull will abate, one thing is clear. Even the biggest broadcasters must take extraordinary steps to survive the tough economic times as well as seismic shifts in technology, competition and services.
The evidence is plentiful at the Big 4, which moved quickly to stem losses the first half of the year and are hunkering down for what could be at least six more months of soft advertising that could push any meaningful recovery into next year’s upfront.
Take NBC, for instance.
The General Electric Co. subsidiary is well on its way to meeting a $150 million cost savings target in 2001 with a string of measures topped by about $60 million in head-count reduction (or 600 jobs) so far this year. NBC has reduced its overall head count every year for the past five, sources say.
Nearly all its cost reductions will come as a result of NBC’s ongoing digitization efforts, which represent an important step in improving productivity, profits and links to affiliates and advertisers.
Profits falling short
The digitization and centralization of some of its owned TV station operations will result in an initial $5 million in savings this year. Another $5 million in annual savings will come from the digitization of research (through the development of an internal research portal) and Web-assisted entertainment development in areas such as casting.
However, programming continues to represent about 70 percent of NBC’s overall expenses, although it realizes syndication and other license fee returns from the 57 percent of its content that it produces internally.
With affiliate compensation dipping below $100 million next year and being eliminated completely after 2005, NBC has turned to creating and in some cases demanding new revenues from its affiliates as it relates to the clearance and broadcast of big event, news and series programs.
But even with its aggressive and creative cost cutting, NBC’s overall 2001 operating profits are likely to fall short of earlier analyst estimates. Neither GE nor NBC break out many of NBC’s core financial statistics.
NBC’s owned television stations will likely deliver a flat performance this year after delivering about a 19 percent increase in pre-tax profits last year. At best, NBC’s TV stations could see a 5 percent increase in operating profits to about $785 million on a 5 percent increase in revenues to about $1.4 billion.
Even NBC’s cable networks will fall short of the 35 percent pre-tax earnings growth it delivered in 2000, which was admittedly buoyed by a more stable economy and advertising market supported by the elections and Olympics.
Initially, NBC was expecting as much as $6.8 billion in overall 2001 revenues and now expects closer to $6 billion in annual revenues, essentially flat from a year ago.
Estimated 2001 operating profits, previously expected to be up as much as 10 percent, have been revised downward to around $1.7 billion, up only slightly from last year’s $1.56 billion. During more upbeat times, NBC was expecting its 2001 operating profits to rise more than 6 percent to about $1.9 billion.
But that’s not the only potential blow to NBC.
XFL follies
Its XFL gamble, while worth taking, has proved ill-timed. NBC will decide within a month if it is going to stick with it another season or bail out for a modest fee of $25 million. If it opts to exit, NBC will have lost a total of about $60 million on the XFL.
Until mid-2000, NBC had heavily hinged part of its future revenue growth on the mushrooming value of its related Internet, cable and international assets. A year ago, it could boast it had created a $6 billion Internet portfolio from an initial $350 million investment. NBC’s Internet portfolio has been downsized and likely is worth about one-third of what it once was, industry sources estimate.
Like all of its peers, NBC has raced to cut its Internet losses and also trimmed its costs in cable, which is generally thought to be a more robust shelter against uncertain times.
Industry experts estimate CNBC operating profits will struggle to increase 5 percent to 10 percent this year, off from the 25 percent or better increase that was originally expected.
CNBC is expected to post $372 million in pre-tax earnings, up from $290 million last year, on $606 million in revenues, up from $509 million in revenues in 2000.
MSNBC is targeted for $274 million in revenues this year, up from $207 million in 2001, although its profitability is unsure. NBC also will take another year of losses on its developing international brands, which include National Geographic and CNBC/Dow Jones.
In total, NBC’s cable and international assets still are valued at around $12 billion, analysts say.
But perhaps the most immediate core threat to NBC is the assault CBS is waging on NBC’s long-dominant command of Thursday, television’s most lucrative night.
The night represents about $900 million in revenues, or nearly half of NBC’s total prime-time revenue take, according to Jessica Reif Cohen of Merrill Lynch.
