Oct 13, 2003  •  Post A Comment

NBC’s low-cost entry into the high-stakes big media game comes with some risk, the full breadth of which won’t be known for about three years-or the amount of time in which the General Electric subsidiary has the likely choice of buying out Vivendi, its minority French-based partner in the new $43 billion NBC Universal.
By then NBC will have exceeded its annual targets of up to $500 million in cost savings and new revenues and should be on its way to creating the additional $20 billion in value it says it can squeeze out of the new entertainment conglomerate within the first five years.
There will be extensive consolidation of real estate and facilities, common operations, personnel and cable network, TV production and other core businesses, NBC Chairman and President Bob Wright said.
But NBC Universal’s prosperity hinges more on its ability to regain the rights to, repackage and distribute key film and television content across emerging fee-based distribution platforms, including digital multicast broadcast channels, streaming Internet, video-on-demand, high-definition services and digital personal video recorders.
The real engine will be customized on-demand services with a broad enough appeal to generate hefty subscription fees and advertising revenues. Early discussions are focusing on a new “Law & Order”-anchored crime channel, action-adventure or romance movie channels and the revamping of Universal’s USA and Sci Fi cable networks. More personalized on-demand service could be launched off USA or NBC’s Bravo cable networks and carry labels such as “My USA” or “My Bravo,” allowing subscribers to cherry-pick TV series, movies, Olympic events and news.
Universal recently hired new teams of specialists to accelerate the digitization of its films and TV shows.
Analysts also expect a GE/Six Sigma-trained NBC to use this time of change to alter the formula for content production and exhibition to make a meaningful dent in spiraling program costs.
Its ambitious centralized sales force will devise new ways to package and sell advertising in and around on-demand content, Mr. Wright told me. Plans are already being formulated to bundle and sell across all of NBC Universal’s cable, broadcast and syndication properties if the deal closes by next year’s upfront.
“What programming we can use, when and how, is subject to existing rights agreements. You can’t do most of these things tomorrow because people have ownership rights that extend for periods of time. We can only reassess their use when these cycles expire, if there is opportunity for that content to be used in VOD or PVR services,” Mr. Wright told me. “That is a very big part of what this deal is all about.”

What is far less certain is how robust and advanced digital on-demand services will be by the time the deal closes, or the extent and effectiveness of NBC Universal’s improved leverage in a world shaped by both the conflicting and common interests of content suppliers and distributors.
Mr. Wright conceded he is talking up premium pay TV and on-demand TV services at a time when they are undergoing their first real baptism of fire in the marketplace.
NBC Universal has announced the definitive terms of its $14 billion deal at a time when ESPN could be looking at the potential loss of $1 billion in profits if its premier sports service is dropped from basic cable. That would have dire financial ramifications for its corporate parent, Walt Disney Co.
Alternatively, cable and satellite operators-Cox Communications, Cablevision Systems and DirecTV in particular because of their expiring ESPN contracts-are staring down the barrel of more than $100 million in collective increased affiliate fees, which average 20 percent annually per subscriber.
The red-hot tug-of-war Cox and ESPN are publicly waging will soon get more interesting when Rupert Murdoch’s News Corp. and Fox Entertainment Group assume 34 percent ownership and control of DirecTV later this year, giving it unprecedented negotiating leverage as a major broadcaster, satellite provider and content producer.
In deference to the need for more extensive alliances with other powerful players, Mr. Wright said talks already are under way on expanding NBC Universal ventures with News Corp. and Comcast Corp., which eventually will make a big content play of its own.
While NBC also will be able to throw around the weight of its retransmission consent for its valuable broadcast NBC TV Networks and TV stations, Mr. Wright said he knows the stakes will go even higher when NBC Universal is subject to the same access and fee rigmarole when it enters the marketplace seeking paid access for its new on-demand offerings.
How high is high? Disney president Bob Iger told analysts Oct. 8 Cox could lose $1 billion in value if 600,000, or 10 percent, of Cox’s 6 million subscribers defect to satellite should Cox drop ESPN or bump it to a paid tier. Other industry experts argue that Cox just might break even if it loses a more moderate 65,000 subscribers (consistent with the defections Cablevision Systems sustained when it took Yankees baseball games off the air last season) and avoid the nearly $200 million in costs to pay for ESPN’s license fees.
This volatile, uncertain fee-based TV hornets’ nest is precisely what NBC Universal will be betting on a year from now, when one enthusiastic forecaster, Forrester Research, predicts as much as 85 percent of U.S. TV households will have access to VOD and PVR-like services, courtesy of rival cable and satellite providers.
But on its financial face value, it is easy to understand why Mr. Wright considers the NBC Universal deal to be “low-risk and high-potential.” He expects the company’s base $14 billion revenues to grow 5 percent to 10 percent annually, its baseline $3.5 billion earnings to grow 10 percent the first year, and cash flow to grow even faster, with no appreciable debt and GE’s deep pockets to fund acquisitions.
For its part, NBC is paying only $5.4 billion upfront-$1.5 billion in debt assumption and $3.8 billion in GE stock that will be immediately monetized-for assets it values at $8.3 billion to its own $33.1 billion in contributed equity. Even if it begins buying back Vivendi’s 20 percent stake at fair market value as early as 2006 or opts to take the new company public then (which high-level sources said is unlikely), chances are GE/NBC will not be paying anything close to a premium to the deal’s current 14 times earnings multiple, even though it expects that NBC Universal could be worth at least $62 billion within five years.
The reason is that GE/NBC has put in place performance stipulations that will limit value of Vivendi’s stake whenever it is monetized. Going into the deal, GE/NBC made Vivendi’s settlement of outstanding liabilities a stipulation to closing the deal. Those liabilities, which could total nearly $4 billion for Vivendi to resolve, are with Barry Diller and his InterActive Corp., the Bronfman family, who sold Vivendi Seagram Universal, and DreamWorks. Although they are Vivendi’s problems, NBC will assist in ensuring that all of these consents to the merger are acquired and each of the liabilities is settled.
None of these consent settlements will block the deal from closing, even though theoretically they could.
Mr. Wright said he sees the biggest risk in not having the right people in the right places, not having the right plans in place and not executing them properly. “But that’s not going to happen,” he said. “It’s all about making the most of what we have in smart new ways,” he said. “ I think it’s pretty low-risk.”