Peacock plucks MSNBC

Microsoft keeps its half of MSNBC.com

This article was updated on Dec. 26 at 4:07 p.m.

After investing hundreds of millions of dollars and seeing very little in return, Microsoft laid the groundwork to exit the cable news business by selling a controlling stake in 24-hour news channel MSNBC to NBC Universal.

Deal raised NBC U’s stake to 82%, giving it complete management control of the cabler and allowing it the option to buy out 100% of Microsoft’s stake within two years. Agreement does not affect the status of Web site MSNBC.com, which will remain a 50-50 joint venture.

Microsoft and NBC created MSNBC as an equal partnership in 1996, and Microsoft invested millions to help the net get off the ground and fund its operations through the 1990s.

The network turned profitable last year, but Microsoft was looking to get out of the cable biz to focus on its online media efforts, while NBC Universal wanted to more closely integrate the channel into the operations of NBC News.

“MSNBC is a critical component of NBC News’ success and has made some key viewership gains in recent months,” NBC News prexy Steve Capus said.

Microsoft sold online magazine Slate to the Washington Post earlier this year, but by retaining its 50% stake in MSNBC.com, it retains ownership in the faster-growing part of the NBC partnership, which gives it a pipeline of exclusive news content for the MSN Web portal.

The price paid for Microsoft’s 32% of the venture was not disclosed, but valuation for the channel would be based more on its distribution in 85 million homes than on its meager cash flow.

NBC paid $1.25 billion for Bravo in 2002, which is distributed in 75 million homes, but NBC U showed the purse strings had tightened when it walked away from the deal to acquire DreamWorks when the price exceeded $1.5 billion.

By agreeing to take a controlling stake, NBC Universal also takes on greater financial responsibility for the channel, which may get a new moniker: NBC News Channel.

The channel has languished in third and sometimes fourth place in the cable news ratings behind Fox News Channel, CNN and, on occasion, Headline News, but it has made some ratings gains this fall. It is now at its closest position to CNN in the 25-54 demographic in three years.

“This is a huge vote of confidence in the channel,” MSNBC topper Rick Kaplan said in a memo to staff.

Eager to gain a foothold in media in the ’90s, Microsoft agreed to an overwhelmingly pro-Peacock deal that required that Microsoft finance what became a great asset to NBC — a fully distributed cable channel and 24-hour news operation.

Helped by vast traffic funneled through MSN, online venture MSNBC.com became the most-trafficked news site on the Web (it logged 22.3 million unique visitors in November). But some opportunities were missed.

“If they had worked together on building a portal or a business news operation in partnership, they would have even more valuable Web assets than they have today,” said industry consultant and former MSNBC.com editor-in-chief Merrill Brown.

Both sides had been unhappy with the arrangement over the last few years, but the deal was so complex that it took months to reach agreement on how to undo it.

With full control of the channel, NBC will be able to make moves, such as creating and canceling shows, without consulting Redmond, Wash.-based Microsoft.

MSNBC slashed programming costs from $150 million to $135 million in 2005, according to data from Kagan Research. The network made an estimated $144 million in ad revenue in 2005 and collected $114 million in subscriber fees. Cash flow is estimated at $26.8 million.

But even if the cable channel makes $1, it’s considered a successful venture by NBC, which can use it to spread out the cost of running a 24-hour news operation.

But some analysts wondered if NBC Universal will decide that the asset — a fully distributed cable channel — would be more profitable as a movie web to serve as an outlet for Universal’s film library.