Universal Helps NBC Keep Its Balance

In some mergers, timing is everything
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If NBC were to mark the one-year anniversary of the takeover of Vivendi Universal with a TV movie, picking a title capturing the importance of the deal would be easy: Just in Time.

NBC completed the $14 billion deal on May 11, 2004. Just four days earlier, the network aired the final episode of its biggest show, Friends. Two days later, NBC wrapped up another long-running anchor of its prime time schedule, Frasier.

The loss of those shows helped trigger NBC's dramatic slide this season. Surrendering the command of Thursday night, which it had held for two decades, helped knock NBC from the top spot in adults 18-49, where it had been for four years, all the way to fourth place.

The plunge is certainly painful. But the Universal deal came just in time to blunt the financial damage. Despite the broadcast network's problems, NBC Universal expects to post strong gains this year, with revenues increasing 10%-15% to around $14.8 billion and profits up 25% to $3.3 billion.

How? One-time cost cuts and beneficial accounting are part of the answer. But buying Universal has permanently diversified the NBC division's financial base. A year ago, 90% of NBC's revenue came from advertising, which is directly affected by falling Nielsens. Today, NBC gets revenue from a mix of products, including a less volatile library of movies and DVDs, as well as cable-network license fees.

How different is that? Today, advertising accounts for just 54% of NBC Universal's revenue.

Bob Wright, chairman/CEO of NBC Universal, says the new network-studio combo makes the company “very balanced”: If one segment stumbles, another can come to the rescue. “If one of them pops, then we're that much better off. We're not trying to create volatility. We're trying to create sustained performance, and this is a great combination of assets.” (See Q&A, page 14.)

Right now, the Universal deal looks like a smart trade. With perfect timing, parent company General Electric picked up assets that are starting to perform better than expected, just as some old NBC divisions like prime time and the Today show, are becoming problem children.

The ratings of Universal's Sci Fi Channel continue to soar; USA Network's revenues are rising much faster than its ratings; and Universal Studios continues to exploit movies and TV shows in the DVD market.

Great Platforms All Around

NBC Universal Television Group President Jeff Zucker acknowledges that “there's no question we've had a disappointing year” with NBC's prime time. However, he adds, “The entertainment cable networks have given us terrific diversification in a growing part of the entertainment business. What we've giving the cable networks is a tremendous plat­form to promote them and market them with the NBC machine and, as a result, make them stronger.”

While Wall Street lauds the speed at which NBC is digesting Universal's operations and cutting costs, the easy gains will be gone after this year. Some analysts see NBC Universal's sales growth slowing from 15% this year to less than to 10% in 2006. Operating profits could grow 25% this year but a slight 3%-6% next year.

Wright has to beat those mediocre Wall Street forecasts, and it will take more than NBC's surprise $600 million bid for Sunday-night NFL games beginning in 2006 to get there.

One strategy is to bind NBC Universal's media operations together much more extensively than any other broadcast-network owner has done.

Viacom, by comparison, never tried to engineer many efficiencies across its broadcast, cable and movie-studio operations, and the corporation is now discussing separating the company into two. At Disney, synergy goes only one way, says one Disney television executive: “What everyone else can do to promote Mickey.”

All Rowing together

By contrast, NBC works hard to get its units to work together. The cable and broadcast networks are part of the same group. Ad sales and affiliate sales are centralized, rather than staying at the networks.

NBC executives point to dozens of tactical moves. Sci Fi miniseries The 4400 got substantial promotion not just on other cable networks but on NBC itself. Just before the cable network premiered its newest series, Battlestar Galactica, NBC reran a three-hour version of the original miniseries that Sci Fi had aired in 2003. Executives from various divisions—from the cable networks to the movie studio—sit in on pilot screenings and offer their input (or lobby to snatch a show for their own schedule).

Bravo President Lauren Zalaznick has already snagged one: Hidden Howie, a reality show with comic Howie Mandel that NBC passed on.

Executives from every NBC Universal division sit on “councils” that meet weekly to discuss joint priorities.

Some of the biggest issues are run through the commercial council. One recent topic was the then-secret plan to bring major professional sports back to NBC by bidding for Sunday-night games from the National Football League. (That deal—cut two weeks ago—wound up at $600 million per year.)

A recurring topic is how the company should set its strategies in digital media, ranging from digital broadcasting to broadband.

