Merger with NBC U aims to be a game-changer

Hollywood is inching toward big changes in the way it sells its wares. The merger of Comcast, the company with the fattest pipeline into America’s living rooms, and NBC Universal, home to a Hollywood major, a Big Three net and a host of top cable channels, could be the catalyst that accelerates the film and TV biz’s transition to a truly on-demand business model.

Comcast toppers Brian Roberts and Steve Burke certainly hope so.

Burke, as NBC U’s incoming CEO, has the formidable task of innovating through the marriage of Comcast and Peacock assets. His post-merger role was formalized Sept. 26, shortly after NBC U’s current CEO, Jeff Zucker, confirmed he will depart once the merger is completed.

Burke will execute the vision that Roberts and his team have been honing for years, at least since Comcast made its unsuccessful run at Disney in 2004. Comcast has long wanted to diversify beyond its wired world by controlling some of the content that flows through its cable pipes, as well as reaping more rewards from cable programming and international markets, where NBC U has moved forcefully with new channels and investments in local production.

Roberts — scion of industry pioneer Ralph Roberts, who saw the potential of the cable in 1963 when he co-founded Comcast by buying one 1,200-subscriber system in Tupelo, Miss. — has articulated a vision of turning Comcast into the conduit that provides as much programming as possible to viewers on any platform, from cell phones to high-def home theater systems.

But wait — haven’t we heard this tale of the wonders of vertical integration before? The Comcast-NBC U union seems on track to be concluded within weeks of the 10-year anniversary of the completion (in January 2001) of the AOL-Time Warner deal. That merger was supposed to be the game-changer that would capitalize on the union of mighty content and distribution assets under one roof.

We know how well that worked out. Time Warner was so humbled in its bigger-is-better vision that over the past two years, it not only split off AOL but also Time Warner Cable, even as it remains a cable programming powerhouse with the Turner nets and HBO. Viacom also went through a deconsolidation phase, splitting CBS and Showtime from Paramount Pictures and the MTV Networks. And there are persistent whispers that Disney is quietly looking for a buyer for ABC in an effort to better focus on its cable programming and production businesses.

Comcast’s leaders clearly see the glass as half full, however, and there is no question that showbiz has changed exponentially since AOL and Time Warner tied the knot. Consumers now eagerly turn to YouTube, Hulu, Netflix, iTunes and their iPads to watch broadband and Internet-delivered video on their own timetables.

As Comcast chairman-CEO Roberts put it on Dec. 3, 2009, the day Comcast’s deal to acquire 51% of NBC U from General Electric was announced: “This deal is a perfect fit for Comcast and will allow us to become a leader in the development and distribution of multiplatform ‘anytime, anywhere’ media that American consumers are demanding.”

Indeed, the growing consumer yearning for greater choice and flexibility in how and when they watch movies and TV shows has been a key refrain for Comcast execs as they faced a gauntlet of hearings and scrutiny during the regulatory approval process. The message to Congress and the FCC has been: We’ll be in a position to give the people what they want — unencumbered by rights issues or legacy concerns about maintaining the status quo.

Does that mean NBC U’s new owners will come out swinging with, for instance, a $50 VOD offering of a Universal Pictures summer tentpole a month after the pic hits the multiplexes?

Probably not on day one, but the arrival of the cable guys in Universal City will surely add muscle to the major studios’ efforts to carve out new opportunities within the traditionally rigid windows for theatrical release (90 days of exclusivity with exhibs) and homevideo release (120 days after theatrical release). Disney and Warner Bros. have been experimenting with early DVD releases and VOD windows that are day-and-date with homevid release, over the protests of exhibitors and major home-vid retailers like Walmart and Best Buy.

Long before the NBC U deal was in sight, Comcast had been the head cheerleader for the potential of VOD delivered in glorious high definition through dedicated cable channels.

At the Consumer Electronics Show in January 2008, Roberts earnestly announced Comcast’s intent to dramatically expand its on-demand offerings, both paid and free, to more than 6,000 movies a month, up from 1,300, plus thousands of hours of TV programming. The expanded roster would be another incentive for subscribers to pay the full freight for digital service, and it would help the studios develop another revenue stream for feature film product, as well as provide more exposure for TV programs through free VOD channels.

Roberts dubbed the plan “Project Infinity,” but the company soon encountered a very finite problem: the difficulty of securing the most optimum movie titles from outside providers.

Comcast pushed hard to convince studios including Warner Bros. to offer new theatrical titles on VOD the same day they hit the homevid window, as opposed to about a month later. Comcast ran extensive tests in selected local markets to help persuade the majors that day-and-date VOD did not cut significantly into physical DVD sales of a title. Today, the Comcast on Demand VOD channels offer some 10,000 movie titles a month (some for a fee, but most of them older titles offered for free) and a total of 70,000 hours of programming, including TV series. The robust growth of Comcast on Demand in recent years convinced Roberts and Burke that the only thing stopping the premium VOD market from growing significantly was the limited availability of new titles. Owning a movie studio will certainly help them solve that problem.

With those considerations in mind, Comcast and NBC U insiders deny the persistent chatter that the post-merger company will look to spin off the Universal Studios film and theme-park unit. Burke has been poring over all aspects of NBC U operations in the 10 months since the deal with GE was announced. But that’s still not the same as being involved on a day-to-day basis in operating decisions.

