A day or so after we went to press last week, news broke, from industry insiders, with the original story alluded to first on the Wrap, an industry webzine, of Comcast going after some form of ownership of NBC.
When we looked at this story, it looked to us like this said more about GE than it says about Comcast. Comcast put in a $50 billion bid to buy Disney, back in 2004 when the studio and broadcaster was doing rather less well than it is today. Disney had lost its way under a management team that preferred the status quo, and under the weight of debt that it took on to buy out ABC some years before.
Comcast should have been in the same state, but having spent $10 billion or so buying out AT&T Broadband to double its size, it had managed to pay down debt rapidly and had already emerged as a cash generating entity once more. From a point where it owed $30 billion and had revenues of $20 billion in the 2003/4 timesframe, Comcast has come a long way.
Today Comcast is still hell bent on having some control over content assets, and still has a few cable networks. One of the ways it paid down debt after the AT&T deal was to sell the half of QVC Liberty did not own, to Liberty Media, picking up $7.9 billion on the process in 2003. That transaction hurt CEO Brian Roberts because he felt he might build a content business around it, even though it threw off lots of cash.
Comcast finances are in better shape (it still owes $28 billion, although very little of it is imminent, but now it has rough annualized revenues of $36 billion), and it throws off something close to $1 billion of cash each quarter, and it still has the burning resentment that most pay TV companies have towards the content side of the business. From where it stands, an established content business is easier to run than a broad spectrum triple play business, especially in the US, especially at a time when AT&T has been allowed to merge back into one monolithic whole (minus one or two parts) and finally has its own quadruple play act together.
We may argue that Time Warner just separated off Time Warner Cable from the rest of the group, simply because running a converged group gave it few advantages. An operator group cannot get better content deals from inside the same group, partly due to market economics, partly due to internal politics, but mostly due to a highly regulated content market, where regulators stand in the way of such cross subsidies.
Fox could not give its content away cheaply to DirecTV when they were both part of News Corp, to give it an edge, and neither could Time Warner with its cable company. So what’s the point in putting together a Pay TV operator and a content business?
One reason is just that Wall Street just loves deals to be done. Investors and banks will bring down pressure on companies to separate one year and to merge the next, just to keep those commission checks coming.
Something similar went on at Viacom when first it hived off Blockbuster and then it pushed CBS out into the cold. Here there is another similarity with NBC, which itself is both a national broadcaster and a studio, in the same way as CBS and Paramount, within Viacom were. Wall Street logic dictated that there was no synergy, in fact the two sides to the equation hated one another and were frequently forced to cut deals to each other’s detriment.
But despite that mutual dislike, with studios trying to get the most profit they can for creating content for broadcasters, and broadcasters canning expensive TV series as soon as the viewing figures take their first glitch, crystallizing losses at studios, sometimes on a whim, it wasn’t this that did for CBS within Viacom. Instead is was the falling value of its radio assets which made it look to Wall Street like the entire group’s assets were crumbling. So perhaps NBC, with no radio station assets to drag it down, is not in the same boat as Viacom was back when it cut CBS aside in 2006.
The truth is that it remains tough to reconcile broadcasting with anything, since it is in semi-permanent decline. Broadcasters can only fight against the general distractions of home gaming, the imposter of DVD content in the home, the dilution to its advertising that DVRs bring and the eventual shift to internet of most streamed content, by fighting fire with fire.
Broadcasters have to take their free to air , advertising driven model to the internet and eventually to handsets, to make up for its loss of audience these past five years or so. Cable networks must also do the same. But they must somehow take a different model, their paid content model, onto the internet or risk undermining their existing route to market.
Does this mean that a studio that produces content both for broadcasters and for cable networks is conflicted? No we don’t think so. But it might mean that a broadcaster which also owns a content company may have internet stresses and strains that can harm business?
So picture the emerging company from such a deal, a cable operator which can name its own price for cable networks because of its enormous reach, suddenly owning or controlling a studio which creates content for both cable networks and for broadcasters, all sat within a broadcaster. Now imagine running it?
Well Brian Roberts might be clever enough, and financially astute enough to succeed where others have failed here, but first off, does Wall Street think so? Well the 12% fall to the Comcast stock level ever since the deal was revealed might only be the effect that always happens as a buyer is discounted and its prey rides higher. But the 3% fall in the overall GE share price, the company which owns NBC, perhaps gives Wall Street’s attitude away. It will need a lot more convincing before investors will bless this deal.
Now sit yourself back in Brian Roberts’ seat and think about how you would run the online part of the merged entity’s business. Are you pushing Fancast the major Comcast content portal, which is gradually changing to the TV Everywhere model whereby paying cable network customers can see the content online for free, as long as they continue to pay. Or are you going to continue to support Hulu, the online video venture co-founded by NBC with partners Fox and Disney?
Let’s be clear, they are not mutually exclusive, once you have a foot in both camps. There would be a little to-ing and fro-ing over just which NBC content, fell into which camp. Does Mr Roberts think certain assets are better at bringing in online advertising revenues or better at riveting existing customers to their cable TV subscriptions. But his interpretation is unlikely to be agreed wholeheartedly at both Fox and Disney, and could the potential for increased friction in the running of Hulu, leading to its disruption and eventual destruction.
