NBC Universal Blueprint Shaping Up

Sep 8, 2003  •  Post A Comment

NBC will seek to use “Law & Order” episodes and other Universal library product to launch subscription on-demand services on USA Network after it acquires Vivendi Universal Entertainment early next year. It’s part of NBC’s plan to radically reshape the merged company’s fortunes and the TV industry’s strained programming economics.

The comprehensive blueprint for change being shaped by NBC Chairman and CEO Bob Wright and his management team hinges on an aggressive use of subscription on-demand technology, Universal’s vast TV and film content, and parent company General Electric’s Six Sigma formula for squeezing maximum costs and profits out of the new $42 billion NBC Universal, well-placed sources tell me.

According to its own internal projections, NBC expects to realize $15 billion of additional value over five years from the merged company by applying interactive technology to its expanded cable network and content holdings in new, more enterprising ways. Only about $400 million of that will be achieved in the early years, with a nearly equal mix of increased revenues and cost cuts. About half the cost savings will be from the sale or discontinued lease of facilities. Another $125 million of the cost cuts will be from elimination of redundant VUE advertising, TV production, marketing, cable network and administrative operations and personnel.

However, those cost savings will offset what analysts said could be a 10 percent to 15 percent decline in NBC’s annual $2 billion earnings as the retirement of hit series after next season adversely impacts its prime-time ratings and advertising revenues. The merger immediately aids NBC by making it part of a less advertising-dependent media company, one that relies on subscription fees for half of its overall revenues.

In an interview, Mr. Wright conceded the career-capping deal for him “is all about content in a digital age where there will be many more places and ways to make use of it.”

“This certainly opens up new possibilities for us that we have thought about but not been able to pursue until now,” said Mr. Wright, who also is vice chairman of GE.

NBC has confirmed it will assume $1.6 billion in Vivendi Universal debt and give Vivendi nearly $4 billion in cash and GE stock, and a 20 percent stake in the new NBC Universal, against which the debt-ridden French conglomerate can borrow funds. Well-placed sources say GE and NBC have virtually no cost or risk in this deal since the $15 billion in expected synergies and savings will more than cover GE/NBC’s cost of buying out Vivendi’s stake beginning in 2006. Mr. Wright said GE/NBC has not offered Vivendi any guaranteed return on its investment, and will consider in several years whether to take the new company public. “GE has three options. It can do an IPO [initial public offering] or pay Vivendi in either cash or GE stock,” Mr. Wright said.

The ability to protect and ensure the continued profitability of NBC, a major contributor to GE’s bottom line, is critical for new GE Chairman Jeffrey Immelt, who is doing his biggest deal yet with NBC-VUE.

unique deal structure

Because of the unique deal structure, GE/NBC will “pay” only $5.4 billion up front for VUE assets, to which it can assign close to the $14 billion value Vivendi has sought. Vivendi is obliged to resolve an estimated $5 billion-plus of outstanding liabilities that GE/NBC said it will not assume and could hold up the deal. Of those, Vivendi appears closer to buying out a 7 percent stake valued at $2.4 billion belonging to InterActive Corp. and its chairman, former VUE Chairman Barry Diller. Mr. Diller told me he would like to see a “smooth resolution” that would allow him to remain a minority shareholder of the new company, and that he considers the merger “a strategically important deal for GE and NBC.”

But, such high-profile drama aside, the real story behind the NBC-VUE merger is what NBC has planned for the VUE assets and how that will dramatically change industry competition and economics in ways that Mr. Wright has been trying to do for years.

“Digital video-on-demand will be a huge part of how they capitalize on a lot of the value within Vivendi’s asset base. The cost cuts are a typical GE way of doing things. Digital on-demand is all about the future and how you will make money in this business,” said a high-level source close to the discussions.

Within three years, NBC seeks to create a broader, consumer-driven media concern and a new brand of customized entertainment, news, information and services for which users will pay fees. But it will be careful to continue nurturing the NBC broadcast network and stations, whose programs, connections and brand will remain a critical mass-market “engine,” sources said. The current Mermigas on Media newsletter provides more exclusive details and insights on the plan (www.tvweek.com/onmedia).

For starters, NBC is in talks with Universal and producer Dick Wolf about repackaging existing episodes of the existing “Law and Order” series and expanding the franchise by creating additional spinoff series. Sources estimate NBC could save as much as $200 million over time as a result of the savings and incremental new revenues it can make just by controlling the “Law & Order” series and franchise, which is owned by Universal and also runs on USA.

NBC also will repackage some of Universal’s 32,000 TV series episodes and 5,000 feature films as theme on-demand services launched as part of the USA, Sci Fi or Trio cable networks or offered to cable operators as stand-alone digital services.

NBC’s continuing due diligence of Vivendi’s financial records has become focused on outstanding licensing agreements for Universal TV programs and films, some of which NBC would like to buy back or reclaim to maximize immediate and profitable use of the content it is buying, sources said. Mr. Wright and other NBC executives decline comment on such specifics.

But well-placed sources said NBC will retain the best of USA’s schedule to preserve the $700 million in revenues it generates annually, and is likely to rebrand and revamp the cable network to include some on-demand offerings. NBC also tentatively plans to broaden Sci Fi to include some reality, information and adventure programming NBC already produces, partly in conjunction with Discovery, National Geographic and NBC News. So far this year, NBC has enhanced the profile and program offerings of its recently acquired Bravo, and has effectively used cross-promotion, ad sales and programming tied to its surprise summer hit “Queer Eye” series. There are plans for VUE’s upscale, artsy Trio cable network to become a niche extension of Bravo, sources said.

“We’re making a bet on content. So we’re looking to mine all the assets they have,” Randy Falco, president of the NBC Television Network Group, told me this week. “We will look to monetize the (Universal) library through VOD and other on-demand services, which will fortify the broadcast network.”

Mr. Falco, NBC Cable President David Zaslav and NBC Entertainment President Jeff Zucker, who accompanied Mr. Wright in a daylong visit Sept. 3 to calm anxious Universal creative employees, are executing the plan. But some analysts already question whether NBC might find itself overwhelmed a year from now and distracted by revamping its prime-time schedule and the VUE assets it also must integrate while reinventing TV industry economics.

The merger arms NBC with more popular cable networks and content to leverage in future negotiations with satellite and cable providers, from whom it will be seeking cash retransmission fees for carriage of its NBC TV station and network signals. VUE’s assets give GE the same competitive clout as Viacom, News Corp., AOL Time Warner and Walt Disney.

Still, Michael Nathanson, analyst at Bernstein Research, noted that the implied values for VUE and NBC suggest 11 times cash flow multiples, which are as much as 20 percent below other media conglomerate valuations. But well-connected sources caution, “This is clearly the kind of deal in which the huge, real value is not
immediately obvious and at least a year away.”