Comfort to the enemy
CBS’s aggressive assault could erode those revenues and inherent profits. If nothing else, CBS’s efforts will give it “huge momentum” in the upfront market. “We expect CBS and Fox to gain share at the expense of ABC and NBC,” Ms. Cohen said.
The convoluted world of media conglomerates being what it is, NBC is also actually helping to fuel the financial strength of rival CBS and its corporate parent Viacom. NBC recently agreed to pay Viacom an estimated $375 million over the next three years (or an estimated $5.2 million per episode for 24 episodes per season) to keep “Frasier” on its prime-time schedule.
The situation underscores the fundamental strength a broadcast network can leverage when it is part of a larger entertainment and media concern, even in the aftermath of the dot-com collapse. Since merging with Viacom last year, CBS has broadened its reach into cable, films, consumer products, the Internet and other ancillary businesses.
While NBC still has a $35 billion or better market value to GE, its options for major growth in tough times are limited to striking strategic alliances or making strategic acquisitions.
Although GE and NBC officials as recently as last week reasserted their determination to keep NBC within the GE family, there is intensified internal buzz about NBC negotiating content distribution alliances with other major industry players that will increase its clout.
NBC officials decline comment, but well-placed sources say NBC is working to achieve more shared-content arrangements like the one it recently announced in which MGM will distribute NBC Studios’ programming (including news and sports) outside the United States. That could mark the first of many strategic pacts between NBC and MGM, both of which are equity partners in the publicly traded Rainbow Media Group.
On face value, NBC is sitting better than its broadcast network rivals, even if it is only expecting a flat to 5 percent increase in the upfront market. The fact is the company is weathering the storm from a position of strength, having realized 16 percent growth in last year’s more robust upfront. However, all industry executives concede the situation could worsen for all players if a writers strike plays havoc with industry economics.
Analysts estimate a lengthy strike this summer could depress network audiences by 10 percent, driving them to cable and other media.
It would not be surprising to find NBC nailing down an agreement to launch new digital cable platforms or contribute to existing cable platforms in an effort to increase the distribution of its owned content and to access others’ film and television content.
NBC has proved successful in these alliances, which include partnering with Microsoft Corp. in MSNBC, Dow Jones in CNBC, and Cablevision Systems and Liberty Media Group in Rainbow Media Group.
With broadcast networks still being uniquely powerful but scarce distribution vehicles, it would behoove Liberty and affiliates such as USA Networks and
its allies-including Vivendi Universal, Sony Corp. and Yahoo!-to find cost-effective, value-creating ways to extend each other’s reach and bolster each other’s bottom line.
Tom Wolzien, analyst at Bernstein Research and a former NBC executive, recently threw out a radical solution. The Peacock could spin off its information services-NBC News, CNBC and MSNBC-in a stock merger with Dow Jones in a new entity in which GE would be a majority owner. NBC’s program and production operations could align with a major content producer and distributor seeking ensured prime time access for its own product. Such a player could include Sony, MGM, Vivendi Universal or USA Networks, analysts say.
Poweful potential alliance
NBC’s broadcast television network and owned TV stations would make a formidable match with Tribune, creating a new powerful multimedia player.
While Mr. Wolzien’s radical scenarios are bold, and NBC officials offer no comment on such prospects, it all underscores the fact that NBC will need to enter into some ambitious alliance or acquisition to make its next growth spurt.
NBC is the last remaining somewhat available broadcast network. Viacom and News Corp. are likely to find a way to co-manage and co-own UPN and perhaps reshape it into a whole other program entity. The WB is firmly in the clutches of AOL Time Warner. The same is true of Fox at News Corp., ABC at Disney and CBS at Viacom, all of which continue to engage in aggressive cost-cutting of their own.
But there’s only so much cost-cutting any company can do in challenging economic times. And it appears as though NBC has played its hand, to the extent it can, at organically creating and growing new program platforms. Some bold new moves are called for and, in short order, will likely be delivered. NBC has never been inclined to disappoint.