Posted on Monday, December 14, 2009
Even as Comcast celebrates gaining a controlling interest in NBC-Universal, there’s a flashing red light on the horizon warning of the company’s potential demise.
Yes, Comcast’s acquisition reflects a carefully conceived strategic vision. The company’s brain trust, inspired by paterfamillias Ralph Roberts, are accomplished deal mavens and skilled operators. It’s not by accident the company is both the largest cable system operator and largest broadband ISP.
Comcast was artful in patiently crating the deal (even if there really wasn’t any other credible buyer for NBC). The opportunity gestated years ago (even before the run at Disney in 2004) as the turmoil at NBC became increasingly apparent. All the planets were lined up signaling GE’s impatience with its unloved and unruly adopted child: NBC was wallowing at the bottom of the network ratings heap; management was the poster child of dysfunction; NBC’s acquisition of The Weather Channel was utterly un-GE like (bringing in private equity partners as if to hedge the investment in a cable channel); the movie-making business is condemningly problematic, resisting the procedural dictates so intrinsic to GE’s modus operandi; and GE’s stock price plunged into single digits.
Ralph Roberts undoubtedly saw he had a motivated, if not desperate, seller.
(Note: For perhaps the most comprehensive and entertaining insight into broadcast television’s decline, and particularly NBC’s stumbling, read NY Times television reporter Bill Carter’s book “Desperate Networks.” All networks are laid bare, but Carter’s report punctures any illusions regarding NBC’s strategic vision and the efficacy of Six Sigma).
But why would Comcast chase the apparent synergy strategy when the “S” word had become toxic to Wall Street media analysts? After the monumentally flawed AOL merger with Time Warner, TW is selling off assets and is now hyper-focused on a transparent strategy: Content is king. Depending upon the given month and year, Barry Diller is pasting together or blowing up his portfolio of assets, dismissing synergy while extolling “transparency.” (Always benefiting himself at the expense of shareholders, of course, and maintaining IAC as his playpen, just as John Malone does with Liberty Media. Question: Who can create more classes of voting shares for a single asset: Malone or Diller? Keep your eyes on Live Nation and Ticketmaster, Diller’s latest masterpiece.) Other examples of the discarded “S” word: Paramount/CBS under the Viacom umbrella and, for those with a bit of historical perspective, the more distant breakup of AT&T and failed legacy of AT&T Broadband.
The Financial Times noted that the Comcast–NBC/Universal deal represents “how media synergy ends, not with a bang, but a whimper.” The FT also notes that the strategy justifying the deal is “convoluted,” saying that “synergy, in any sense other than a company buying a similar one and cutting out costly duplication, has never fulfilled its promise in media.”
Interesting enough, Comcast made sure to note that its justification for the deal did not include any efficiencies from combining assets. Steve Burke, Comcast’s president, stated that 99.9% of the employees (approximately 100,000 at Comcast and 30,000 at NBC-Universal) don’t overlap. Comcast is setting the context: Don’t judge us by the criterion that Viacom’s Sumner Redstone or the board of AOL/TW fed the world.
Comcast is surely right about the lack of synergies, at least on the cost side. The portfolio of businesses of the combined companies consists of:
- Sports teams (Philadelphia Flyers and 76ers)
- Theme parks (Universal Studies)
- Internet (Fancast, DailyCandy, Fandango, Plaxo, iVillage)
- Cable networks (E!, Golf Channel, Regional Sports, SyFi, USA, Bravo, NBC, MSNBC)
- Broadcast networks (Telemundo, NBC)
- IP video (Hulu)
- Film catalogue (Universal, somehow to be connected with Comcast’s stake in MGM)
- Cable subscribers: 24 million
- ISP subscribers: 15.7 million
The real bet is that, in a digital media world, Comcast needs video content to protect its cable operator franchise. The company wants to be able to influence all the content and distribution issues challenging its franchise.
IP video is the future. By owning a stable of cable networks (which will contribute an estimated 82% of the company’s cash flow when the deal is completed), and by controlling NBC-Universal program production and distribution, Comcast hopes to develop a defined distribution chain for video, while exploiting every niche in the theatrical, video-on-demand, and DVD release schedule.
For Universal Studios movies (and perhaps MGM, as well, as a result of Comcast’s investment in the troubled lion), there will be distinct windows for video-on-demand and DVDs and various toll-collection schemes for watching movies on whatever digital platform, whether it be mobile smart phones, tablets/notebooks, computers, DVRs, or Netflix-type offerings.
