Wednesday, November 25, 2009

Holman Jenkins On GE's Sale of NBC/Universal

Last week's Holman Jenkins column in the Wall Street Journal has been laying on my floor, waiting for this post. In that piece, entitled "The Economics of Jay Leno," Jenkins weighs in on GE's attempt to dump its entertainment unit onto Brian Roberts' Comcast.

Jenkins begins,

"As Mr. Leno explained in a candid interview with trade bible Broadcasting & Cable: "If you are making buggy whips and no one is buying buggies anymore, do you keep making buggy whips? I don't know. This is an economic decision."

In Jack Welch's day, an employee perhaps would not have expounded so freely. Otherwise, however, GE is behaving like what it's always been, an unsentimental owner of a business that it no longer likes and doesn't know how to fix.

Yet, truth be told, Comcast's shareholders don't want the job of fixing NBC either. Only the controlling Roberts family does—and then because the alternative may be having no great future as a prominent American business family. Ergo, a deal merging "content" and "distribution" seems inevitable, even though the track record of such deals is unpropitious."

No kidding. As I've written in some prior posts, combining content and distribution has been a disastrous strategy in media. Think AOLTimeWarner.

Then there's this little nugget, about which I've been writing for a few years,

"This would be a merger, after all, of two businesses that seem headed toward some combination of the fates of newspapers, music CDs and the old wireline telephone business. Customers want the product for free. Comcast's lifeblood, the $100-a-month cable bill and the $50-a-month broadband bill, increasingly look like duplicative expenses. And so on.

True, the number of households that have actually dropped their cable subscriptions in favor of subsisting on TV streamed or downloaded from the Internet is not yet large. But for the Roberts family and its Comcast property, their worst fears lurk just around the corner—being reduced to a "dumb pipe," subject to commodity pricing while somebody else (Google) makes all the money.

Yet an escape route is vexingly hard to envision. Time Warner and Comcast have been talking up plans to make their respective cable lineups available by computer—as long as you keep paying your cable bill. This is a stopgap, especially appealing to anyone who owns two homes but wants to pay only one cable bill. Never mind, too, that hundreds of shows are already available online for free, via Web sites operated by none other than Comcast and the TV networks themselves."

Despite a consultant friend of mine lecturing me several years ago on how wrong I was to believe internet-based video content viewing would cripple cable distributors in the near future, now even Jenkins sees it as just about here. And financially important, too.

As an alternative, Jenkins focuses on the one thing that cable can control and use to its advantage,

"Set-top data, when married with demographic information and purchasing histories, has long been touted as the foundation of a new kind and a better kind of advertising—personalized, less annoying, capable of commanding higher rates from marketers who lament that half their ad budgets are wasted (i.e., selling cat food to dog lovers), but they don't know which half.

For Comcast and other signal deliverers, then, the long-term trick may be inveigling households into keeping the set-top box at the center of their entertainment lives. Maybe the box will be offered free in the future with your broadband subscription. Maybe it will be offered free regardless of who supplies your broadband. The set-top box will morph into your personal "media computer," a gift from a programming aggregator, as long as you agree to surrender large amounts of personal data about your viewing, surfing and purchasing habits."

This is a good insight on Jenkins' part. But it doesn't really mean that NBC/Universal is of special value to Comcast. It simply means any cable provider, even sans content, can sell the viewing habit data. So much for the GE deal as adding value in this scenario.

Jenkins closes with this observation,

"Bottom line, since a deal seems nearly certain to happen: Would a savvy media investor wish the Roberts family luck in their gamble? Absolutely. Would such an investor care to come along for the ride? Maybe not so much."

Which is pretty much my own conclusion, as I noted in this post early last month, when the talks came to light. As for the followup post, this is it, spurred by Jenkins' similar treatment of the other, non-GE side of the deal.

I've written several posts recently, found under the "GE" label, remarking on the failure of the original RCA purchase which brought NBC to GE. And its more recent mismanagement, despite Immelt's protestations of the entertainment unit being a core business for the failing, diversified conglomerate.

But, as I briefly noted in those posts, while Comcast may be the only reasonable buyer, that never meant it was a good idea for the cable systems owner.

More likely, this is one business which might be best spun off to GE shareholders, to avoid more damage to any existing US corporation. If the content housed in the unit has any real value, wouldn't it make more sense to let it be realized independently by the group's management as a pure play? Then some other content outfit, if it desired that talent, could separately make a bid and enrich those remaining shareholders.

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