Growing NBC

Apr 15, 2002  •  Post A Comment

As NBC, backed by corporate giant General Electric, cruises into acquisition mode, the network’s biggest challenge is to produce the next generation of hit prime-time series to sustain NBC’s ratings and financial dominance.
But that task has been complicated by mounting tensions between NBC Chairman Bob Wright and Andy Lack, a career newsman and former news president who was appointed NBC president and chief operating officer last May to help oversee most NBC operations.
Tensions between the two top executives have spilled into the open in internal meetings, creating divisive factions among managers. The conflict and other related matters were addressed April 4 in meetings attended by Mr. Wright, Mr. Lack and new GE Chairman Jeff Immelt at NBC headquarters in New York. The executives declined comment on top management changes being mulled.
“Andy is trying and I’m trying. We’re working through it,” was Mr. Wright’s only comment about the situation.
High-level executive changes are expected in the coming months as program-related operations and executives begin falling in line behind NBC Entertainment President Jeff Zucker, to whom Mr. Immelt and Mr. Wright give high marks, and with whom Mr. Lack worked closely on the “Today” show.
Mr. Lack is expected, at least for now, to keep his titles, well-placed sources said, though his responsibilities will be more narrowly focused on the integration of NBC and Telemundo station, news and programming operations; and overseeing MSNBC President Erik Sorenson’s efforts to fix MSNBC’s ratings and revenue woes. Mr. Wright will continue to be more involved than he originally intended in overseeing many of NBC’s daily operations.
Mr. Lack’s newsman’s sensibilities–which sometimes have him responding too brusquely to delicate corporate matters and too apprehensively to the fiscal, highly structured mandates of GE management–have led to a bumpy start in his steering a bigger, more unwieldy corporate ship, sources said. Some say internal conflicts could have been a contributing factor in the recently announced departures of NBC Chief Financial Officer Mark Begor, who returned to GE, and NBC West Coast Entertainment President Scott Sassa.
“Andy is a news producer who operates from a command-and-control point of view and likes to make decisions quickly,” said one high-level NBC executive. “The nature of this job isn’t like that. You have to suffer through things and projects, and you have to coach people and leverage your ability to get them to do things. You have to do a lot of homework. That’s not exactly where he comes from.”
Mr. Immelt says he is committed to NBC’s executive team and is not concerned about the internal strife: “It’s like a family. With any business like this, people have to look at their careers and see where they best fit.”
Even Mr. Lack hints of transition woes. “It’s been a sea change for me, looking through GE’s prism lens at business challenges and opportunities,” he said. “I’ve known Bob for nearly a decade. We see things very similarly, and when we don’t, we still end up in the same place.”
Jay Ireland, president of NBC Television Stations and former VP and chief financial officer at GE Plastics, is among those positioned to eventually move up the ranks in management realignment, high-level sources said.
“Jay’s disposition is a lot like Bob’s. He gets both the NBC and the GE way of doing things,” said one NBC executive. “Knowing how best to use GE’s management style of think-tank exercises, formula accounting and small, snug teamwork is critical to helping NBC achieve its own goals.”
However, NBC’s most formidable task is developing sure-fire prime-time successor hits to “Friends” and “ER” to ensure the NBC TV Network’s $600 million-plus in annual operating profits from an otherwise stagnating broadcast business. It also must build upon and refortify its annual $350 million investment in news, which is generating more than $200 million in annual profits as a result of amortizing its costs over more cable and broadcast TV outlets at a time when competitors such as ABC are rethinking their news commitment.
“We can’t perform if we can’t have a lot of earnings come out of entertainment,” Mr. Wright said.
NBC is pushing hard for more distribution of its CNBC and MSNBC cable operations while considering ways to expand its news-gathering resources by expanding its Dow Jones partnership or buying into the likes of Reuters, Bloomberg or European-based news operations, sources say.
“We’ve got to leverage the network’s strengths, particularly in news, across our cable properties,” Mr. Lack said. “Jeff [Immelt’s] marching orders to us have been clear: top-line growth through execution and acquisition.”
One acquisition that isn’t imminent is the purchase of AOL Time Warner–though that media giant’s plummeting stock could make it an attractive takeover target.
