NBC Universal's Jeff Zucker on Content, Convergence, Comcast -- and ConanPublished: September 29, 2010 in Knowledge@Wharton
Content is king in the television industry, but the traditional broadcast model has been under siege in recent years as the market becomes more fragmented and viewers access their favorite programs in new ways. The changes ushered in by the advent of the Internet, DVRs, smartphones and Netflix have created numerous opportunities for the entertainment industry, but Jeff Zucker, president and CEO of NBC Universal, said shifting to an entirely digital model remains an unworkable financial proposition.
"Hulu and Netflix are pretty much destroying our business model and if we don't figure this out, there's not going to be any content to watch anymore," Zucker noted as part of the recent Wharton Leadership Lecture. "A couple of years ago, I worried that we were trading analog dollars for digital pennies ... I've since revised that quote, and I think we're now up to digital dimes. But the equation still won't work."
Solving the equation at NBC will soon be out of his hands. After months of speculation, Zucker told employees in an e-mail on Friday that he would step down from his position after the completion of the takeover of NBC Universal by cable giant Comcast, which is currently seeking regulatory approval to purchase 51% of the company from longtime parent General Electric. In an interview with The New York Times, Zucker acknowledged that the decision to leave was not his own choice. Although reports have been circulating that he had long had an exit deal in place, the Times reported that a contract settlement was only completed on Thursday. Zucker declined to elaborate on the financial terms of his departure. "We had both gotten to the same place," Zucker told the newspaper. "[Comcast COO Steve Burke] made it clear that they wanted to move on at the close of the deal, and I was completely comfortable with that."
Zucker, 45, spent his entire professional career moving up the ranks at NBC, where he was hired as a researcher for the 1988 Summer Olympics shortly after graduating from Harvard. Although he was quick to point out that NBC's broadcast offerings represent only "10% of the company bottom line" Zucker has faced sharp criticism for the network's fall to fourth place in prime time ratings, its lack of breakout hits and the controversial decision to jettison scripted dramas at 10 p.m. in favor of a Jay Leno-hosted variety program.
In a talk centered on "Cs" -- including "content" and "convergence" -- Zucker cited courage, commitment and character as key to leading the company through ups and downs in its fortunes. He also discussed the fallout from two "Cs" that put his name -- and the network's -- in recent headlines: the proposed merger of NBC and Comcast, and Zucker's decision to oust Conan O'Brien as host of The Tonight Show in favor of returning the reins to Leno after his 10 p.m. show flopped.
"The best advice I ever got was don't be afraid to make a mistake, but don't make the same mistake twice," said Zucker, who did not elaborate on his future plans when announcing his departure. "[Leadership] is really about having the courage to take a chance and then taking the consequences if it doesn't work out. It's about having the commitment to live through that and having the character to recognize that ultimately you're in charge."
'The Show Was a Disaster'
Zucker accepted his first job at NBC after failing to gain admission to Harvard Law School. He was accepted at the University of Virginia Law School, which allowed students to defer for two years. Instead of going back to school when the deferral ended, however, Zucker moved from NBC Sports to a position as a producer at the network's venerated Today show. In 1992, he was named executive producer. At the time, the morning program was going through some growing pains.
"At the age of 26, they had this crazy idea to put me in charge of the whole show. That was due to two things. [One], I had worked really hard and I had devoted my life to the show for two years ... I stayed all night and there was one world crisis after another that I produced because I was the only one there," he noted. "The other factor ... was that the show was a disaster."
Since debuting in 1952, Today had dominated ratings for morning shows for most of its lifespan. A few years before Zucker took the reins, however, the program lost the number one spot to ABC's Good Morning America. Under Zucker's leadership, the show relocated to a streetside studio similar to its original space in the 1950s, introduced a summertime concert series and regained the top spot in the ratings.
"I understood [when I took over] the legacy of the Today show, but I wasn't bound by it," Zucker stated. "I was willing to take chances. People would say, 'We don't do that on the Today show' and I would say 'Have you seen what [ratings] position we're in?' We took a lot of chances when I was there and [eventually they paid off.]"
When Zucker was working on the 1988 Summer Olympics in Seoul, South Korea, the event was broadcast on one network -- NBC -- and viewed on one platform -- television. NBC paid $820 billion to acquire the rights to carry the 2010 winter Olympics in Vancouver on broadcast, cable and online. Although ratings were up 14% over the 2006 winter games, the company reportedly lost $223 million on the Olympics in the first quarter of 2010. "The world is entirely different than when I began [at NBC]," Zucker said in an interview after his speech. "Just using the Olympics as an example, our programming is across multiple platforms more than 24 hours a day, if that's possible. The world was a lot simpler in 1988. It's a lot more complicated in 2010, and the biggest benefactor of that I think is the consumer."
