TV, Film Changes Ahead in Pending Comcast-NBC Universal Deal

As Comcast and NBC Universal inch towards a merger announcement later this week, now that France's Vivendi has signed off on the deal, attention shifts to the fundamental changes expected in the new entity's broadcast TV and studio assets.

Comcast, the largest domestic cable operator, is pursuing a 51 percent stake in NBCU to build a programming empire by combining both companies' thriving cable networks. The new NBCU, valued at about $44 billion, will not include Comcast's cable systems. USA, CNBC , MSNBC and SyFy are among the cable networks that generate 65 percent of NBCU's profits even though they represent only 25 percent of revenues. Unlike broadcasting, cable networks continue to grow from their reliance on both advertising revenues and subscription fees.

General Electric's current 80 percent ownership in NBCU will shrink to 49 percent with plans to eventually exit its new Comcast partnership as it restructures its global industrial portfolio. In recent days, GE has agreed to buyout Vivendi's 20 percent stake in NBCU for $5.8 billion, based on a $30 billion valuation for NBCU. This paves the way for the long anticipated deal to be announced as early as Thursday.

Assigning at least $9 billion debt to the new NBCU, to fund GE's Vivendi buyout and to cover the $6 billion in cash Comcast must bring to the merger, will require cost cuts, asset divestitures and changes in the broken broadcast and film business models. The NBC TV Network and ten NBC-owned broadcast TV stations are fodder for both in light of their declining ratings and financial fortunes. As the controlling owner, Comcast also could opt to sell or dismantle the Spanish language Telemundo TV Network and TV stations, as first reported here.

Comcast could select the best of NBC TV and Telemundo and integrate it into NBCU's combined cable networks or create new cable networks rather than sell them. It also could sell off the TV stations to major NBC-affiliated groups owners such as Hearst Television, Gannett and Belo. Comcast could radically alter the business model and function of the local TV stations by using them to advance hyper-local information, news and marketing for Internet-connected devices -- from iPhones and IP-connected TVs to PCs.

On the film front, Comcast is a long-time advocate video-on-demand coinciding with the DVD or even box office release of films to make exhibition windows more profitable. NBCU also could use its co-ownership of the online video service Hulu to advance a pay model for TV programs and films. Comcast is expected to use its control of Universal Studios to reduce expenses and radically alter the ways in which movies and produced and distributed.

The track record and management style of Comcast owner CEO Brian Roberts and president Steve Burke suggest they are unlikely to assume as-is ownership of weakening broadcast TV and studio assets. The overall value and revenues of both are being marginalized by streaming online video and digital technology that allows consumers to access the news and entertainment they want, when they want.

Having interviewed and written about the Comcast executives for years, I know that the company will focus on fully leveraging the cable networks and studio films to strengthen the new NBCU's position in global mobile on-demand entertainment and information. Comcast is not making a big bet on NBCU, against the conservative objections of its shareholders, to maintain the status quo and suffer the same poor return on investment as many other mega media deals of the past two decades.

As part of what could be a year's regulatory review, the Federal Communications Commission could require divestiture of some of the dozen or so TV stations in major markets such as Philadelphia and Los Angeles where Comcast has dominant cable systems. The newly appointed Obama FCC also could use the merger to begin deregulating the changing broadcast industry.

"The Comcast takeover of NBCU, including its stake in Hulu.com, would likely increase concerns about its efforts to link online video to its cable pay-TV service, and ensnare the deal in the broader network neutrality debate," observed a recent report from Stifel Nicolaus.