“I just don’t think [AOL Time Warner] is something we need today,” Mr. Immelt told Electronic Media. “We can continue to grow our businesses and look at other strategic opportunities without doing something that traumatic and of that size.”
Mr. Wright is even more blunt: “It’s not going to happen,” he said. “AOL is not a growth business. … They certainly aren’t going to have the margins they enjoyed, so it’s hard to see them expanding their income at anywhere near the rates predicted. They were talking about 30 percent a year ago for AOL. Now they may be single digits.”
Mr. Wright said buying or being bought by AOL Time Warner–GE’s stock itself has been hammered of late, trading at a near-low of $33 a share–would be “much too big a departure” even at $90 billion without a premium.
“I don’t think it would be that well-received because everyone has suddenly come to the conclusion that AOL isn’t the company they thought it was,” Mr. Wright said.
On the other hand–attention please, Messieurs Messier and Diller–Mr. Immelt is also adamant about NBC not being for sale. “I like the kind of business NBC is. I’m keeping it,” said Mr. Immelt, an upbeat, energetic chairman who prefers to go by first names and insists he “couldn’t be better” even in the face of the latest marketplace adversity.
“The challenge is to keep the performance of both GE and NBC strong. The way we run them may remain the same, but the look of the companies will likely change dramatically in the next few years,” he said.
Integral to that is the secure, congenial partnership Mr. Immelt, 46, has forged during the past six months with Mr. Wright, 58, also a career GE executive, who doubles as one of his three advising vice chairmen at the world’s largest corporation. If Mr. Immelt is GE’s new cheerleader, Mr. Wright is its new statesman.
“Jeff Immelt and Bob Wright are in the process of taking their businesses up another notch,” said Nicholas Heymann, a longtime GE observer at Prudential Securities. “Because they can pretty much afford to do anything at any price, it will be interesting to see what they do.”
Advertising redefined
One thing they won’t do is take ads for distilled spirits.
NBC recently took up the controversial cause for hard-liquor advertising on television, and then, just as quickly, gave it up. In his first public comments on the matter, Mr. Wright conceded the turnaround was a case of bowing to pressures from a variety of opponents, including beer companies. But GE did not interfere in the process or the decision, Mr. Wright said.
“Jeff Immelt was adamant that not be the case,” Mr. Wright said. “We talked to agencies and advertisers. The business that was out there was not as large as we thought it would be, but it wasn’t about money. A number of advertisers were not thrilled about the [community service] obligations they would incur by working with us under the strict program we announced.”
As for Washington, “The government pressure was no greater than you saw in the press. There was some legitimate stuff expressed. I didn’t feel like I was being held to some ridiculous standard,” he said.
“None of the gr
oups of people opposed to what we were doing, on their own, would have made a difference. But there wasn’t enough to be gained to potentially alienate audiences and other clients,” Mr. Wright said.
NBC executives estimate that hard-liquor advertising would have generated more than $100 million in new revenues even in a depressed ad market that Mr. Wright says is looking up.
“There is a lot of money that has been on the sideline the last 10 months,” Mr. Wright said. “But clearly we’re not out of the woods yet.”
Still, NBC is optimistic about getting upfront advertising price increases of 5 percent to 8 percent based on the strength of its prime-time ratings and the tight inventory created by excessive make-goods at ABC and Fox.
Telemundo, whose acquisition by GE for $2.7 billion closed Friday, will be part of many advertising deals in which NBC can bring to bear the clout it has with 400 advertisers–three times the number that currently support the Hispanic program service (which runs second in ratings to rival Univision).
“Hopefully we can get better pricing than they have had and we can get better volume than they have had. We have better coverage with agencies and with clients,” Mr. Wright said. “We will package in Telemundo where it makes sense for clients who need and want to be in Hispanic television.”
NBC also is in the process of quietly launching a new GE-wide pitch to advertisers. “At the Customer; For the Customer” is a program that aims to band together NBC’s advertising marketing services, GE Capital’s financial services and some of GE’s other far-flung businesses to pitch their collective strength and products to corporate clients such as blue-chip auto, retail and aircraft advertisers. The value-added programs for advertisers, supported by a 20 percent increase in sales staff, will be fully launched by 2003.
Right now, NBC represents less than 10 percent of GE’s revenues and earnings, although GE would like to see that double in the coming years.
