Although Brian Roberts vows not to "Comcast-ize" NBC Universal as the new controlling owner, transforming digital change is inevitable at the dominant cable operator and entertainment conglomerate. The status quo is not an option.
Congressional and regulatory review of the proposed $30 billion joint venture is occurring amid controversial efforts to set national broadband policy the cable industry considers a threat to its $160 billion infrastructure.
Cable operators face huge unknowns if the FCC regulates broadband as a Title II commodity akin to telephone service. Comcast will have the added pressure of gingerly managing weighty matters such as retransmission fees both as a broadband service and content provider.
Amid the turmoil, the company must grow its moderating cable distribution and cable network businesses, while reinventing a declining broadcasting business.
Despite Comcast's anticipated 10% return on its investment in NBCU, the absence of new growth scenarios makes the union "strategically questionable," according to a detailed analysis by Credit Suisse analyst Spencer Wang. The new entity is expected to grow earnings at an estimated annual 8% (substantially boosted by including 2010's Olympics' related losses) on just 3% growth of revenues through 2015, keeping pace with entertainment conglomerates such as Walt Disney.
Here are five areas where Comcast must pursue new strategies:
Mobile: At last week's annual cable conference, Roberts demonstrated a new Comcast app for Apple's iPad that could be a game-changer for in-home cable TV viewing. Use of the iPad touch screen to search, select, store and transfer content to other devices bypasses the standard set-top box.
It provides an elegant, immediate interface for social networking, e-commerce and paid services; all could generate new revenue streams. Although the beta app (still in development) is dependent upon the iPad reaching critical mass, Roberts promises more such innovation.
BTIG analyst Richard Greenfield calls it "the beginning of the most important technical enhancement to multichannel video provider offerings in a long, long time." So far, the cable industry's attempts to establish cross-platform models for paid content (TV Everywhere) and addressable advertising (Canoe Ventures) have been lackluster.
Cable networks While the new venture's portfolio includes USA and CNBC, cable networks are spending more on programming and marketing to maintain strong ratings and ad dollars. They comprise 85% of the new joint venture's earnings, with revenues and earnings growing an average annual 7% almost equally from ads and subscription fees.
Future above-average growth depends on devising paid content models for mobile Internet devices and addressable advertising to target consumers. The new entity comprises 16% of total cable network advertising revenues and 14% of domestic cable affiliate revenues, tied for third with News Corp. behind Time Warner and Disney. However, the new Comcast-NBCU's cable networks are expected to generate moderate 5% advertising growth and 7% affiliate revenue growth over the next five years.
Broadcasting While Roberts says he is prepared to invest in rehabilitating the ratings-ravaged NBC, it is not Comcast's prudent style to throw money at a deteriorating business model. Wang estimates the NBCV TV network will post a $509 million loss this year (about half from the Olympics) and that it will continue to run an earnings deficit of several hundred million dollars over the next five years, barring a prime-time ratings recovery.
With cable nets USA, CNBC, SyFy, Bravo, E Entertainment, Golf Channel and MSNBC producing solid original content and increasing returns, the NBC TV Network's expensive production model no longer can be justified. Although the NBC TV Network generates 67% of the broadcast segment revenues, it generates only 8% of earnings due to $3.5 billion in annual program production costs.
NBC's ability to generate paid content revenues in the face of declining home video sector through Hulu.com (co-owned with ABC and Fox) has not panned out. Cable's TV Everywhere strategy is struggling.
Advertising As a broadband provider, Comcast has the technological wherewithal to leap to addressable advertising and charge premiums for connecting marketers with their prime customers. With Canoe Ventures addressable efforts still snagged, it is critical that Comcast innovate on its own. But Roberts' remarks last week suggest a lingering reliance on conventional advertising revenue streams still recovering from recessionary low growth.
Even cable networks' continued gains in advertising upfront budgets and viewers are not enough to restore double-digit growth. Interactive advertising is a growth imperative.
Content Roberts conceded last week that Comcast is "late" to the content game, having lost its previous bid for Disney and passed on a stake in Discovery Communications. He says Comcast will tap NBCU's diverse cable, broadcast and film content to drive new broadcast and on-demand services.
That's expected, but it's not the same as reinventing content for the connected mobile age. Short-form, interactive, social and transactional content innovation would give Comcast-NBCU a leg up on competition. "It's going to require some risk, some investment and some patience. We signed up for that," Roberts said. The big question is whether all that applies merely to what is, or what can be.
Brilliant analysis, as always.
You've got the facts straight, but for all those who trust the Roberts family, raise your paw !