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NBC positioning for lucrative future

Aug 13, 2001  •  Post A Comment

Even in a difficult economic year, NBC will make more money than any of its broadcast or cable network peers. But it is wrestling with the challenge of how to maintain that edge under a new boss and despite intense competition.
Short-term, NBC is prepared to launch a more aggressive multiplatform advertising effort, mirroring those of Viacom/CBS and AOL Time Warner.
A 15-person sales force next month will begin cutting cross-platform ad deals under the NBC Connect moniker, backed by an existing network sales force of about 100. Cross-platform sales could integrate $100 million to $200 million in incremental annual revenues, sources say.
NBC’s intensified sales and marketing activity, in part, is a reflection of Jeffrey Immelt, who has specialized in those areas and officially takes over for longtime General Electric Co. Chairman Jack Welch on Sept. 7.
Although designed to partially ameliorate the damaging impact of the ad recession, the unified sales pitch for its broadcast and cable networks, TV stations and Web site platforms also is a first step toward a grander plan being formulated at NBC to leverage its upscale broadcast and cable audience and content brands.
Even in these formative stages of development, the broad notion is to reshape NBC over the next three to five years into a more interactive lifestyles management, information and entertainment company whose place in the digital world parallels GE’s other core businesses.
Like Mr. Welch, Mr. Immelt is a big supporter of NBC and new interactive technology. He is a visionary who embraces GE’s penchant for controlled risk-taking to achieve huge wins, as evidenced in his management of GE’s medical business, analysts say.
“I think NBC clearly is an opportunity to develop a solution as opposed to being a business problem with no answers,” said Prudential Securities analyst Nicholas Heymann. “GE views this as a roadmap for higher intellectual content and service sales to an upscale 18 to 49 demographic.”
The idea is to eventually improve the quality of life for NBC’s core viewers by giving them access to information, services and connections to help them better manage their homes, lives, finances and leisure time. The first evidence of such integrated, interactive efforts is at least a year away and could even be included in next year’s budget, sources say.
NBC also aims to help advertisers reach beyond the pitch to provide more information and to transact with target consumers.
One example might be providing instant personalized financial and general news information to viewers on an interactive TV device while providing a vehicle for connecting to national and local advertiser services, managing home utilities and customizing entertainment and leisure activities.
Reinforcing NBC’s link to GE, the corporate parent has ordered that its Six Sigma program-which provides more value-added service to consumers and digitizes the infrastructure to cut costs and maximize revenues-be integrated into every level of NBC’s operation. It’s already evident in places such as administration, internal communications and TV stations.
In sales, NBC assists national and local advertisers to find ways to save money, take orders more easily and faster, and to aid customers.
NBC is pursuing its broadband fortunes cautiously to avoid a repeat of the unhappy premature bust it experienced with its Internet investments in the past year. However, Wall Street investors and analysts say NBC’s long-term future under GE partly depends on its ability to develop a broader, more lucrative, less advertising-dependent business model.
“The broadcast network model just doesn’t work anymore. GE wants to see 20 percent to 30 percent revenues generated from intellectual content and better leveraging of audience over the next five years,” said one well-placed source.
At the moment, NBC executives contend there are no plans to sell NBC, to spin it off into a separately traded entity largely owned by GE or to merge it with another major media concern. For now, NBC is an attractive business with high cash flow and high margins-and even more revenue-building potential.
NBC is well on its way to a total of $250 million in cost cuts this year, most of them coming from the “digitization” of the company or the consolidation, replacement and general conversion of tangible tasks into more cost-efficient electronic functions. For instance, paper records and memos have been replaced by e-mail and electronic data banks throughout NBC’s corporate parent.
Those cost cuts (which included the elimination of 600 jobs earlier this year) and the reduction of Internet losses by about $100 million offset an estimated $350 million to $400 million shortfall in ad revenues this year as a result of the current ad slump, sources say. NBC generally settled for a 6 percent decline in upfront pricing and a 10 percent decline in upfront ad inventory sales.
Newly appointed NBC President and CEO Andy Lack wants to acquire more TV stations, cable franchises and other brand franchises, which will begin to happen in 2002, when accounting rule changes will make acquisitions less of a drag on GE earnings.
NBC could seek to acquire individual stations or major station groups, including LIN Television, Hearst-Argyle Television, Granite Broadcasting or Young Broadcasting. NBC also could seek a waiver from the Federal Communications Commission, in anticipation of a liberation of ownership restrictions, to exercise its option to take complete control over Paxson Communications. Among other things, NBC has joint sales agreements with many of Paxson and Hearst-Argyle’s TV stations and a joint production and syndication arrangement with Hearst-Argyle through its NBC Enterprises.
In particular, Paxson TV stations, which have 84 percent coverage of U.S. homes, provide an increasingly significant second platform for NBC program reruns, syndication fare and promotion.
Assuming full control of the Paxson stations would help NBC generate an estimated $100 million to $200 million annually in incremental revenues, sources say.
NBC also is eager to expand its cable franchises, which could involve increasing its position in Rainbow Media Holdings or creating new cable program platforms with the likes of fellow Rainbow partner MGM.
On a more ambitious level, NBC still could seek some kind of strategic equity arrangement with companies such as USA Networks or AOL Time Warner, with whom NBC has conducted serious deal talks in the past.
Sources say Mr. Immelt prefers organic growth of GE’s businesses from within but he is also supportive of accretive acquisitions.
But for now, Mr. Lack largely is concentrating on what one executive described as “tearing down the walls” between various NBC divisions to get them to work together to maximize cost savings and revenues. NBC can reduce only so much of its $1.6 billion in annual overhead.
An early effort has been the “hubbing” of NBC-owned TV station mechanics. NBC promotions across the board have been aggregated under NBC Agency President John Miller. Local station Web sites will begin mining interactive real-estate and want-ad opportunities next year in an effort to transform advertising and advertiser relationships. NBC also is seeking ways to go about its business differently in Hollywood, well-placed sources said. However, investing in some or all of Michael Ovitz’s troubled Artists Television Group TV production company or Sony Entertainment is not the answer-at least for now, they said.
A pact being negotiated with Omnicom Group, giving the ad agency a behind-the-scenes hand in at least one musical special this fall, is indicative of the more creative, cost-savings approaches to program production NBC will take more of in the future.
But NBC’s biggest challenge is reshaping its static model of selling entertainment programming and selling advertising to value-added functions in a digital world where GE already sees and is pursuing its fortunes.
NBC knows it will take more than simply producing or owning 65 percent of its own overall sc
hedule to maintain and grow profits. A costly license renewal for an “ER” or a “Frasier,” or a deeper-than-expected advertising lull, can dramatically throw off the company’s financial dynamics.
NBC historically has been more proactive than its peers in cutting and managing costs, and with the network’s financial breakdown-even for a tough year like 2001-leaving its competitors in the dust, it’s a good bet GE won’t sit back and let the broadcast industry change without it.