The first post-merger steps NBC Universal take later this year may include making USA Network the official cable home for Olympic Games telecasts, making a bigger bundled play for advertising dollars in the upfront, launching select “Law & Order” franchise episodes on demand and using the company’s cable networks to breed new programming.
However, NBC Chairman and CEO Bob Wright makes no bones about the fact that NBC Universal’s focus-first and foremost-will be on preserving and advancing its television interests at a time when all of the conventions upon which NBC has built itself into a $35 billion business are being challenged. It will be a television-driven company.
“The television portion will drive the company. But television is both broadcast and cable. The motion picture part of the business will continue to be highly visible and very important. The film and television libraries also will be significant contributors,” Mr. Wright told TelevisionWeek. “They are just different entities, that’s all. These are just windows.”
That said, it may be tricky transforming Universal’s studio into a product development and library center for the merged company’s TV outlets, though it will continue to go about its traditional film and television business.
NBC is sure to get “first look” at most original TV product, sources said. Mr. Wright said the company is intent on tapping available Universal films and TV programs for creative niche content blocks, cable channels and new on-demand businesses. He will continue to use his expanded portfolio of cable channels as a place to create and repurpose programs.
The incentive to foster creativity and development was never stronger, since NBC acknowledges that the next great idea on television frequently comes from new, unknown sources. But some Hollywood executives wonder just how independent and financially flexible Universal will be operated by executives whose only point of reference is a General Electric-correct NBC.
Jeff Zucker, former entertainment czar and president of NBC’s newly formed news, entertainment and cable group is leader among equals, with Universal Entertainment President Ron Meyer (overseeing the studio and theme parks) and NBC TV Network Group President Randy Falco (commanding most other nonprogramming operations of the merged company) also reporting to Mr. Wright. But it is Mr. Zucker, considered a television wunderkind, who is singled out as the successor CEO.
A career GE executive who doubles as a vice chairman of NBC’s corporate parent, Mr. Wright has been a visionary leader when network broadcasters needed him most: ending affiliate cash compensation and justifying cable network ownership. But his eye never strays far from the bottom line. He concedes he is as fixed on achieving $500 million-plus in annual cost cuts and synergies as he is committed to repositioning NBC Universal as an interactive multichannel player.
Having pushed for more than a decade to expand NBC’s footprint in a multichannel universe to include a studio and more cable networks, Mr. Wright has an unprecedented financial cushion on which to place his Vivendi Universal Entertainment bet.
NBC is expected to report a 20 percent rise on operating profits of about $2 billion on a 4 percent rise in revenues of about $6.8 billion in 2003. This year, NBC’s overall operating profits are expected to rise 10 percent to $2.2 billion on the strength of national election and Olympics spending, which should boost overall revenues 12 percent to $7.7 billion, according to analysts.
But by 2005 NBC’s operating profits could flatten out and its growth could come to primarily hinge on the VUE assets, which are powered by the USA cable network and Universal film studio.
USA generates an estimated $700 million in annual cash flow for Universal and is valued at 1.5 times the film studio-not at all the financial profile of a general-interest cable network out of sync.
The NBC TV Network is the most profitable of its broadcast network peers, generating nearly $1 billion in operating income on about $5 billion in revenues in 2003, according to analysts.
However, revenues generated by new on-demand services, cable channels and other new businesses by tapping NBC Universal’s expanded content portfolio will become crucial in offsetting ratings and advertising revenue losses at the NBC TV Network, whose long-dominant prime-time schedule is under siege.
The fact that NBC still is not sure which or how many Universal film or TV titles it immediately controls to launch new services is the way studio licensing ought to work, he said.
“The reason we are comfortable with this is that they are doing a good job with their current distribution agreements, and that gives us strength to get to a period of time, which is a few years from now, where we might have a great deal more flexibility with the programming. By then the digital resources will begin to create that opportunity,” Mr. Wright said
“This is a strategy that is a five-year plan. It’s clearly not going to get into full steam until 2006 or 2007,” he said.
NBC could aggressively seek to buy out existing license agreements on choice Universal films or television programs around which NBC can build new on-demand and cable services. “I suppose it’s possible. I don’t have a list like that,” he said.
Cable operators’ extensive storage capacity could entice NBC Universal to establish a limited on-demand studio “lending library” controlled at the headend perhaps as early as 2005.
“If we could digitize the entire library, which takes a lot of time and money, then subscribers could search that entire library through their cable systems and select what they want, when they want it and be billed from there,” he said.
“But it isn’t going to happen that way initially. That is where you want to end up. At the start, we’ll get people used to this idea of looking for programs. It’s something you have to market. You see some examples at Cablevision and HBO. They are marketing small sections of programming, like [making] `Sopranos’ episodes available to get people started,” he said.