Despite the market’s nagging insistence that NBC must be bigger to effectively compete, Mr. Immelt says it is more likely to buy cable program services (such as Discovery) or a major TV station group (such as Gannett) than it is to acquire another media giant. GE prefers growing NBC organically, using its profitable news and information operations–anchored in NBC News, CNBC, MSNBC and National Geographic–to build a bigger global and digital cable presence; and its 39 percent-owned Value Vision–recently renamed ShopNBC–to mine e-commerce opportunities. Sources say MSNBC co-owner Microsoft Corp. has talked about playing a role in some of NBC’s future deals.
Steady as she goes
“We need to find things we can invest in that give us good returns and the ability to make NBC’s contribution larger, and that’s not easy to do. But we have done that with Telemundo,” Mr. Wright said.
And he, like Mr. Immelt, is on a grow-it-cautiously path.
“We can develop NBC through acquisitions and internal growth to be a stronger and bigger business that is not too volatile,” Mr. Wright said. “We only want to have scale in media businesses we’re comfortable with. We’re not just trying to be bigger.
“We have three significant issues in front of us: the buying and developing of KNTV, a new station in an old market (San Francisco); buying and integrating Telemundo; and making the most of our stake in Paxson.”
Ah yes, Paxson. NBC is eager to move beyond a binding arbitration proceeding that begins next week in which Paxson Communications Chairman Bud Paxson claims his company’s value and sale options have been hurt by NBC’s Telemundo acquisition.
“They’ve done all the damage they can do,” Mr. Wright said. “Their real threat was saying they were going to file and hurt us in buying Telemundo. The Federal Communications Commission has recognized this for what it is: a commercial dispute.
“[Mr. Paxson] thought he would be out of this by now. He’s very unhappy at the prospect that it may be another year or two. Bud has convinced himself he could find a suitor if we were not here, which is where the debate comes in. We’ve told him publicly and privately if he found someone, we’d consider bringing them in as a partner.”
But Mr. Wright said there is no way NBC will forfeit its equity partnership pact with Paxson that gives it buying options. NBC could acquire Paxson for about $3 billion next year, pending deregulation, insiders say.
Depending upon timing, NBC should be able to retain many of the dozen or so overlapping Paxson stations and some 20 duopolies pending deregulation, creating a massive platform off of which to launch new niche programs and advertising services. The deal struck in 1999, which gave NBC an initial 32 percent stake for $415 million, will double its TV household reach.
NBC’s plans call for a second over-the-air broadcast network to be built on Paxson’s digitally supported, family-oriented ad hoc network and distributed by Paxson’s cable- and satellite-boosted 75 TV stations across 65 percent of the country. At this early stage on the drawing boards, the new network is being designed as a broad original entertainment and information platform aimed at adult viewers, sources say. NBC declined comment on the project.
Programming headaches
A major frustration for Mr. Wright and bottom-line-driven GE has been the inability to break the vicious cycle of lost investments in prime-time program development.
But Mr. Immelt, an applied math major and Harvard MBA who admits to being uneasy about reconciling the costly, inexact science of network TV program production with GE’s more rigid financial requirements, is resolute about solving the problem.
“We’ve got to constantly be thinking about new ways to do a better job of cost control in this industry. But the best thing I could do is to put someone in place like Jeff Zucker–who is creative and pushing the envelope–and give him 100 percent of my support,” Mr. Immelt said.
Mr. Wright has built the best possible defense for NBC. In recent years, it has increased its cable play and internal program production to 65 percent (although revenues from syndicating its off-network shows are declining slightly to an estimated $200 million this year). NBC has leased out Saturday mornings to Discovery and may do the same with other problematic time periods. It has backed away from most high-priced professional sports rights, sticking only with the Olympics, on which it made $75 million in profits earlier this year.
Despite such efforts, NBC has learned there is no way to mandate prime-time hits. In fact, in agreeing to pay $7 million per episode for “Friends” (without a second same-week rebroadcast in NBC’s own prime-time schedule, a proposition refused by Warner Bros.) and $5 million per episode for “Frasier,” NBC has done what it said it wouldn’t do: pay extraordinary license fees to outside suppliers. A similar squeeze several years ago prompted NBC to pay Warner Bros. a record $13 million per hour-long episode for “ER.”
