Thomas Edison made mass communication possible. He invented the phonograph and the telegraph and figured out how to distribute electrical power. He also founded General Electric, which commercialized his inventions and is today one of the largest publicly traded companies in the world. General Electric made everything from microwaves to jet engines—and thanks to its 1986 purchase of RCA, it owned NBC, too.10
When deal discussions began in 2009 between Comcast and GE over NBC Universal, Edison's old company, for all its size and breadth, was not doing well. Profits were down, losses within its finance arm, GE Capital, were enormous, and, as part of the constellation of businesses that had profited from elaborately complicated securitizations of subprime mort-gages, GE was being blamed as a participant in the country's financial near-collapse. GE Capital had been started in the 1930s as a middleman operation, smoothing transactions between factories and consumers on durable goods like washing machines; eventually it moved into turbines, real estate, and a host of other areas. By 2009 it was deeply involved in the subprime credit market and needed $50 billion in bailout assistance.11
Following a 56 percent drop in revenue in 2008, trust in the company was eroding fast.12 Jeffrey Immelt, General Electric's CEO, needed to show that his company had a plan, that it was slimming down and exchanging assets for strength on its balance sheet. Although he had emphatically asserted in March 2008 that offloading his company's key media asset was unthinkable, as the financial world crumbled around him in 2009 selling NBC Universal began to make sense.13
Jack Welch, for two decades GE's famous CEO, had made the deal back in 1986 to bring NBC within the GE family. Later, Immelt bought up $21 billion in additional assets, tripling the size of GE's entertainment business in 2004 by buying cable, film, and Universal theme-park assets from Vivendi, which became a minority partner in the new company, NBC Universal.14
But being in the media business did not make sense for GE, and being inside GE's giant world of turbines, jet engines, commercial loans, and air conditioners did not make sense for NBC. NBC employees had little to offer when they were summoned to be part of annual GE Imagination shows, and GE's factory floors were a universe away from the set of Saturday Night Live. As NBC faltered—moving from first place among the networks in 1996 to a seemingly permanent fourth spot starting in 2001–2, its position as part of General Electric made even less sense.15 In the first nine months of 2009 NBC made 27 percent less profit than in the same period in 2008. Even though overall profits for the entertainment division remained healthy—bolstered significantly by NBCU cable-channel revenue from CNBC, USA, and Bravo—and NBC Universal as a division contributed about 12 percent to GE's enormous bottom line according to Bloomberg data, analysts considered the division the odd man out within GE.16
General Electric kept NBC Universal partly out of corporate vanity and a desire for political influence. Executives seemed to revel in their power over NBCU editorial decisions, which rankled NBC employees. During the summer of 2009, GE allegedly directed an MSNBC journalist not to criticize Fox, and, as the parent company aimed to capture lucrative stimulus funding for green energy developments, allegedly ordered NBC to cover President Obama's health-care summit.17 Rumors flew about GE's role with the administration; Immelt was reported to be making calls to Capitol Hill supporting Ben Bernanke's renomination as chairman of the Federal Reserve.18 The same week the Comcast-NBCU merger was approved by the Obama administration in January 2011, Immelt was appointed to lead President Obama's Council on Jobs and Competitiveness, replacing former Federal Reserve chairman Paul Volcker.19
But NBC Universal was also pursuing other options. Zucker considered encouraging Vivendi to go public with its 20 percent stake (if Vivendi decided to exercise its option to sell, which was available each year from November 15 through the first full week of December). He brought in a parade of bankers, who probably discovered what Comcast's team found out at about the same time: NBC Universal's books were in shabby shape. It was hard to tell how things added up. An IPO seemed unlikely.20
However much Zucker may have dreamed of independence, in 2009 Immelt needed a comeback story for investors. Shedding NBC Universal would give him a $30 billion headline and let him claim a large deal that would make GE's operations more coherent. He could then move on with GE's enormous core businesses in power generation, aviation, and medical imaging; save his reputation; and divert attention from doubts about his standing as CEO.