Television network and cable programming will be offered to subscribers via various subscription platforms: The more you pay, the sooner you will get to see the content, sometimes streamed, sometimes downloaded. By making every possible bet on the roulette table with their distribution and content chips, Comcast expects to avoid having its base of millions of broadband and cable subscribers be undermined by Hulu and other forms of online video-on-demand.
Moreover, Comcast can influence the reinvention of NBC as a cable channel, constructing the coveted dual revenue streams (advertising and monthly affiliate fees, a la basic cable, a concept advocated by none other than John Malone).
Comcast’s obvious objective is to avoid the financial devastation experienced by the music and publishing industries. As a public company, Comcast also needs to grow revenue and earnings and not be viewed, as cable stocks have been, as moribund. By standing in the center of the content-distribution confluence, Comcast hopes to drive its triple play (video, data and telephony) and even work to build additional revenue from mobile offerings and WiMax, via its investment in ClearWire. ClearWire’s envisioned 4G service will provide Internet connectivity on the go and probably cost an incremental $30 a month, or more.
The business strategy: offer a menu of service offerings. It is not preposterous to think a portfolio of services could exceed $200/month per subscriber.
It’s true that Comcast is positioning itself to handle all sorts of compelling questions:
- Will broadcast networks become cable channels and provide dual revenue streams?
- Will net neutrality prevent ISPs from “throttling” and tiering ISP service offerings?
- Will video-on-demand cover the continuing decline of DVD revenue?
- Will Netflix ($9.99, all you can eat) and Red undermine video-on-demand?
- Will there be any real differentiation between IP video and cable video?
But then there is the first red light on the horizon. There is an adage that is all too relevant: The deeper you examine the past, the clearer the future. Comcast is treading where just about every media industry has tread before at some point, i.e. seeking to control its destiny through vertical and horizontal integration. The result, just about each and every time: government regulation that unravels the violating business.
By being able to influence all these issues, by driving so much revenue per household, by controlling content and distribution, and by charging for hardware on customer premises, Comcast will surely draw government scrutiny. How?
Just as RCA did when it was positioned to influence all radio developments: It was broken up and redefined by the Justice Department in 1930.
Just as the motion-picture industry did when it had perfect vertical integration: The industry was broken up by the government-mandated consent decree of 1948.
Just as broadcast television did when it had complete oligarchical dominion: The FCC introduced PTAR and FinSyn in the early 1970s, altering ownership and programming schedule rules (until doing a U-turn in the 1990s).
Just as AT&T did when it built what many called a “natural monopoly”: With the prodding of MCI-initiated litigation, the Justice department broke up AT&T in 1982.
Just as Microsoft did when it used its operating system to build a monopoly in browsers: The Justice Department hit it over the head with a 2×4.
Just as it is likely that Barry Diller’s outrageous proposal for a monopoly through a merger of Live Nation and TicketMaster will be tossed aside.
Just as Google was quietly informed by the Justice Department to keep its hands off Yahoo.
The likely problem for Comcast is its ubiquity: It will be involved in all digital content and distribution debates, broadband “universal” access, spectrum allocation, and net neutrality, IP video distribution windows, IP telephony access—and this is just the start.
The second red light on the horizon is that Comcast is mistaken when it thinks it can somehow maintain a distinction between television and “computer” screen viewing, and somehow continue to drive both video and Internet revenue (and telephony as a high-margin add-on) by controlling the distribution pipes and limiting access to IP video. Once a low-cost media server gains acceptance—using WiFi to deliver content from the Internet to a large screen—video, data, and audio from any input can be sent to any screen. This will blow apart the convenient though stupid lean-forward/lean-back differentiation between computer and television screens that TV executives used to claim as a way of dismissing the threat that consumers would watch video on a computer screen.
There is no enduring distinction between IP video and cable video. The technology, relatively inexpensive and easy-to-use, is available to make the two merge. You just plug the cable video input and Internet input into a media server and use a wireless router to send the output to any screen in the house. The viewer couldn’t care where the video originates. It’s all the same.
The problems are just beginning, too: Technology has a way of becoming cheaper and easier to use at a ferocious rate.
Comcast will be forced to try to be the traffic cop, telling viewers what they can and cannot do, and at what cost. Viewers won’t go along with the company’s wishes. Neither will regulators in Washington.
This is a guest post by Ken Krushel, a senior alliance member of the Devil’s Advocate Group. Ken has held senior strategy positions at NBC, Paramount and MGM. He has consulted with Warner Brothers, Sega Corp., MGM and Lifetime Television. He was CEO of College Enterprises, Inc., which merged with Blackboard, Inc., to create the largest enterprise educational software company in North America. He also founded Proteus, Inc. a pioneer in marketing specialized subscription-based content for mobile phones.