WSJ: Behind the Feathers at NBC

Oops, NBC was supposed to be long gone from the General Electric portfolio. Broadcast TV is no longer a cakewalk: GE must now do a deal with Vivendi for Universal Studios to find a safe harbor for the Peacock network. On Aug. 1, NBC Chairman Robert Wright called 2003 “the best year we’ve ever had.” But if you look behind the feathers, you’ll find a troubled NBC that has no choice but to do this deal.

The buzz on Wall Street has always been the same: Mr. Wright would make NBC number one, then dump the company on some unsuspecting media mogul to manage its eventual decline.

In 1986, when GE bought NBC for $6.3 billion, the Big Three networks shared over 80% of the television business. They could have run bad home movies back then and 20 million people would have watched. But the TV world was changing: Rupert Murdoch combined programming and delivery to create the Fox network, giving advertisers another avenue to reach a national audience.

New amplifiers in cable networks meant hundreds of new channels that pull advertisers away from the Big Three. For the first time at the end of 2002, ad-supported cable passed the broadcast networks’ all-day market share, now down to 44%. That’s nothing: the Internet is taking eyeballs away from primetime, and TiVo users skip commercials altogether. The Golden Age of TV is tarnished.

After bottoming in 1991 with only “Cheers” as a Top 10 hit, Mr. Wright put NBC back to work. Thursday night TV triumphed on the nothingness of “Seinfeld” and frivolity of “Friends.” Mr. Wright was smart enough to walk from expensive sports programming. And even NBC’s cable bets paid off, CNBC rode the bull in the 1990s, while NBC made Microsoft fund much of the lame MSNBC.

Why hasn’t GE sold by now? (Perhaps Jennifer Aniston is more fun than gas turbine engineers?) Until the early 1990s, networks like NBC had to buy their programming from outside studios. A silly rule known as Financial Interest and Syndication, kept networks from the huge upside from the syndication (read reruns) of hits. When Finsyn was repealed, the industry realigned vertically. Viacom re-merged with CBS. Eighteen shows in CBS’s fall primetime lineup are now from their in-house studio (or co-production with an outside studio).

For the same reason, Disney bought ABC, which now does 14 shows. Fox does 14. Each of these networks is also leveraging their productions by rerunning first run shows on their own cable channels, a few days later. Because GE never sold, NBC is stuck as the bridesmaid, and produces just three (and co-produces another six) of their own shows.

But even combining production and broadcasting is no prize. Big brands from Coke to Nike used to pay up to reach a national audience. Now via cable or the Web, you can piece together an audience of your own demographic choosing. In the meantime, costs for NBC have skyrocketed. “Friends” costs $6 million per episode, and is in its last year. “Law and Order” is at Universal, which is asking, gulp, $550 million per year. It’s easier to buy Universal.

With prospects for broadcast TV somewhat dim, NBC found its safe harbor in cable. Because there is typically only one cable company in each city, cable can charge what they want for their service. Much of cable’s cost is for programming, which gets marked up 100% to consumers. You may think you get a bunch of free channels via the basic cable tier, but your cable company pays 39 cents per month per subscriber for the USA Network, 16 cents for Lifetime, 12 cents for Bravo, 13 cents for Sci-Fi, whether you watch that channel or not. Tiering is the secret business model of the cable business. NBC paid $1.25 billion for Bravo to get a bigger piece of this safe harbor. About the only synergy is Jay Leno getting a makeover on Bravo’s Queer Eye for the Straight Guy.

Now, GE must get Universal, if only Edgar Bronfman, who wants the last laugh after selling it to the French, would go away. For NBC, it’s no laughing matter, they need more safe harbors, like the cable channels USA and Sci-Fi. But there is a movement afoot by consumer groups to do away with tiering. The three killer words to NBC and the rest of the business are “a la carte.”

Cable bills have outpaced inflation and now the average cable bill is higher than the average satellite TV bill. A backlash is building, and one potential remedy is the prohibition of tiering and institution of “a la carte.” GE may solve a near term problem with a deal for Universal, but NBC may be entering a bigger storm ahead. Better dump the whole thing. Put Barry Diller on your speed dial.