By early 2009, with GE stock at a fourteen-year low,21 Immelt was ready to sell. The investment banker Jamie Dimon, head of JPMorgan, met with Brian Roberts and Steve Burke on March 3, and in July JPMorgan Chase's vice chairman James B. Lee set up a meeting with both Brian and patriarch Ralph at the annual Allen & Company Sun Valley media conference. By December, Ralph had signed off on the deal, saying, according to the New York Times, “I've done a lot of deals in my life. Every deal has its time. This is the right time.”22
Talks between General Electric and Comcast during the summer of 2009 were volatile and irritable. The goalposts kept moving as valuations shifted and GE intermittently demanded more cash. Comcast wanted to put as little cash into the deal as possible, and argued that its existing programming properties were highly valuable; meanwhile, GE was having trouble getting Vivendi to sell its stake at a reasonable price.23 The television comedy 30 Rock lampooned the negotiations in 2011:
Liz Lemon: Hey, what's going on with Jenna's dressing room?
Pete Hornberger: Jack rented it out to an IT company. The Kabletown board is meeting this week to approve buying NBC, and he's doing everything possible to make us seem profitable. He turned the green room into an NBC experience store. And we have to schedule our rehearsals around the Bat Mitzvahs Jack has booked in the studio.24
At particularly difficult moments, Comcast's chief financial officer, Mike Angelakis, met with Keith Sherin, his GE counterpart, to rescue the relationship and solidify the basic terms on which NBC Universal and Comcast would join forces. During all those months, NBC Universal network executives, including Zucker, were left out of the negotiations.25
And the deal worked. Sort of. The news leaked the day NBC Universal executives were told about it at the end of September 2009; the leak made it seem as though NBC Universal wanted to scuttle the talks by making Comcast's investors balk at the company's apparent plans to spend $30 billion for NBC Universal. If the investors were sufficiently spooked, they would sell and lower Comcast's share price—making it more likely that NBC Universal could strike out on its own. NBC Universal may have been nervous about being a tiny part of a cable-distribution company; there was still a broadcasting cachet that did not mix with the cable-guy cowboy culture. Zucker sent a proud e-mail to NBCU employees the day after the leak was published in The Wrap, a trade blog: “Given the attractive nature of our assets,” he wrote, “there is always significant interest in NBC Universal. That has been amplified lately by the annual discussion with Vivendi about its 20 percent ownership of our company. Vivendi … have not yet made us aware of any final decisions about their future with us; should they choose to exit, there are a number of possible things that could happen.”26
Brian Roberts was furious at the leak: he did not want investors thinking that Comcast was putting its own money at risk in buying NBC Universal. Before the deal terms were made known, the headlines might have trumpeted that Roberts was off on another Disney-like detour. Comcast held its collective breath, and its stock price stayed firm. When the deal was formally announced, in December 2009, analysts applauded Immelt's focus, but Comcast's institutional investors were puzzled. There seemed to be a lot of hot air in the numbers, making the $30 billion fanfare overstated. There were no particular synergies—since Comcast could get access to NBC Universal programming through contracts, why did it have to buy the company?27
On the whole, however, the logic of getting NBC Universal out of GE overwhelmed the media industry's hesitations over putting it into Comcast. In particular, maki
ng NBC-the-network more successful might help the rest of the broadcasters. Keeping media companies together might be good for the overall ecosystem.
But interest in NBC-the-network was not driving the deal: after decades of media leadership, the network's most valuable assets were likely to be its federal licenses to use spectrum and its rights to be transmitted by the cable company. As a programming entity, it was not worth much.
Still, if the NBCU sale made sense from Immelt's point of view in 2009, it remains to be asked: how did NBC-the-network, once among the most powerful media entities in the world, get to be fodder for the chopping block? What changes in the media and communications landscape had made it an unwanted asset of an American manufacturing company, almost lost in the rounding? What had happened to the proud NBC peacock?