“Burke’s been saying that he’s not going to sell something off until he really knows what he’s got,” says an NBC U exec who has been close to the transition process.

Burke is widely regarded as a whip-smart executive. (He impressed Warren Buffett enough to be made a board member of Berkshire Hathaway.) He’s a Harvard Business School grad who is described as a natural leader, methodical in his decisionmaking, and a supportive, considerate boss who empowers his lieutenants and shuns the spotlight. (Case in point: Burke agreed to let Zucker announce his departure with media fanfare on Sept. 24, while Burke’s official appointment as CEO came two days later, on a Sunday, with a four-paragraph press release and no follow-up interviews.)

In the time he’s spent in recent months at 30 Rock and in Universal City, Burke has made it clear he intends to be a hands-on CEO, with numerous direct reports, so that he can get into the trenches on all aspects of the business. It’s expected that the new NBC U will be realigned along major business lines — cable entertainment, broadcast, film and theme parks, news and sports.

Burke has deep roots in the broadcasting biz — his father, Dan Burke, was the No. 2 to Tom Murphy at Capital Cities/ABC for years — and industry experience as a Disney exec who launched the Disney Stores retail chain and the Mouse’s Euro Disney park. He was dispatched to be prexy of ABC Broadcasting after Disney bought the Alphabet in 1996. (He relocated to Comcast as Roberts’ No. 2 in 1998).

But while Burke has undeniable showbiz credentials, he does not have a deep background in the creative side of the business that drives the fortunes of the film studio and the broadcast and cable networks.

NBC U insiders say they’ve been impressed so far with Burke’s openness about the fact that he’s on a learning curve. “He asks a lot of questions, and you get the feeling that he’s really listening” to the answers, says a Gotham-based NBC U exec.

On the TV side, Comcast-NBC U union is pretty close to the “perfect fit” that Roberts enthusiastically declared. The Peacock’s cable nets will remain the crown jewel of the enlarged company. USA Network, Syfy, Bravo, Oxygen, CNBC, MSNBC and others will blend well with Comcast’s E!, Style and G4. Comcast’s Versus, Golf Channel and 10 regional sports networks (plus partial interests in others) will add heft to NBC U’s Olympics- and NFL-driven sports operation.

After the merger, some 82% of NBC U’s cash flow will stem from the cable programming unit. The fortunes of the NBC broadcast network get a lot of attention, but it, like the film studio, is of small consequence to NBC U’s bottom line — so long as the net doesn’t ring up spectacular losses.

Burke’s immediate challenge in TV is sorting out the post-merger management hierarchy. He faces a double-edged sword of having a deep bench of executives from both companies — almost too deep. NBC U’s Bonnie Hammer, head of USA, Syfy and the Universal Cable Prods. wing, and Lauren Zalaznick, head of Bravo, Oxygen and iVillage, are formidable execs who are unabashedly vying for enlarged turf.

Comcast Entertainment prexy Ted Harbert, who has been the steward of E!, Style and G4, has been a good soldier for the company and is looking for upward movement, possibly to the NBC broadcast network, given his background as an ABC programming exec in the 1980s and ’90s. But it’s understood that Burke has been courting former Showtime entertainment prexy Bob Greenblatt, who became a free agent in July, to be the entertainment czar at NBC network and Universal Media Studios.

Although sources indicate that Burke is still formulating his plan for the overhaul — “it’s a huge puzzle, and wherever he decides to put one piece it will affect other pieces,” says an industry source close to Burke — the industry betting has Hammer ultimately taking the reins of the cable group.

Beyond personnel issues, the new-model NBC U will have to attack the audience fragmentation problem that is vexing every other network and the studios that supply them. Online distribution of TV programming is growing, but the money from advertising and paid downloads isn’t following as quickly as viewers have taken to new platforms.

NBC U is a partner in Hulu, which took off as an Internet vid venture thanks to the easy access it provided to selected shows from NBC U, News Corp. and, most recently, the Disney entities. But Comcast’s Roberts has questioned Hulu’s business model of offering so much programming for free with limited advertising.

In late 2008 Comcast and Time Warner got behind an alternative business model (dubbed TV Everywhere) for broadband streaming of some cable programming: It would work on a password-protected basis for viewers who already subscribe to cable, satellite or telco service. Comcast, however, quietly put its Xfinity broadband service on the backburner after it was bedeviled by technical issues with the authentication system and the intense regulatory scrutiny of Comcast’s heft as a broadband and Internet video provider.

Cracking the code of getting paid for Web-based viewing of NBC U TV shows is surely high on Burke’s to-do list, as it is for every other showbiz CEO. (Even Hulu is now trying out a $10 monthly subscription service.)

Roberts, the strategic thinker who complements Burke’s strength at managing people and operations, seems undaunted by the challenges ahead. The post-merger NBC U will be governed by a five-member board comprised of the architects of the deal: Roberts, Burke and Comcast chief financial officer Michael Angelikas and GE topper Jeff Immelt and chief financial officer Keith Sherin.

As a triple threat with network, studio and cable assets, “We can play a helpful role in bringing consumers licensed content. We think that’s what consumers want,” Roberts said in a CNBC interview on Dec. 3. “Broadband (subscription) sales have been the fastest-growing part of our company for five years. Faster (broadband) speeds means more content on more devices. That can be great. The brands and the content gets created and the dollars follow.”

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