The announcement of the marriage of Comcast, the largest U.S. cable operator, and NBC Universal, the cable, film and broadcasting powerhouse, is expected within days.
If it comes to pass, the deal would offer a huge stable of content at a fair price for Comcast and help NBCU’s parent, General Electric, to unwind its stake in the entertainment business.
And as the deal inches closer to reality, many surmise that the creation of a successful content and distribution giant could have a broader, positive impact on the cable industry as a whole.
Comcast-NBCU would dwarf its nearest competitors — in addition to its 24 million cable subscribers, Philadelphia-based Comcast would add the NBC Television Network, 26 owned-and-operated television stations, Spanish-language network Telemundo, a dozen cable networks (including Bravo, CNBC, Syfy and perennial basic-cable primetime ratings champ USA Network), and a piece of online venture Hulu to its current stable of cable networks, which includes E!, Style, Golf Channel and G4.
The combined entity is estimated to have annual revenue of about $42 billion. By comparison, Viacom had 2008 revenue of $14.6 billion; Time Warner Inc. (including its Time Warner Cable distribution arm), $47 billion; and News Corp., $30.4 billion (in fiscal 2009). The combined entity’s sheer size and mix could benefit the rest of the industry.
Comcast-NBCU could become a catalyst in the further growth and acceptance of video on demand, could solidify online-authentication efforts and could even expand sports offerings by creating a more competitive rival to ESPN.
The deal also gives Comcast a huge presence in sports programming, perhaps offering some leverage for operators against ESPN. NBC Sports has rights to such iconic events as the Olympic Games in 2010 and 2012, the U.S. Open Golf Championship, the Kentucky Derby, Wimbledon and The French Open, in addition to National Football League games and the Stanley Cup Finals — all content that could lead to additional VOD opportunities for sports programming and the creation of special events channels.
Detractors point to the possibility of heavy regulatory conditions heaped on the deal (including network-neutrality and program-access conditions) and to cable’s spotty record in the realm of vertical integration.
Vertical integration — the marriage of content and distribution — has not been executed with any precision in the cable industry. Time Warner Inc. chairman and CEO Jeff Bewkes spent millions of dollars and the better part of a year unwinding his content and distribution assets. The old arguments for vertical integration — lower programming costs and exclusive content — aren’t necessarily a guarantee any more.
Comcast, nonetheless, is pushing a strategic vision in which content increases in value. At a Bank of America conference in September, before news of the NBCU deal hit the press, Comcast chief operating officer Steve Burke gave his thoughts on the matter: “I think there are a lot of case studies where content and distribution, particularly in a world where the distribution has technology that can deliver content in new and innovative ways, you really can create a lot of value by putting content and distribution together, particularly if that content is cable content,” he said.
Comcast doesn’t appear to believe that owning content will make it cheaper for the distribution side of the business. Instead, it sees content as another growth vehicle.
And the most recent numbers back that up. In the third quarter, Comcast’s content assets (E!, Golf, G4 and Style) grew revenue and cash flow by 10.3% and 12.5%, respectively. Its much-larger cable operations grew both metrics by 2.8% and 2%.
Cable distribution is still by far the largest part of the business — at $32.4 billion in 2008, it represents about 95% of Comcast’s total sales — and will be even after the NBCU joint venture. After the deal is done, analysts have estimated, distribution will account for 77% of Comcast’s total revenue and content 23%.
The deal promises to be a win not only for Comcast, but for the cable industry in ways both strategic and competitive. If executed as planned, the union offers solutions to problems now nagging all cable operators and programmers.
1 Comcast-NBCU could accelerate the rollout and acceptance of video on demand.
The business of VOD has huge potential, but has suffered from industry infighting and apathy, failing the industry’s expectations in revenue or subscribers.
Comcast has historically been one of the most video-centric cable operators in the country. It decided to focus on video initiatives, such as on-demand, well before its peers. Currently, Comcast systems have, on average, about 10,000 available VOD titles, and the company wants to double that to 20,000 titles next year. The MSO recently surpassed 13 billion television shows ordered on demand within its footprint.
NBCU, on the other hand, has a library of about 4,000 movie and television-show titles, all of which could find their way onto VOD platforms — not just Comcast’s. And its Universal Studios would help to ease the day-and-date debate by allowing Comcast and other cable operators to offer VOD theatrical films on the same day they’re made available in video-rental outlets.
Miller Tabak media analyst David Joyce said that a Universal move toward day-and-date would not solve the issue entirely, but it could make other studios more open to the idea.
“It depends on the model,” Joyce said. “I think that if they can show that it works for them, they’ll get some quick followers.”
Pali Research media analyst Richard Greenfield said that while he doubts that one studio will sway the rest on day and date, the movie industry was moving in that direction anyway.
2 A combined operator/programmer could reconcile cable’s online-TV business more quickly.
As one of the larger partners in Hulu, the online video site, NBC has considerable clout. Under the wing of Comcast, that clout could be increased by transforming Hulu into the authentication vehicle for every multichannel distributor.
Cable operators, satellite-TV providers and telco video providers are all attempting to crack the online content code by allowing their subscribers to access content on the web in an effort dubbed “TV Everywhere.”
But analysts believe that with an already established online presence — Hulu is a known name, it has a dedicated following, and most customers already know how to get to the site — Comcast could solve the online authentication conundrum for the industry in one fell swoop, by transforming Hulu into the TV Everywhere site.
“Layering on a password and tying that to the fact you’re a subscriber shouldn’t be that big of a deal,” Joyce said.
On a conference call with investors in October discussing the potential of a Comcast-NBCU union, Sanford Bernstein media analyst Michael Nathanson said Comcast could change Hulu to a subscription model (something the current partners have contemplated) or a clip model, moving the first-run premium programming now on the service behind a pay wall on its own system.
“Hopefully, Comcast-NBC will shape some of the development of online video and go after some of the dangerous implications that we think Hulu poses to the overall ecosystem of television economics,” Nathanson said on the call.
3 A successful merger could help boost cable stocks in general.
Forget for a moment all the hurdles of the Comcast/NBCU deal: the regulatory conditions tacked to the deal, the daunting task of getting a return on the broadcast investment, countless hiring and firing issues, and the eventual, but certain, culture clashes that will have to be reconciled.
If the two companies can begin to show investors a real return — or the promise of one — it bodes well for the industry. Historically, big public companies drive big public industries, and the cable industry is no different. Just like General Motors has driven the automotive industry stocks, so have Tele-Communications Inc., AT&T Broadband and, now, Comcast been the benchmarks for cable. The main benefit of this may, in the end, simply be that what is good for Comcast is good for the cable industry.
In the past five years, cable MSO stocks have closely followed Comcast’s fortunes; although the country’s largest cable operator has had a bigger share of the gains as well as the losses.
For example, in 2005, when the MSO sector declined about 10%, Comcast stock fell 20.7% for the year. In 2006, when Comcast stock was up 61%, the rest of the sector rose 40%; in 2007, when Comcast was down 36%, the sector fell 28%. So far in 2009, Comcast stock is down nearly 15%, and the rest of the sector is down about 20%.
If the cable giant makes strides in marketing, technology customer service and, perhaps most importantly, stock price gains, benefits flow to smaller operators.
“The healthier Comcast is, the healthier the industry is,” Leichtman Research Group president Bruce Leichtman said. “They are the majority for investors, and they are the bellwether for investments.”