NBC, the Radio Corporation of America's broadcasting arm, became the first television station to transmit broadcasts in the country when it covered a speech by President Franklin D. Roosevelt launching the New York World's Fair in 1939.28 After World War II, the television industry boomed: in 1948 there were 350,000 television sets, primarily along the eastern seaboard; six times that many were sold in 1949.29
RCA had started its television broadcasting operation as a way to sell RCA television sets, but it came into its own as a broadcaster in the late 1940s, when stars like Milton Berle and programs like Texaco Star Theater gripped the popular imagination.30 Sports rights were already expensive: according to Television History—The First 75 Years, an online cataloguing project, in 1948 television rights in the New York City area for baseball games cost $700,000, or the equivalent of $7.7 million today.31
RCA-NBC was also first in color programming, transmitting a Dragnet episode in Technicolor. NBC competed strongly with CBS in sports programming in the 1950s and was “all color” by the summer of 1966.32 Although the early 1970s were not good years, as it fell behind ABC and CBS, NBC restored much of its former magnificence in the 1980s with several major hits—Cheers, Golden Girls, Miami Vice, and the Cosby Show among them.33 In 1986, General Electric bought NBC's parent company, RCA, for $6.3 billion.34
In the tussles between distributors and programmers that have shaped the American media narrative, NBC initially played the role of distributor. As Senator Franken reminded Zucker at the February 2010 hearing, until the 1990s, the FCC's Financial Interest and Syndication (fin-syn) Rules prevented broadcast networks from owning long-term rights in the programming they aired. The Commission was concerned that vertically integrated networks—controlling production as well as distribution—would have an incentive to favor their own programming, and it wanted to shore up independent (and thus diverse) programming by allowing independent producers to run the lucrative market in syndication.35
In the early 1990s, the fin-syn rules were taken off the books after NBC and others argued that getting rid of them would not lead the networks to favor their own programming.36 As Bob Wright, then president of NBC, said at the time, “It is in our self-interest to do everything we can to promote a strong independent production community.” NBC pointed out that it was unfair to allow media companies like Time Warner to be vertically integrated while locking broadcasters out of the game. But the attraction of favoring its own programming proved to be too great.37 By 2005, NBC was the largest supplier of the shows aired over the network; more than 75 percent of NBC's prime-time programming was produced by companies owned or controlled by its corporate parent.38 In exchange for the privilege of broadcast distribution, the networks were asking for at least part ownership of any show they put on the air.
As Senator Franken said to me in September 2010, “As soon as they got what they wanted, they just let it out, they let it be known to the creative community that they were interested in owning as much of the programming as possible. And they let it be known to their affiliates and everybody, that they were going to have—and I was at NBC, so I saw it at affiliate meetings—they were basically saying, NBC is going to own at least half its own programs. I mean, they were very blatant about it. Then the creative community in Hollywood and to some extent New York were basically told that if you want a get a good time slot, you want to get on, you might want to sell us, or give us, essentially, a piece of your show.”39
Getting rid of the fin-syn rules led to substantial media consolidation: Disney bought ABC TV; Paramount bought CBS.40 The broadcast networks ceased standing alone; it made much more sense, now that they could vertically integrate, to fold them into larger conglomerates that could funnel product down the distribution chain with total control.
Zucker, testifying in 2010, had the same challenge as Bob Wright had faced during the fin-syn discussions of the early 1990s: assure legislators that a mega-distribution company would continue to act in the best interests of capitalism and consumers once it controlled valuable content. When Zucker was asked by Representative Charles Gonzalez (D-Tex.) whether the new merged entity would have any “advantages as to other providers that may not have the access to the content that you are going to have,” Zucker replied: “It is in our interest to make sure that our programs are as widely distributed and seen by as many people as possible. So that is the way that we will recoup the tremendous investment that we make in entertainment, news and sports. And so from our perspective, we want to make sure that our programs are as widely distributed as possible.”41 (The phrase “it is in our interest” is usually a warning flag.)