“Our financial models don’t require us to change utilization of Universal assets for the next two to three years,” he said. “We have plenty of headroom in operating their assets the way essentially they are.”
“We can get synergies on more apparent things, such as real estate, before we have to drive any change in content,” he said.
That will start by likely consolidating both companies’ creative operations at the Universal West Coast site. Such real-estate consolidation and sales comprises 30 percent of the cost cuts being planned. The other major factor will be headcount reduction. For instance, sources estimate that folding Universal’s cable operation into that of NBC cable could eliminate $130 million in costs. NBC and VUE executives decline comment.
Some high-level, well-regarded Universal executives, including Universal Television President David Goldhill and Universal Television Chairman Michael Jackson, are not expected to remain with the new merged company, sources said. NBC and VUE executives decline to comment on personnel plans that have not been announced.
Given its expertise and resources, NBC will be able to very quickly and effectively bolster Universal’s already strong USA and Sci Fi cable networks, just as it fine-tuned its recently acquired Bravo the past year. Ratings are up and the average viewing age has been improved from 52 to 45 on the success of new programs, including the hit, “Queer Eye for the Straight Guy.”
“This is about looking for ways to make them more exciting and better. They [Vivendi)]have been very limited in what they could do to support USA and Sci Fi. We have lots of ways to enhance and promote them,” he said.
Sources say NBC is anxious to make USA, which is VUE’s single-biggest profit center, a major cable hub for some of its more specialized Olympic Games telecasts. It may also seek to strengthen other of USA’s sports telecasts with popular franchises it already controls,
such as NASCAR and golf.
NBC also could cross-utilize its NBC broadcast network and branded cable networks for promotions, developing new programs and repurposing select series.
But that doesn’t mean operating NBC Universal in strictly conventional ways. Just this past week, Mr. Zucker announced NBC’s plans to develop and operate a 52-week continuous prime-time season that will officially launch in August amid presidential political conventions and Olympics coverage. The network will also launch new series in January and May.
“We should think about organizing ourselves for a digital future,” Mr. Falco said. “We’re trying to figure out what exhibition windows we should look at and how the current system should be changed in light of new technology.”
“What happens to the network business year to year could have less to do with cable in the future and more to do with the popularity of video games. We need to develop ways to compete with that,” he said.
“The bet we’re making is on content and what its value will be in a digital world where distribution is more of a commodity,” Mr. Falco said.
That said, NBC Universal’s first brush with the largest and newest distributor, the DirecTV-empowered Fox Entertainment Group, already is under way, because the dominant domestic satellite provider is negotiating its licensed carriage agreement with NBC Universal’s Trio cable network. NBC and VUE executives decline to discuss it.
NBC also will need to rethink its free news, late-night and entertainment contributions to Comcast’s free video-on-demand trials, since NBC Universal intends to charge subscribers for its own newly launched on-demand services.
“The cable operators are going to have to make a decision about the role of [video-on-demand] vs. utilizing the TiVo-like hard-disc memory base. From an IP standpoint, we would prefer VOD, and I think the cable operators would too. If they think they are going to be assaulted by DirecTV or EchoStar or consumer electronics companies giving away personal video recorders, then they are going to be forced to deal with that,” Mr. Wright said.
For now, NBC officials concede they are frustrated and stymied to take their pre-merger planning to the next level. A second request for in-depth information by the Federal Trade Commission, which can be routine, has unnerved officials of French-owned Vivendi Universal, who are guarded about sharing information, even in high-level brainstorming sessions such as the one NBC and VUE officials plan this week to better identify specific synergies and cost cuts.
Vivendi Universal officials also are nowhere near making headway in their negotiations of a legal and financial settlement with former VUE chairman Barry Diller, who, like his new company InterActiveCorp, have complex stakes, the unraveling of which could foil the NBC Universal deal.
“It is not necessary to terminate this agreement. We can co-exist together. An option is to not do anything,” Mr. Wright said.
“We’re only getting into it now. It’s very complicated. Everything is doable at a price. The question is whether the parties can come together on some form of it. I think Barry would rather have his interest in cash that he can do something with rather than as preferred shares. But the unwinding of those is tricky business, and it creates a lot of potential liabilities. He clearly doesn’t want to be a part of that and neither do we. So it’s going to be a slow and a complicated process,” Mr. Wright said.
Mr. Wright said NBC will develop more series and new programming practices on its cable networks, some of which can be carried over the NBC TV Network. Conversely, sources said Donald Trump’s “The Apprentice” could be repurposed on CNBC.
“You have to provide for the development and production of successful programming, and you have to keep creating and exploiting it,” Mr. Wright said. “That can be a lot more difficult and risky than developing hit films.”
“The more programming you produce, the greater the opportunity for growth and getting smarter about it,” Mr. Wright said. “That multiplier is what I am counting on to get that lift.”