GE/NBC charting a digital path to savings

Apr 15, 2002  •  Post A Comment

General Electric’s self-styled “digitization” program is a major financial weapon for NBC that has accounted for $400 million in savings in recent years.
The digitization of NBC’s advertising sales, marketing, backroom and other operations could yield as much as $700 million in new revenues and cost savings this year, according to Wall Street analyst Nicholas Heymann at Prudential Securities. It will lead to $1.6 billion in cost savings in all of GE this year, and $10 billion in savings and new revenues within three years.
NBC’s 13 owned TV stations have centralized engineering, sales, promotion, program acquisition and other backroom operations in a regional practice called “hubbing” that eventually could generate more than $400 million in annual cost savings, Mr. Heymann said.
Digitization techniques also are cutting in half the time it takes to make sales payments to TV stations, which can be a big boost to profits. NBC’s ability to increase its efficiency and inventory to stations has offset plans to completely eliminate $100 million in annual affiliate cash compensation payments by 2004.
However, one of GE’s biggest advantages for NBC-its financial might-may also prove to be one of its biggest threats: The health and well-being of GE Capital is critical to both GE and NBC.
The financial unit generates 40 percent of GE’s earnings and accounts for most of its $240 billion in debt. Although only 15 percent of GE’s earnings growth comes from acquisitions financed with stock and interim short-term debt, GE recently broadened its options, raising $60 billion in long-term debt.
But the perception that GE is more of a finance company than an industrial company weighs heavily on its stock, which can be used as deal currency and has been trading at a near-low of $33 a share.
So analysts say there is a compelling reason why GE might want to acquire a large operating company such as AOL Time Warner just now, having been foiled in its attempt to buy Honeywell for $50 billion last year: Doing so would help to ease Wall Street’s overriding concerns that the financial risk associated with GE Capital’s $427 billion asset portfolio could lead to an Enron-like balance sheet crisis. Some GE and NBC insiders say that once AOL Time Warner stock drops too far below $20 a share, and $90 billion in market value, the companies will have to take a closer look.
GE has been working overtime to ease Wall Street’s concerns. It hosted its first-ever earnings call with investors last week to stress that it is relying on less risky long-term financing and that it can achieve its lofty 20 percent earnings growth targets despite the sluggish growth of its 26 core businesses. But unimpressed investors responded April 11 by driving GE’s stock price down 9 percent, representing a loss of more than $30 billion in market value.
Bottom line, according to analyst Heymann: “Jeff Immelt’s big idea is to transform GE and NBC through digitization-digitizing every aspect of how it allocates, spends and invests capital. His goal is to leverage the resources of GE, and the processes it has perfected to create value, and to move NBC away from the standard analog TV model.”