Since the elimination of the fin-syn rules, the NBC broadcast network had been on a bit of a roller-coaster ride. Ratings surged with Friends and Seinfeld in the 1990s but collapsed in the 2000s. On the plus side, NBC bought Telemundo, the nation's second-largest Spanish-language television network, in 2002.42 Its news and sports operations remained strong, with Nightly News, Today, and Meet the Press on the news side and the Olympics, the Super Bowl, and NFL Sunday Night Football at the top of the sports list. But as a whole, NBC broadcast faltered.
NBC seemed to be symbolic of the broadcasting business generally. As Craig Moffett, an analyst for the investment firm Bernstein Research, said in 2009, “Broadcasting is the sick man of media and NBC is ailing worst of all.” In the fourth quarter of 2009, the NBC broadcast network saw its revenue fall by 2 percent and its operating profit sharply decrease. Meanwhile Universal, the movie studio, lost 25 percent of its revenue in the fourth quarter, mostly because of a huge fall-off in DVD sales—64 percent lower than the previous year—and money-losing movies like Land of the Lost, The Incredible Hulk, and The Mummy: The Tomb of the Dragon Emperor. Although Brian Roberts testified in early 2010 that “at the heart of NBCU's content production is the National Broadcasting Company, the nation's first television broadcast network and home of one of the crown jewels of NBCU, NBC News,” the fact was that NBC-the-network was a small, cold, and distant planet in the NBCU galaxy of content.43
The traditional broadcast networks’ business model was based for decades on big brand-name advertisers buying millions of dollars’ worth of bulk advertising. Advertisers spent that money because the Nielsen ratings agency told them that people were watching particular shows—and Nielsen collected its data by tracking a few thousand households and scaling up the numbers.
But now that market is no longer functioning the way it used to. CBS and ABC have weathered the change better than NBC has, thanks to cannier programming choices, but the trend is unmistakable: except for political ads and prescription drugs, spending on broadcast-television advertising has markedly and steadily decreased. Even the Olympics do not give much return for advertising dollars on broadcast: GE spent $2 billion in 2003 for rights to the 2010 Winter Olympics and the 2012 Summer Games, but ended up losing at least $250 million on the former, in part because advertising revenues did not live up to projections.44
Cable channels, meanwhile, are getting a bigger share of the total ad dollar; by 2008, they had $21.6 billion in total advertising spending, up 15 percent from just ten years earlier, and drew in 39 percent of all television adve
rtising dollars.45 (The Internet, meanwhile, has grown nearly twice as fast as cable television, as measured by ad revenues.)46 According to Nielsen, ad spending on national cable networks went up 16 percent, to $19.1 billion, in 2009, while broadcast network advertising fell around 10 percent, to $20.3 billion.47 Even though each cable network may attract only a small slice of the audience, cable as a whole has the broadest scope and is the easiest way to reliably reach a mass audience. Meanwhile, broadcasters’ costs remain extremely high: NBC labors under at least $3.5 billion in annual program production costs.48 So with advertisers moving to cable, broadcasters are looking for other sources of revenue.
That means that NBC Universal's traditional flagship, the broadcast network, has taken a backseat to the company's cable offerings, including USA (the number one–rated cable channel), Bravo, Syfy, CNBC, and MSNBC.49 These are enormously popular brands with a huge market share; collectively, they represent 80 percent of NBC Universal's value.50 USA is available in 82 percent of all U.S. homes (about 90 million households) and is a hugely popular source for original series, movies, and sports events. Syfy provides what it bills as “imagination-based entertainment,” including a strong dose of horror, science fiction, and fantasy. Bravo is seen in 75 million households, is the fastest growing Top 20 ad-supported cable entertainment network, and is the home of both Top Chef and Real Housewives programming. CNBC has 85 percent of the market for business news and is seen in more than 340 million homes worldwide, including more than 95 million households in the United States and Canada. MSNBC, launched in 1996 as a joint venture between NBC and Microsoft, is a market leader in news, particularly online.51 During the fourth quarter of 2009, NBC Universal's cable networks grew by 8 percent in both revenue and operating profit, with Syfy, Oxygen, and Bravo all growing operating profit by double digits, and CNBC by 7 percent.52
Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age Page 16
