Comcast-NBC Universal Deal To Change Comcast’s Business Model

DFN: This article presents the reasons why Comcast would buy NBC; I’ve yet to see anything that explains as equally well, why GE would sell?

Comcast-NBC Universal Deal To Change Comcast’s Business Model
By Money Morning on November 20, 2009 | By Money Morning | www.moneymorning.com
http://www.dailymarkets.com/stocks/2009/11/20/comcast-nbc-universal-deal-to-change-comcasts-business-model/

With a possible buyout of General Electric Co.’s (GE: 15.59 -0.17 -1.08%) NBC Universal Inc. in the works, Comcast Corp. (CMCSA: 15.01 -0.03 -0.20%) is adapting to a changing technological landscape.

Comcast, the United States’ largest cable television provider, is hoping to avoid becoming the next newspaper or record company by expanding its role from an entertainment medium to a content provider.

“The world of cable delivery is about to change,” Forrester Research analyst James McQuivey told the Los Angeles Times. “Cable companies for years have made their living by selling consumers hundreds of television channels bundled together. But the future is going to be very different, and cable companies instead will be selling an ‘entertainment experience.’”

While Comcast is now a major player in the Internet service provider (ISP) business as well as telephone service, more than half of its revenue comes from its cable TV customers. But factors working against Comcast include:

More Competition: No longer limited to satellite TV providers, telephone companies continue to widen their reach through fiber-optic cable.
Higher fees for content: The fees Comcast pays for programs from TV networks are on the rise.

The likely Comcast-NBC deal would give the cable provider a 51% stake in NBC, while GE would retain a 49% stake and contribute roughly $12 billion in debt to the new company, according to The New York Times. GE would eventually sell its ownership interest over a period of several years. The two companies agreed to value NBC at about $30 billion, Bloomberg News reported.

Paris-based Vivendi SA, which owns 20% of NBC, has no intention of being a part of the new entity, Vivendi Chief Financial Officer Philippe Capron said at a Morgan Stanley (MS: 32.10 -0.21 -0.65%) conference in Barcelona.

Vivendi is seen as the last obstacle for GE to strike a deal with Comcast, and Vivendi is asking GE for a higher price for its stake and certain deal protections, two people familiar with the matter told The Wall Street Journal.

Competition Likely to Change Comcast’s Business Model

More than 54% of Comcast’s top line comes from its TV customers, who are fleeing.

Rate increases have helped offset 10 consecutive quarters of net subscriber losses, but Comcast can only raise rates so many times before it alienates its customer base.

When the market decides it can no longer bear Comcast’s rate increases, the company will likely turn to advertising revenue, which currently represents just 3.6% of sales. A deal with NBC Universal brings to the table more ad revenue from its 11 networks -including Bravo, USA Network and MSNBC – aligning the Comcast-NBC with media giants like Viacom Inc. (VIA: 31.52 -0.76 -2.35%) and The Walt Disney Corp. (DIS: 30.01 -0.20 -0.66%).

There are also Comcast’s interactive, targeted ads a la Google Inc. (GOOG: 569.964 -3.026 -0.53%), which generated just $15 million in sales in the third quarter. So far, these ads reach only a few subscribers in isolated areas across the country.

“But the big number,” Chief Operating Officer Stephen Burke said of interactive ads earlier this month, “will be generated when the industry gets together and allows a national advertiser the ability to advertise across the country.”

Cable operators like Comcast once had entire regions to themselves. But in the mid-1990s companies like The DirecTV Group (DTV: 31.54 +0.04 +0.13%) and Dish Network Corp (DISH: 19.99 +0.13 +0.65%) – with much-smaller dishes to mount than what was previously available – made it easy for consumers to switch to satellite TV.

From 2007 to 2008, DirecTV grew its subscriber base 4.6% while Comcast’s shrank 0.8%. DirecTV now has 18 million TV subscribers to Comcast’s 23.7 million.

Comcast and its satellite rivals saw new challengers with fiber-optic TV and Internet service, particularly Verizon Communications Inc.’s (VZ: 30.43 -0.09 -0.29%) FiOS. Similar to the dawn of cable, Verizon’s biggest challenge is burying the cables in neighborhoods (cable companies use copper-based coaxial cables versus FiOS’ fiber-optic cables, so they can’t share wires). As it installs more fiber in neighborhoods, Verizon is becoming more of a threat to Comcast.

Both providers use their market penetration – or how many customers they have out of the total amount of wired homes – as a key measurement for growth. Comcast was wired in 51 million U.S. homes at the end of the third quarter and saw its video penetration fall by two percentage points to 46.5%, compared to 48.5% in the same period a year ago.

Verizon FiOS TV, while available in far fewer homes – 10.9 million – is penetrating the number of wired homes fast, with a 24.7% penetration in the third quarter compared to 19.7% in the same quarter last year.

Because the number of wired homes grew by almost 2% in the past year, Comcast’s market penetration on the surface looks flat. But that’s not the case.

Comcast actually lost TV customers, going from 24.4 million subscribers in third-quarter 2008 to 23.7 million in this year’s comparable quarter – a loss of roughly 700,000. Verizon’s FiOS TV, which started in Texas in 2005, now has 2.7 million subscribers.

Comcast’s penetration of homes that can receive its Internet service is growing, but at a slower rate than Verizon’s. Of the 50.8 million homes wired for Comcast Internet, penetration was 30.9% in the third quarter versus 29.5% a year ago. Verizon’s FiOS equivalent jumped to a penetration of 28.5% of the 11.5 million wired homes in the third quarter, compared to 24.2% in the same period last year.

Why Rent When You Can Buy?

Carrying cable channels like MTV, Comedy Central and the Disney Channel doesn’t come cheap, and it’s getting more expensive for Comcast as content providers try to make up for ad dollars lost to the recession.

Broadcast networks such as Fox and CBS intend to charge for their over-the-air channels that they once transmitted for free, putting pressure on cable companies’ bottom line.

“Comcast’s fear is that it will become more difficult to pass those price hikes on to viewers because of the increased competition,” Jason Bazinet, a media analyst with Citigroup Global (C: 4.20 -0.06 -1.41%) told the LA Times.

“If you are [Comcast Chief Executive Officer] Brian Roberts, buying a content company is a hedge against these rising programming costs,” he said.

This would enable Comcast to help set the prices itself.

“For Comcast,” Bazinet noted, “you would be collecting as many checks as you are cutting them.”

Buying NBC would also make Comcast a bigger player in the sports arena; it already owns nine regional networks as well as the cable channel Versus. NBC brings to the table the NFL, NCAA football, the PGA and the Olympics. The deal would put Comcast in the same space as Disney’s ESPN, according to Bazinet.

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