NBC Uni-Comcast: Why the deal?

Combo could transform the content distribution business

It's not just about those trendy cable network assets: Comcast's plan to acquire 51% of NBC Universal also is about seemingly boring things, including VOD and changing business models.

However odd a couple these players appear on paper, a NBC Uni/Comcast combo could transform the way content owners and distributors do business. A preliminary deal could be unveiled as early as Sunday.

The cable giant has done much to react to changing consumer viewing patterns by expanding its on-demand content library, boosting the number of films released on VOD the same day as DVD and getting more cable shows and other content online. It has done so via initiatives with such names as Project Infinity, launched last year, and TV Everywhere, launched this year.

"Comcast has long felt that if you put enough proper programming on-demand, that is how consumers will want to watch," cable industry consultant Steve Effros says. "If you can satisfy customers more, they are going to be more willing to stay with you."

There is more revenue to be made if people stick with the more expensive digital cable service or choose content that costs more, like day-and-date film releases, of which Comcast offered nine in 2007, 35 in 2008 and as many as 100 this year.

Comcast chairman and CEO Brian Roberts said in 2007 that the biggest benefit of expanding day-and-date releases might be to increase the stickiness of his firm's cable services.

Comcast has grown its on-demand library to more than 17,000 pieces of content watched by 23.8 million video subscribers, including 18 million digital video customers. The 13 billion views of on-demand content since the cable giant launched its service in 2003 is well ahead of the 6 billion song downloads Apple's iTunes reported at the start of the year.

Comcast has managed to expand its on-demand and day-and-date offerings via deals with nearly every major Hollywood player. "The problem has been that program owners have been reluctant to change their linear release practices," Effros says. "Comcast wants to do more and get the industry closer to the tipping point."

That is a key reason why it has set its sights on NBC Uni after not managing to pull off a deal for Disney in 2004.

An investment in MGM later that year, as part of a broader group that included Sony and private-equity firms, gave Comcast a stake in a Hollywood icon but no day-to-day management control. It did, however, get the right to distribute MGM and Sony content on its VOD platform. Comcast and MGM also collaborated on creation of the MGM Impact VOD action channel.

But having a controlling stake in a major player like NBC Uni could boost Comcast's effort to change the user experience and business models.

Gabelli analyst Christopher Marangi says a deal could "accelerate the success of TV Everywhere." That is key as Comcast executives have expressed concern that consumers otherwise might cut their cable connection as online viewing continues to rise.

Sanford Bernstein's Michael Nathanson recently argued that players in the entertainment sector have been in too much conflict and disarray to take advantage of the digital age. That has allowed new competitors, from DVD-rental kiosk firm Redbox to iTunes, to eat established players' lunches.

But a Comcast/NBC Uni deal could begin "a new, better chapter for media economics," Nathanson says. "Someone needs to man up; for goodness sake, let's hope that someone is Brian Roberts."

Although it would upset the status quo in the entertainment industry, the deal could benefit content firms and distributors, he argues.

Nathanson suggests that Comcast could use NBC Uni to push for a better VOD system for pay movies, with better terms for studios and new windows for Comcast. The company also could develop on-demand broadcast TV offerings with specialized ad opportunities "that derail the growth of DVRs."

Still, despite the positives, deal talk worries Comcast investors as an acquisition could take a year to go through regulatory approvals. "The Street does not like the deal because they would rather get a 100% claim on Comcast's growing free-cash flow," Northlake Capital Management's Steven Birenberg says.

General Electric, which controls 80% of NBC Uni, is expected to have options to get out of its investment altogether during the coming years. "We expect this will significantly reduce Comcast's willingness, if not ability, to increase shareholder returns," Collins Stewart analyst Thomas Eagan says. Overall, he expects Comcast shares to remain in a tight range because of "the overhang of an NBC Uni deal."

As for NBC Uni staff, they fear the obvious if a deal goes through: personnel cuts. They also are torn about current GE ownership, with some arguing that the devil could benefit from a takeover.

NBC Uni president and CEO Jeff Zucker apparently would remain in his post, but with Comcast holding a majority stake, he would report to the cable giant.

Comcast COO Steve Burke, who reports to Roberts, would be the point person ensuring the Hollywood conglomerate performs to Comcast's liking. How long Zucker would stay aboard after a deal closes remains an open question.

Jeff Gaspin, who has risen to chairman of NBC Universal Television Entertainment, and NBC Universal Cable president Bonnie Hammer, who is credited with the cable unit's meteoric rise, are likely to play bigger roles.

If a deal doesn't go through, both companies would suffer.

GE essentially has admitted that it doesn't see the media space as a core business. If things don't jell with Comcast, an exit in stages could begin weighing on the sentiment of GE investors who these days prefer outright ownership of assets -- or their sale. It also would further distract NBC Uni staff, who have dealt with five owners during the past 20 years.

For Comcast, "the implications are arguably even worse," Sanford Bernstein analyst Craig Moffett says. Not only would management's image suffer from missing out on another big content deal, but also shareholders would fear more acquisition attempts, he argues.

"Comcast has again clearly signaled its desire to be in the content business," Moffett says. "In the absence of a deal, investors would be left waiting for the next shoe to drop."

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