The marketing council, chaired by John Miller, NBC Universal Television Group's chief marketing officer, and Marc Shmuger, vice chairman of Universal Pictures, focuses heavily on releases of Universal theatrical movies or DVDs. How many spots can Sci Fi Channel run for the theatrical release of Chronicles of Riddick? Can NBC's Will & Grace run a snipe during the credits that promotes the DVD release of former Thursday-night princess Jennifer Anniston's Along Came Polly? Can she host Saturday Night Live?

It's particularly important for executives at the former Universal units to feel that they're getting support from the mother network. NBC Universal Television Networks Group President Randy Falco admits that there was “trepidation” among the Universal executives about how they would fit into General Electric, which is renowned for its unyielding operational controls.

“[Former Universal employees] don't know what the culture is like. They think it's very inflexible, Six Sigma and all that,” Falco says, referring to one of GE's rigid management regimens. “We want a culture where they feel like they have a home that is very supportive.”

How's it working? Bonnie Hammer, president of USA Network and Sci Fi Channel, voices no complaints. Although her two channels' recent hits were in development before the sale, she attributes a chunk of their success to promotion by other parts of the empire. “We couldn't have paid for the amount of reach that NBC gave us,” she says. “We would have depleted our entire marketing budget to get the ratings points we got from two weeks of promotion on NBC.”

Hammer adds that, when she wanted to lure World Wrestling Entertainment away from Spike for USA Network, Zucker was initially skeptical. “Do you really want this?” he asked. “I said, 'Yes', and he said, 'Let's go.'” That decision also prompted NBC's Spanish-language network Telemundo to agree to carry regular matches and NBC to schedule wrestling specials.

NBC snagged the Vivendi Universal properties in a five-way auction. French parent Vivendi Universal was struggling under debt that had been amassed by then-CEO Jean Marie Messier on an expensive worldwide shopping spree in an attempt to transform Vivendi—a telephone- and water-utility company—into a media conglomerate.

Other suitors—including Liberty Media, an investor group led by Vivendi board member and former Seagram CEO Edgar Bronfman Jr., and MGM Studios—submitted bids hovering around $12 billion in a mix of cash and stock.

But Wright proposed a merger in which Vivendi Universal would be able to raise a couple of billion in cash but would primarily receive a 20% stake in NBC Universal. That gave the French executives a piece of the upside and saved them from total embarrassment. “All the French were concerned with was that they didn't look stupid down the line,” says one U.S. media executive involved in the negotiations.

Vivendi rejected requests to interview its senior executives, saying only that the company is happy with NBC Universal's progress over the past year.

Even Universal executives who were squeezed out in the takeover have few criticisms. “Internally, NBC takes up so much oxygen in the room,” says one ex-Universal executive who stays close to former colleagues. “But I think they've been pretty smart with what they've done about cable.”

Former Universal Television Group Chairman Michael Jackson agrees. “They bought intelligently, and they bought at exactly the right time.”

But this is no time for NBC to stumble.

Zucker, of course, is intent on turning NBC around. Even though the network generates just 15% of NBC Universal's operating income, it's the engine that can help keep everything else healthy.

“Next year is an important comeback year for us,” he says. He notes that the broadcast-network race is so tight that, even in fourth place, NBC is 0.4 of a ratings point out of first place. “In the next two years, I would like to see NBC prime time back in first place,” he says. “I think it's achievable in one year, and we have to get there within two.”

The Next Frontier

Top NBC executives are obsessed with technology, from digital video recorders to video-on-demand to Internet video that could bypass not just cable operators but TV stations. Like many TV executives, NBC officials are also riveted by TV-over-cellphones.

No one has figured out how to make any money on this. But NBC has long been aggressive in pursuing technology, investing early on in TiVo and offering its news shows—which have no value in reruns—to Comcast's VOD services.

Falco says NBC can no longer consider itself a broadcaster or even a cable network but is a programmer of all sorts of media. “I really don't believe that, in the 21st century, any media organization can be organized around silos. People are finding new ways to consume media.”

But those new opportunities are also troubling. Piracy threatens not just the DVD but even the network business. On-demand programming could shatter TV's advertising model.

With all those landmines, says one senior NBC Universal executive, “I need to figure out how to take this $15 billion business and make it a $25 billion business, rather than a $10 billion business.”

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