It has always been our contention that Hulu is designated for the scrap heap anyway. We don’t think you can take some of the hottest content in the US, and bundle it together and give it away, and make money out of it. And even if you can, how much money will be made for whom?
Is it divided based on how much content is put out for free? Is it divided based on shareholding? Is it divided based on the viewing figures online (or broadcast) of content placed on it? We don’t know this, but there is already enough friction on the Hulu business model for a successful introduction of a service to be destroyed by internal politics.
What it will NOT do is make the kind of profit which Fox, Disney and NBC ALL need in profit contribution for the use of that content. Hulu will be making a loss for some considerable time to come, depending upon how it pays for content.
Add Comcast prejudices in there and it may prove impossible to run a good deal sooner than it would have been without Brian Robert’s contribution to its management. To be fair, Fox has an impressive set of online services of its own and still it has managed to not ruin Hulu, but we’re sure there have been some tough moments.
However Roberts may see a Fancast which has the best NBC free to air content (better than that placed on Hulu) and some content only available to existing cable subscribers, as a double whammy, creating a destination for all of America to get some free viewing, and then guiding those people inexorably towards a Comcast subscription of some sort, and therefore the rest of the web content.
But investors will have a tough time trying to swallow this. Neither of those free content propositions are yet providing concrete evidence that they are the way forward, the correct interpretation of a seismic shift in power between linearly viewed content and internet on demand content. To us, the people that live with this issue, it has been obvious for five years that this is inevitable, but that has never stopped investors from burying their head in the sand and insisting that a company doesn’t move with the ‘vision thing’ in the CEO’s head, but instead moves under the guidance of the ‘obvious’ steps available to him.
Sprint’s move into WiMAX was the result of one man’s vision, and the result is likely to be the best US wireless network, but not until shareholders have suffered long and hard in both Sprint shares and in the shares of any company associated with it, such as Clearwire. The vision may create something great and good but investors don’t like being forced to go along for the ride with something unexpected.
It is these investors who are saying, why can’t Roberts see what’s staring him in the face, and in the light of recent legal steps which have taken the ceiling away from cable TV ownership, go after a merger with Time Warner cable. Or at least he should be buying more cable operators and keep himself out of this ‘internet’ mess. They would even put up with his love affair with constantly upgrading infrastructure ‘ DOCSIS 2.0 cost Comcast a fortune to put through the antiquated AT&T network, now DOSCIS 3.0 is costing an arm and a leg. But at least it means that Comcast can chase more broadband subscribers from AT&T and Verizon.
The fight for the control of digital media technologies is full of companies who started out as one thing, like a telecommunications operator, who want to be entirely another thing, such as a pay TV operator.
Roberts perhaps sees that it is time for Comcast to mix it with the likes of YouTube, rather than continue doing more of the same old thing. Investors are perhaps saying that he will do it over their collective dead bodies.
But other investors have perhaps caused this situation, those of GE. The company merely has to sit tight and wait for its Capital Finance division to recover at the same pace of all of the US financial markets. The division fell from quarter revenues of $18 billion this time last year to $13 billion and a contribution of almost $3 billion down to $600 million. It is the most sick of all of the GE properties. Energy infrastructure is down slightly in revenue, but up in profits. Technology infrastructure is noticeably down in revenues, but only slightly off in profits. So why would investors look at one of the smallest operations within GE, NBC, which is mildly down in revenues and off 33% in margin.
Simply because loss of control, but not its entire shareholding, will retain the pizzazz associated with owning a film company while putting a little cash in the bank.
GE is a complicated beast. It has $97 billion in liquid assets (down $2 billion this year so far) and yet even a recent noticeable decrease of $19 billion in the amount it owes short term still means it owes almost $175 billion. And on the one hand it is owed $351 billion in financing receivable, and yet it owes $339 billion in the funding of such, which are just balanced leasing assets for the most part.
Whatever amount of money the deal throws up, is probably not enough to affect the financial equation at the parent, but it perhaps becomes one less thing for management to worry about. NBC became NBC Universal when Vivendi sold Universal Studios to NBC in 2003/4, and there remains a hangover of a 20% holding that Vivendi retains in the combined entity, leaving GE with just 80%. If Comcast steps in for a 51% slice that will only mean GE giving up 31%, and the cash element from that is not big enough to right the GE ship, and yet plenty big enough to stretch Comcast resources for a few years to come. But it does mean that Vivendi could not come along and demand the purchase of the rest of its shares at a time when GE has other things occupying its mind.
The combined entity would own a few dozen TV networks NBC, and a handful of profitable cable TV networks including NBC’s USA and Comcast’s E! entertainment channel. It would also own NBC Universal’s Universal movie studio, and 10 local NBC stations from New York to San Diego.
The underlying thing which drives Roberts may be exercising some control over, or getting some benefit from Hulu. Its own Fancast service has a pitiful following, while Hulu has 40 million regular online viewers.
But our view is that Wall Street has been burned before by major cash generating businesses chasing the internet dream and investors will do their utmost, including dropping significant chunks of Comcast stock, to dissuade Roberts from this deal.