“We’ll always be in the same position. I just don’t seem to be able to get out of it,” Mr. Wright conceded.
“You can’t get hits sequenced against the loss of audience,” he said. “It just is very difficult to do that. Despite our best efforts, we just aren’t able to do that the way we like. All you can do on the cost side is to pass up the situations that are overpriced, even though they may be potentially attractive.
“The thing we have avoided doing is to not take on ridiculous-priced program deals because we don’t have as many hits as we’d like. `Friends’ and `ER’ are a different story,” Mr. Wright said.
Next season, NBC will engage in more prime-time program repurposing. It will negotiate same-week rebroadcast rights for some new and returning first-run shows–and already has such rights for “Crossing Jordan,” “Watching Ellie,” “Fear Factor” and “Dateline.”
“I think advertisers and affiliates are starting to see that in the very fragmented world, having programming available simultaneously on different pla
tforms does not necessarily kill it. The combined effort may actually be enhancing. The negotiating teams at the studios are still not there yet, but that’s more stubbornness than it is strategic view,” Mr. Wright said.
An even more demonstrative attempt to boost ratings and cut program costs has been NBC’s resorting to what critics call tasteless reality shows such as “Fear Factor,” which stands in sharp contrast to the network’s highly esteemed “ER” and “The West Wing.”
“That’s not really true,” Mr. Wright said. “We’ve always done edgy shows that are a little different.”
And the NBC chairman said Mr. Zucker is the right person to give NBC the right programming mix; Mr. Wright likens him to the late NBC programming guru Brandon Tartikoff.
“Brandon was comfortable sitting next to the make-believe character Alf in a satellite talk with advertisers, discussing the creative quality of `Hill Street Blues,”’ Mr. Wright said. “Jeff’s background in sports and live television at the `Today Show,’ which is pop art at its best, taught him that you’re only as good as your ability to relate to people.”
Again this year, NBC is expected to spend $50 million on program development and an additional $150 million producing and promoting programs that will fail–the same as other broadcast TV networks. All told, NBC spends more than $1 billion annually on prime time programming.
One continual programming bright spot has been the “Law & Order” franchise. The network is in discussions with USA Networks about yet another “L&O” series and the development of other new series, which could lead to a partnership with the newly formed Vivendi Universal Entertainment. One option would be for NBC to become a strategic equity partner as it has in its successful Rainbow Media partnership with MGM and Cablevision Systems.
And while an alliance of that nature with Vivendi might make some on Wall Street salivate, it’s not a slam dunk that NBC will be expanding significantly.
While recent universal accounting changes make it easier for NBC to make large acquisitions without diluting GE’s stock price, continued pressure on GE stock and on GE’s overall balance sheet and GE Capital’s disclosure practices could limit the number of growth deals GE is willing to fund for NBC.
No studio purchase
So don’t expect NBC to buy a studio, or cable systems, or radio stations.
“Looking at the whole industry right now, [a movie studio] is the last place I’d ever go,” Mr. Immelt said. “I always think content will be there, no matter where the industry goes in the future.” As for buying cable systems in a deregulated world where cross-ownership prohibitions are eliminated, he said, “I just don’t think it’s us.”
The newspapers owned by many major TV station groups NBC has eyed–such as Gannett or Hearst-Argyle–would “not necessarily” be a hindrance to deal-making, Mr. Immelt said. “But who the heck knows? It all depends on the deal terms.” NBC already has laid the groundwork with successful syndication and co-production joint ventures with both Hearst and Gannett.
Liberty’s Discovery Communications, which could command a premium price of $12 billion in a bidding war, would be a great match for NBC’s National Geographic and commitment to nonfiction programming. NBC and GE officials said a premium makes Discovery too pricey, but they do not want to lose the service to Viacom in a new round of negotiations. NBC also has been eyeing the news and entertainment cable service of bankrupt Kirsch Media, although those components are all likely to go to creditors such as Rupert Murdoch or Silvio Berlusconi.
However, GE Financial’s underwriting capacity makes it easier for NBC to make debt assumption–as in the case of Telemundo–part of any deal.
Immelt’s bottom line: A new wave of media deregulation “makes all things possible.”