Chairman Shahid Khan comments on Comcast-NBCU deal

 

Comcast hedges against weakening in core business

By David Gelles and Andrew Edgecliffe-Johnson in New York

Published: January 19 2011

When Comcast’s takeover of NBC Universal was conceived at the 2009 Allen and Company media conference in Sun Valley, the television industry was undergoing a period of great uncertainty.

General Electric, the industrial conglomerate that owned NBCU, had just watched the TV business endure a gruelling advertising recession. NBCU’s chief executive, Jeff Zucker, was struggling to reorder the broadcast arm’s primetime line-up – an effort that dragged over into last year’s scheduling feud between comedy hosts Jay Leno and Conan O’Brien.

The problems at NBCU – the group behind NBC News, Bravo and Universal Studios – made the long-running question of why GE continued to own a media business more pressing, and provided perfect conditions for Comcast, the US cable company, to strike, five years after it had been frustrated in an unsolicited $54bn bid for Disney.

The deal, announced in December 2009 and approved by the Federal Communications Commission on Tuesday, has Comcast buying 51 per cent of NBCU for $6.4bn in cash, and injecting cable channels into the venture. GE will sell its remaining 49 per cent stake to Comcast over seven years, and Vivendi will reap $5.8bn for its 20 per cent. The new joint venture is valued at $30bn.

Yet, from the outset, many analysts questioned the logic of combining NBCU’s content with the distribution might of Comcast, the largest US cable and internet service provider. Time Warner had just done the opposite, abandoning past efforts to add distribution properties to its core content business by spinning off AOL and Time Warner Cable.

Critics also wondered if the businessmen from Philadelphia, where Comcast is based, were ready for the scrutiny that would come from owning a broadcast network and news outlets such as MSNBC.

Comcast contends that the deal makes good business sense. For one, it can make more of its own cable networks, such as the Golf Channel and E!, when they are paired with bigger NBCU cable channels such as Bravo, USA and CNBC.

Comcast’s bid also seems a hedge against the prospect of a slowdown in its core cable business. Cable companies around the country lost subscribers for two quarters of last year, raising concerns about “cord cutting”, where consumers drop cable for online alternatives.

By acquiring NBCU, Comcast has diversified its risk in case cable weakens further. It has also instantly made itself a major player in the developments shaping the emerging market for online video.

With the rights to NBC’s content, particularly the backlog of Universal Studios movies, Comcast will have significant weight in negotiations with online rivals. Films still help drive each new video distribution platform, as Netflix, the DVD and online video rental service, in particular has shown most recently.

US regulators approved the deal with conditions designed to prevent Comcast from using its new might to harm competitors. But on Tuesday afternoon two very different accounts were on offer as to what the deal creates.

Most analysts said the conditions were generally unobtrusive. “I think the FCC was quite lenient on them,” said Shahid Khan, chairman at MediaMorph, the software-as-a-service provider. “It looks like a joke. I was expecting them to be much stricter.”

This view was echoed by FCC commissioner Michael Copps, the lone dissenter in a 4-1 vote in favour of the deal, who said the new entity would have too much power. “This Comcast-NBCU joint venture grievously fails the public interest,” he said.

Comcast also seemed pleased with the outcome. “I don’t think any of the conditions are particularly restrictive,” said Comcast executive vice-president David Cohen. But some Republicans said the FCC over-reached, placing too many onerous terms on Comcast.

Comcast shares were flat on Tuesday and rose early on Wednesday, suggesting investors were surprised neither by the approval, nor by regulators’ demands.

Shares are up nearly 40 per cent in the past year, broadly in line with competitors, and this media rebound has silenced some of the strategic doubters.

“It is now clear in retrospect that, in buying media assets at a price struck in late 2009, Comcast bought NBCU very well indeed,” said Craig Moffett, analyst at Sanford Bernstein. “What the deal lacks strategically, it more than makes up for in sheer market timing.”

Questions remain as to how Comcast will handle some of NBCU’s less compatible assets, such as its Universal Studios theme parks, and whether it will feel compelled to dispose of overlapping cable channels.

Still, Comcast-NBCU will have unparalleled influence over the rapidly evolving media landscape. In the nascent online video market, the new venture will have particular leverage to shape deals and determine access rights, in spite of the government’s conditions.

It will also retain substantial cash balances. Although analysts doubt that Comcast will pursue further substantial deals for now, these should allow it to step up its share buy-back programme, Mr Moffett said.

On Tuesday, regulators signed off on the deal with a whiff of trepidation, setting in motion events that will invariably reshape the media industry.