Why Experts Say NBC Wants New Cable VUE

For years, Bob Wright watched rival networks pair with movie and TV studios. But the NBC CEO didn't get it. "We have taken the position that we don't have to do that," Wright said during an appearance at the Washington Press Club three years ago.

"We are sort of standing there by ourselves right now." Tying a network to a single provider of programs is a bad idea, even if you own it, he argued. "It's not clear that anybody just can live off of its own in-house production on the entertainment side. It's hard enough to find a hit when you are selecting from 10 different studios."

But his opinion may well change as NBC gets closer to actually securing the U.S. media assets of Vivendi Universal Entertainment (VUE). Success would give NBC parent General Electric not just the USA Networks cable channels that it (and every other bidder) covets, but also Universal Studio, a major producer of movies and TV shows that includes NBC-aired franchise Law & Order and its offspring.

So far, without actually submitting a formal bid in the three-month-long "auction"—Vivendi wanted $14 billion—NBC parent General Electric has outlasted all but one of the seven suitors: The investor group led by former Seagram CEO Edgar Bronfman Jr., who sold his company to Vivendi and now wants the media business back. One of Bronfman's partners is Cablevision, which has agreed to combine its cable networks AMC, WE and IFC with VUE.

GE is proposing a cash-free merger with NBC that would include the assumption of around $2.2 billion in debt, some GE stock that could be sold and future "liquidity events." With other suitors, even Bronfman, balking at the asking price, Vivendi can brag about a $14 billion sale by putting a high (some say too high) value on NBC.

An adviser to Bronfman said Vivendi faces a "distinct and contrasted choice. Do they step toward the strategy they articulated, which was 'pay off debt and get out of the entertainment business that we're not genetically coded to run?' Or do they essentially increase their stake in the entertainment business."

Vivendi, NBC and Bronfman would not comment.

While it's not crystal clear which offer the Vivendi bosses will prefer in Tuesday's board meeting in Paris, Vivendi and other industry executives believe GE would bring the biggest changes. GE envisions lots of opportunities to leverage NBC's programming and ad sales prowess against USA Network and Sci Fi Channel, plus its appetite for TV shows against Universal's television production operation.

Then there's "the GE way," the strict management and financial approach that makes GE acclaimed as an industrial conglomerate, but is not seen as much fun by entertainment executives.

If NBC gets it, Sanford Bernstein & Co.'s Michael Nathanson sees the network making a series of incremental moves. "It's about fixing the mix." He points to the success of Queer Eye for a Straight Guy on NBC's recently acquired Bravo network, which has clearly benefited from heavy summer promotion on NBC. "Get a couple of those on USA and you make a lot of money." With the studio, "you access a lot of library material and you're not held hostage to another studio when the next ER or Friends comes up for renewal."

Bernstein's GE analyst, Kerry Stirton, predicted that the company would chop $200 million in "people-related" expenses, about 4% of VUE's annual cash expenses. GE could also generate $50 million in additional operation cost savings among VUE's and NBC's existing cable networks, plus trim another $50 million in real estate and miscellaneous costs. That's a total of $300 million.

Success in marrying NBC with Vivendi's cable networks is far from guaranteed. While profitable, NBC's primary cable ventures MSNBC and CNBC are in Nielsen's ratings basement. So is 30%-owned broadcast/cable hybrid Pax. Perking up Bravo—a cash-starved, 0.2 rated network when NBC bought it last year—was a lot easier than juicing up the established USA Network, already one of cable's top-five rated networks.

Industry executives expect the biggest change at the Universal movie studio, and everyone points to what Viacom has done at Paramount.

The studio has largely become a distributor, rather than a producer that puts its own money at risk. "Paramount doesn't own any films. They basically lease that studio out," said Morgan Stanley media analyst Richard Bilotti.

NBC can also merge its new syndication unit with Universal's.

While a lot of speculation, NBC's motives centers on Universal's three Law & Order variations on NBC, some see it as a smaller factor. Universal and producer Dick Wolf have been seeking around $500 million a year to extend their deal for the three shows.

But buying Universal won't save that much. First, NBC would still have to pay Wolf his share. Second, the future Law & Order profits will be factored into the purchase price.