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CAN SUPERDWEEB SAVE THE NETWORK BIZ?

Plans by NBC and Microsoft to partner in a 24-hour news channel may be only an initial step in an alliance that has the potential to change the face of television

With the blessing of NBC parent General Electric, top brass at 30 Rock have held top-secret exploratory discussions with Microsoft about taking a major stake in all of NBC, according to sources familiar with the talks.

“There are discussions going on now that would put Microsoft in NBC’s business and NBC in Microsoft’s business,” says a source familiar with the talks.

Details are still sketchy, but sources say a deal might involve Microsoft taking as much as a 49% stake in NBC, which could easily cost in excess of $4 billion.

Spokespersons at NBC and Microsoft would not comment. NBC chairman Robert Wright and GE chairman Jack Welch, big fans of Microsoft supremo Bill Gates, have long sought a strategic partner that would give the Peacock web more clout. In the past, such potential partners as Time Warner, Viacom and Turner Broadcasting have been ardently pursued by NBC without success, usually with the dealbreaker coming down to GE’s reluctance to cede control of NBC.

Wright has been quite vocal in the wake of proposed megamergers between the Walt Disney Co. and Capital Cities/ABC, and Time Warner and Turner, that NBC has the wherewithal “to move forward” without an equity partner. But rapid consolidation in the business, coupled with technological changes on the near horizon that promise fundamentally to alter distribution, have created a climate ripe for NBC and Microsoft to marshal their resources.

Issues of control turn out to be less of a hurdle with Microsoft. The software giant has ongoing efforts to expand its empire into the entertainment business, including a stake in DreamWorks. A sizable stake in NBC would instantly raise Microsoft’s profile and jumpstart its efforts to be a content provider of not only news, but entertainment and sports.

Brass at both NBC and Microsoft are keenly aware that while current technology makes delivering video to computers a cumbersome and costly affair, new technologies, including high-speed cable modems, are on the near horizon and the two concerns want to be dominant players if and when the TV and the PC finally merge.

Since it was reported in the Wall Street Journal last week that NBC had brought Microsoft in as a partner on its efforts to launch a 24-hour cable news channel, Wright has put a gag order on his usually accessible executive team. Still, 30 Rock has been abuzz for more than a week about a major deal in the works.

“Microsoft would be a great partner for us,” says a 30 Rock insider. “Given the stranglehold that (Time Warner and Tele-Communications, Inc.) have on distribution – I mean those guys have almost half the cable homes sewed up – it would be great to have someone like Microsoft on our side, who is a leader in the charge to distribute information.”

ABC’s plans

ABC last week announced plans to launch a 24-hour news service to rival CNN sometime in 1997, and NBC is anxious to jumpstart its own efforts and be up and running sometime next year. Even if the pact in the works with Microsoft should fall apart in the eleventh hour, NBC has a key advantage over those looking for a piece of CNN’s action. NBC’s blueprint calls for it to transform its cable network America’s Talking to an all-news format, which NBC claims reaches 20 million homes.

Others now on the sidelines, including Rupert Murdoch’s Fox Broadcasting and even beleaguered CBS, are looking for ways into the news game.

One rumor making the rounds on Wall Street last week had Murdoch exploring partnership possibilities with new CBS proprietor Westinghouse Electric Corp. for a 24-hour news channel launch. Murdoch and CBS president Peter Lund recently made a joint visit to Washington to lobby Senate Majority Leader Bob Dole on various telecommunications legislation, fueling speculation the duo had other mutual interests in mind.

The two companies could theoretically use leverage they have through their extensive TV station holdings under “retransmission consent” regulations that allow them to extract a fee from cable systems operators. The fee could be replaced by a cable news network.

Meanwhile, ABC plans to use what leverage it has, both through its station group as well as with such cable programmers as ESPN – to secure carriage for its 24-hour news effort. ABC may be the news leader among the Big Three, but it will still have a serious challenge in making a viable business out of its all-news channel.

According to industry sources, ABC will spend an estimated $10 million-$20 million a year on the venture and could lose anywhere between $50 million and $100 million before it sees a profit from its news channel.

The channel will need to reach more than 15 million homes before it could become economically viable, according to industry estimates. In fact, most cable networks do not hit black ink until at least 30 million homes.

The key problem, as Capital Cities/ABC president Bob Iger notes, is for a news channel to reach critical mass in an environment in which cable systems operators such as Time Warner and Tele-Communications Inc. are major shareholders in CNN parent Turner Broadcasting System.

Cablers wary

But even cable operators who don’t have a financial stake in CNN are wary. “What do I need with another one?” says one top cable operator.

Still, the big rush to get into the 24-hour news business does pose a real threat to CNN.

“The fact that there may be one, two or three more news channels won’t expand the actual amount of money to be made from news, but it could affect CNN’s bottom line,” says a veteran news executive familiar with CNN’s operations. “Between CNN and Headline News there’s probably $550 million$600 million in revenues, with margins that are better than 30%. If you have a strong brand out there like ABC or NBC, and they have the resources to be in this for the long haul, CNN will have problems. However, that doesn’t mean the other guys are going to make a ton of money.”

Indeed, it wasn’t until Disney decided to take over ABC that the network made its move into 24-hour news – where it will compete head-to-head with Time Disney foe Warner after the Turner merger.

And while talks between NBC and Microsoft may be a long way from a done deal, their planned all-news channel may be the first part of a much broader alliance.

Rex Weiner In Hollywood Contributed To This Report.

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