Despite the favorable deal terms discussed, Comcast would have to justify the bold move by creating pay walls for content, reducing its reliance on advertising and revamping broadcast TV and cable delivery, which will be increasingly marginalized by streaming video online.

Radical changes to existing business models are inevitable in the creation of a new media giant that defies the industry's dismal track record with such unions.

A potential merger poses new doubts about whether content can be profitably managed by a media behemoth mired in slower-growing distribution assets.

It took Time Warner AOL and Viacom-CBS years to unwind their failed content-distribution unions. Even now, General Electric-owned NBCU's successful cable networks cannot offset heavy losses from broadcast television, films and theme parks, exacerbated by the recession, which deflated overall operating profit 43% in the first half of 2009.

That is why Comcast would have to use its 51% controlling interest wisely. NBCU's total revenue growth will decline a record 10% this year and will not gain more than 4% annually over the next five years -- even with exclusive Olympics telecasts.

Comcast also must hedge its bets against cable, satellite and telco distribution -- increasingly challenged by Internet streaming video services, such as Google's YouTube and Netflix on-demand, as well as rising content costs spiked by soaring affiliate license fees.

"We suspect Comcast believes it needs content to protect its landline distribution platform," notes Pali Capital analyst Rich Greenfield. "It wants to mitigate the risk of becoming that scary 'dumb' pipe."

The irony would be that "Comcast will own some of the most consumer desirable content that exists, but have no way to get it to you outside of your home," he said. Cable operators still have no sure wireless extension of their service.

Still, a merger with NBCU would provide Comcast with the leverage to shape the free versus paid content landscape by developing new premium fee services, robust VOD option and premium paid services. That could manifest in creating layers of premium paid content at Hulu, the successful ad-supported online video service owned by NBCU, Fox and Disney, as well as the new TV Everywhere, allowing cable subscribers to transport paid content to any digital platform.

It would "accelerate new business models, momentum for online authentication, new approaches to on-demand and online windowing content, and interactive advertising initiatives, said Bank of America Merrill Lynch analyst Jessica Cohen.

A major risk would be juggling the differences in the expectations, metrics and management of content versus distribution assets, which vexes even News Corp. and Walt Disney -- the target Comcast's failed $54 billion bid in 2004.

"Distribution companies tend to focus on efficiency and costs. Content businesses tend to be hit-driven and billions of dollars are invested over many years in people and projects before it is clear whether you have the right creative team," said Soleil Securities analyst Laura Martin.

Such risks are offset by Comcast sharing the financial load with GE, which maintain 49% ownership and will essentially underwrite the transition. Comcast would contribute up to $6 billion in cash (no stock) and its assets, including $6 billion in cable networks that include E! Entertainment, The Golf Channel, G4 and the regional sports networks.

What Comcast is really after in this deal is NBCU's lucrative cable networks that generate 60% of NBCU's earnings and comprise roughly $22 billion of the media giant's estimated $30 billion market value. The combined cable networks would generate an estimated 75% of the new entity's overall earnings, or $3.8 billion in 2010, with cash flow growing annually at nearly 40%, Cohen estimates.

NBCU's cable networks will generate an estimated $2.2 billion in earnings in 2009 of the media company's total $3.1 billion in earnings. By comparison, the fourth-place NBC TV broadcast network and stations will contribute $309 million in earnings, film $429 million, and theme parks and digital each will generate about $114 million in earnings, according to UBS. Comcast cable networks will generate an estimated $630 million in earnings this year, Cohen said.

The Olympics would continue to be an important future income source for both companies. Comcast and the U.S. Olympic Committee have plans on hold to launch a full-time cable channel devoted to continuous Olympics-related coverage, which is in a financial dispute with the International Olympics Committee. NBC's exclusive telecast rights to future Olympic Games biannually could lose $150 million on the 2010 games, analysts estimate.

In a portent of things to come, NBCU this week is rebranding all content for a global audience as Universal Networks Intl.

But controlling so much content -- including the NBC TV Network and Universal Studios -- does not guarantee financial success against cyclical losses and a deteriorating DVD business. The new entity will face stiffer competition from other morphing media giants. Disney has announced its $4 billion acquisition of Marvel Entertainment. Well-heeled media giants like Time Warner, Liberty and even Microsoft, could pursue potential targets such as DreamWorks Animation, Scripps Networks Interactive, CBS, MGM Studios, Discovery Communications, Electronic Arts, LionsGate, and The Travel Channel.

Fears about the concentration of content firepower are rampant. Comcast could make some NBCU content exclusive on its platforms or spur more retransmission consent payments, now that a major cable operator would own broadcasting assets. The deal would have to include terms allowing NBC's content to be available on competing television service providers, like Verizon, AT&T and DirecTV.

A tie-up between leading cable and broadcast entities would have been considered impossible, but broadband ubiquity has heightened demand for content.

"Many program access and exclusivity issues can likely be alleviated" and regulatory concerns could also be resolved by offering concessions to the Federal Communications Commission, such as selling (broadcast) assets or agreeing to specific codes of conduct with unaffiliated program services, Cohen said.

The potential merger is possible now because of GE's intensified need for cash and retooling its technological and industrial assets, including jet engines, medical equipment, and energy. GE will transfer $12 billion in debt to the merged media entity after buying out Vivendi SA's existing 20% stake in NBCU for about $4 billion, the optioned sale that triggered the Comcast proposal.

Whether or not the Comcast deal is finalized, GE has decided it must reduce its exposure to the volatile, declining fortunes of media and entertainment. NBC TV Networks and stations in a free fall: The NBC TV network, which is fourth in prime-time ratings, wrote an estimated $1.5 billion upfront advertising sales: a 21% decline from the prior year on 11% less inventory. NBC's local stations generate 11% and its broadcast network generates 25% of overall revenues, but only a combined 14% of earnings.

Contributions from the NBC TV network and stations will shrink to $893 million of NBCU's overall $2.56 billion in operating income in 2009.

Martin says that securing former News Corp. COO Peter Chernin to manage the merged company would add 10% to its assumed value. "He is the right guy to guide the messy turn around at NBC and integration into Comcast," she said. Comcast CEO Brian Roberts and COO Steve Burke will continue to call the shots at the helm of the new company, whether it is Chernin or Jeff Zucker, existing NBCU CEO, serving as liaison to the creative community.

It may be irrelevant that the potential NBCU-Comcast deal already is getting mixed reviews from industry analysts and shareholders. The time has come for major change.

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