The planned joint venture between Comcast and NBC Universal will create a massive media production and distribution machine that marks the move from the traditional television and movie business into a new era of networked digital distribution. There are already questions about what that means for Hulu and the implications for the OnDemand Online service that Comcast is rebranding Xfinity as part of its own TV Everywhere ambitions.
The deal signals a significant change in the broadcast landscape in America that has been developing over decades. The dominance of free to air broadcast networks in America has long since been overtaken by cable and satellite operators offering subscription services. As a broadcast television network, NBC has been slowly declining in power. It is increasingly clear that the future will be dominated by the delivery of information and entertainments services delivered over digital networks.
“If the future of media is cable, digital and global, this combination serves all three,” NBC Universal chief executive Jeff Zucker told analysts.
Under the agreement, a new venture will be formed with Comcast initially owning 51% and GE retaining 49%, although there is the potential for Comcast to achieve outright ownership of the new company in the longer term. Subject to regulatory approval, the new vehicle will include NBC Universal, with its broadcast network and ten local television stations, a movie studio and theme parks. Comcast will contribute its cable channels and some other assets, together with $6.5 billion in cash, the majority of which will go to buy out the 20% stake in NBC Universal owned by Vivendi.
The deal is really all about the cable channels, which will contribute over 80% of the revenue. Effectively, it will create two businesses for Comcast, one with revenues primarily derived from programming and the other based on distribution.
Of the NBC broadcast network, Brian Roberts, the chief executive of Comcast, said “there is more upside than downside” in buying it today, “since it only about 10% of the cash flow”.
With respect to the movie business, “The industry is in transition from DVDs to electronic distribution after a period of extraordinary growth, and it does have to contend with a new set of realities with the electronic age.” He said: “Hollywood has a long tradition of changing distribution models as technology changes, and we think we can really play a helpful role as a major electronic distributor in this next transition.”
He said the majority of value was in the cable programming channels, with annual growth rates of 15% and margins of nearly 50%. “We think cable networks are one of the best businesses in the media sector because each channel is its own multimedia brand, with a minimum of two robust revenue streams in affiliate fees and advertising and a great online presence.”
Steve Burke, the chief operating officer of Comcast, who was previously with Disney, added: “We also believe that content plus distribution creates real value, particularly now at a time when new technologies are allowing you to do things that you have never been able to do before and bring things to consumers that they have never gotten before.”
He said that distribution benefits content while content benefits distribution, with the opportunity to launch and grow cable channels, to use new technologies such as video-on-demand, electronic sell-through and on-demand online.
“We are particularly excited about interactive television advertising and applications, the ability to use the cable two-way plant to allow advertisers to do what they’ve always wanted to do, which is put ads to specific homes that show an interest in what they are advertising,” he continued.
“We also think there is the ability to create new services and new packages for our cable and Internet customers in the future. In our mind, content and distribution go together very naturally. Obviously, not everyone believes that, but we really look forward to proving that they do in the months ahead.”
While the future of online distribution is strategically central, it is not currently material in terms of revenue in the context of the overall deal. However, there was inevitably a question about what it means for Hulu and the separate TV Everywhere initiative that Comcast has been pursuing with Time Warner Cable.
Hulu is a joint venture between NBC Universal, Fox and ABC, in which NBC Universal now has a 27% stake. Comcast has not been a great fan of the free online distribution model, and has been countering with its own initiatives, aimed at offering programming online only to pay-television subscribers.
“NBC Universal is distributing a lot of their broadcast content on Hulu, and they have been quite careful not to put too much of their paid-for-cable content out for free over the internet,” said Steve Burke. “We think both those strategies are smart and appropriate — not that they asked us — and we would see after the deal closing, lots of broadcast content going to Hulu and being available for free, and cable content that cable customers pay for, that cable companies and satellite companies and telcos pay for, being on TV Everywhere.” He concluded that “Hulu and TV Everywhere are complementary products”.
Asked if that might change when the deal closes, and whether there could be a Hulu Premium, he said “That is certainly not in the cards”.
In practice, the agreement will take some time to receive regulatory approval and even then Comcast will have only a minority say in how Hulu is run. However, by the time the deal closes, the NBC licensing deal with Hulu will be up for renegotiation, so all bet are off.
It seems likely that Hulu will come under pressure from its other partners to introduce some form of paid model. Comcast will no doubt want to offer premium programming and movies from NBC Universal to its paying subscribers.
It has emerged that as part of the broader TV Everywhere initiative Comcast is changing the name of its OnDemand Online to Xfinity.
The effective acquisition of NBC Universal by Comcast has been compared to the ill-fated union between AOL and Time Warner at the height of the millennial technology boom. That destroyed value as the combination was unable to realise the supposed strategic synergies.
So far the track record of the cable industry in accelerating innovation has not been great. While cable companies have rolled out video on demand and digital video recorders, the benefits of their networks in terms of offering interactive services and targeted advertising have yet to be fully exploited.
Cable operators like Comcast face the prospect of online video services and network connected television displays rendering their current business model redundant. In reality, the threat of so-called cable “cord-cutting” is often overstated, and consumers will actually become increasingly reliant on cable for high-bandwidth network access.
In the meantime, consolidation of premium programming channels will serve to reinforce the position of Comcast as the leading cable television operator in the country.