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NBC Taking TV’s Future by the Reins with on-demand content, delivery

Sep 15, 2003  •  Post A Comment

News Corp. Chairman Rupert Murdoch and NBC Chairman Bob Wright are among the media visionaries delivering a jolting wake-up call to content producers-one which, if unheeded, will likely cost the program makers competitive footing and billions of dollars in revenues and profits.
Unfortunately, these moguls’ warnings could whiz right past anyone whose eyes glaze over at the mere mention of personal video recorders, on-demand services or digital servers.
What these media powerbrokers are signaling is television’s break from the old world and leap into the new world, where, increasingly, consumers randomly access, store, manipulate and customize content that historically was the one-way set-time monopoly of a handful of networks.
For instance, when it takes command of Vivendi Universal Entertainment next spring, NBC will move quickly to mine its TV and film libraries and its USA, Sci Fi and Trio cable networks to launch fee-based on-demand services. It will allow viewers to cherry-pick programs, movies, news, sports and interactive TV options for a tailor-made subscription service, giving them what they want, when and the way they want it. Then, NBC Universal likely will deliver those subscribers to advertisers with ZIP code precision. Within several years consumers will watch digital video on their cellular telephones and manage their collection of viewing choices on a personal home server.
In that digital environment, the economics of owning, producing and licensing content takes on new meaning.
NBC Universal will “change the amount of value content providers can create and keep rather than share with distributors,” observed Nicholas Heymann, a Prudential Securities analyst covering GE.
That will be a formula for the growing of NBC Universal’s annual $13 billion revenues, now almost evenly split between subscription fee and advertising sales, compared with NBC’s ad-dependent model.
NBC also will apply GE’s Six Sigma approach to program production to reduce deficits and design from start to finish a program tailored in every way to a specific viewer demographic. It will use digital compression and other technology it already embraces at its other core businesses to change the timing, pricing and access to exhibition windows to deliver paid content sooner and faster.
And NBC will likely start down that path with the already proven, popular and widely recycled “Law & Order” franchise.
“I am betting on the future here, that over time the digital boxes will be very well accepted and that cable operators will be looking for the kind of product we now will own,” Mr. Wright recently told me.
Clearly NBC, with all of its hard-core GE financial discipline and technical insight, is in a position to shape and set the new economic paradigms that media and entertainment players are struggling to achieve based on the notion of using one content to make more money in more places.
NBC “gets it,” and will have the broader depth of assets to do something about it.
The same is true of News Corp. and its Fox Entertainment Group, which will hold and manage the controlling 34 percent stake in DirecTV that will make it a content and distribution player of unparalleled proportions.
“I don’t think the market has yet fully understood just how transforming it will be to have a major digital distribution arm,” Mr. Murdoch told a Sept. 8 Morgan Stanley investors conference. He was surprisingly forthcoming about his vision for putting free TiVo-like PVR units in the hands of his new domestic satellite subscribers as a catalyst for the on-demand, interactive, personalized content that will be the source of hefty new revenues and profits.
Fox will be able to negotiate better program pricing based on its content and distribution scale. But with a $7.5 billion film and television production operation that has a smaller catalog than most of its peers, Fox already is demonstrating it can maximize what it owns across its many venues. It has shifted more marketing dollars toward home video, where DVD sales of even off-beat and dated TV programs and films have outpaced the market. Since the Fox broadcast network and owned TV stations are the largest buyers of Fox-produced programs (to the tune of about $620 million in annual sales, according to Morgan Stanley’s Richard Bilotti), clearly Fox already is doing with its own assets what NBC seeks to do with VUE. Can you just imagine what value Fox will create when it can go a step further to program its branded content for DirecTV’s built-in PVRs? That is synergy.
It may be after its disastrous revelation this week that it will cost up to $225 million more than expected in 2004 to buy programming for its Starz! Encore service that Liberty Media Corp. seeks protected pricing and distribution access from Fox once it controls DirecTV. As a producer and a buyer of programming with little distribution leverage, Liberty is a 20 percent owner of News Corp. that failed in its bids this year to buy either DirecTV or VUE.
That’s just a hint of the convoluted new economic metrics in the works by consolidating media companies that understand the power of digital and other emerging technology.
Not to be outdone, Comcast Corp.’s chief operating officer, Steve Burke, told a Morgan Stanley conference that while the dominant cable operator places its bets on free VOD and high-definition content today, it knows major strides will come in shifting to personalized, lower-cost, even tiered niche content, the template for which may be squeezed out of Comcast’s tender fee negotiations with Walt Disney’s top-ranked and top-priced ESPN.
“There’s going to be a big clash between the distribution industry and Disney over the next 12 to 18 months. I don’t know how it will work out. But the idea that we could be paying $10 or $8 in five or six years for ESPN basic-it can’t happen,” said Mr. Murdoch, who said he expects to pay less, not more, for sports license fees in the future. But, he added, “there is going to be a lot of blood on the floor before you can get ESPN out of basic [cable].”
So what are the early messages to be gleaned from the changes in digital delivery, packaging and pricing already on the way for content producers and owners, especially if-like MGM, DreamWorks and Sony-they have limited or no distribution clout?
* Prepare for a profound change in your economics and try to get ahead of the curve. Strategically position yourself with companies that can help to ensure your content access to a variety of distribution platforms and formats.
* Devise more ways of bundling and marketing what you already own free and clear on the assumption that increased consumer personalization means increased demand for niche content.
* Create new pricing strategies and valuable trade-offs before you enter negotiations with cable and satellite operators or even broadcast or cable networks. If you can give them an easier, surer way to get what they need and still make money, they’ll take it.
* Don’t wait to start rethinking the use and placement of your content, which in some cases could be refashioned in an interactive universe as masked marketing. The best thing to do is to figure that all the rules of play have changed, because they have.