The state of television news also has changed significantly since Zucker was at the helm of the Today show. In his speech, Zucker discussed how MSNBC found a brand identity by becoming the liberal yin to Fox News' conservative yang. Afterward, he noted that "very few people come to television news to find out the news. They come to find out what you think about the news or to help you interpret the news. When I was [at Today], we were reporting the news and breaking news. That's almost impossible today."
In 2000, Zucker was promoted to president of NBC Entertainment, in charge of the network's entire prime time schedule. He moved up the ranks, gaining additional responsibilities and in 2007 was named president and CEO of NBC Universal. Zucker will remain in the job until the Comcast deal is completed. Previously, the two companies had said that after the merger, Zucker would report to Comcast COO Burke, a former Disney executive. Now Comcast has named Burke to take over for Zucker in overseeing NBC's broadcast, news and sports divisions; cable networks including USA, SyFy and Bravo; Universal Pictures movie studio; theme parks in Orlando, Hollywood and Japan, and the online video site Hulu.com, a joint venture with Fox and ABC. "I've spent 24 and a half years at NBC; it's the only place I've ever worked," Zucker said during his Wharton speech. "I feel it's given me a tremendous advantage: I know where all the bodies are buried. Nobody can pull the wool over my eyes."
'NBC's Got to Do Well'
When Comcast announced a deal last December to acquire controlling interest in NBC Universal from current parent GE, NBC Universal was valued at $30 billion. The merger is currently awaiting approval from federal antitrust regulators. Officials from the cable operator expect that about 80% of the cash flow from the new company will come from cable networks, including USA, Bravo, CNBC and MSNBC. At Wharton, Zucker pointed to a fifth consecutive most profitable year for NBC's cable division, record profits for news channels CNBC and MSNBC, and favorable outlooks for the company's theme parks and for Universal Pictures. "If we didn't have the broadcast network, if we didn't have NBC, people would think we were the best media company out there," Zucker noted. "The fact is, if the name of the company is NBC Universal, it doesn't matter if USA is the number one cable network in America. NBC's got to do well."
NBC's prime time lineup has struggled for the past six years and, as the person who put about 80% of the company's current leadership in place, Zucker takes responsibility for that. "[Regarding] the leadership I put in place after I left there, I think the development was too niche. It wasn't broad enough. We needed broader programming to reach a larger audience, and we went a little too cable," Zucker said. "The next set I put in place [was] just completely wrong and that was completely on me. They were good producers and bad executives, and that one I blew. Now the team we have in place is a team I know incredibly well that has worked for me for a long time. I think we have the right team."
Kevin Reilly, current president of Fox Entertainment, succeeded Zucker as NBC's programming chief and served in the post until 2007. His tenure was followed by that of Marc Graboff and Ben Silverman, founder of the production company Revielle. Zucker was criticized for getting rid of Reilly, who went on to a successful run at Fox, and hiring Silverman, who introduced a slate of mostly unsuccessful shows and generated unfavorable press for his personal exploits. Last year, Silverman and Graboff were replaced by Jeff Gaspin, formerly in charge of NBC's cable division. Graboff continues as chairman of NBC Entertainment, but now reports to Gaspin. It's unclear how Comcast or Burke will change the leadership team once Zucker leaves.
But it was Zucker who decided in 2009 to turn over a timeslot that is traditionally reserved for scripted programming to a Leno-hosted talk show. Five years earlier, Zucker convinced former Harvard classmate O'Brien to remain at the network by promising that the comedian would succeed Leno as host of The Tonight Show. According to Zucker, the 10 p.m. show allowed the network to keep ratings winner Leno "and still make good on our promise to have Conan at 11:30."
After the Leno show was announced, however, NBC affiliates threatened to preempt it, worried that ratings for their 11 p.m. newscasts would suffer from a lead in with a smaller viewing audience. Writers, actors and producers criticized the network and Zucker for taking timeslots away from scripted programming. In one of the more public examples, while accepting an award at the 2010 Golden Globes aired by NBC, actress Julianna Margulies pointedly thanked executives at rival CBS for "believing in the 10 o'clock drama." Although the move was expected to save NBC millions of dollars because a talk show or reality program is cheaper to produce than a drama or sitcom, ultimately "neither show worked. Jay didn't work at 10; Conan didn't work at 11:35," Zucker said.
Displacing O'Brien and reinstating Leno at The Tonight Show was "the most painful decision of my life," Zucker stated, and he endured plenty of flak as a result. Fans of O'Brien used Facebook and Twitter to create the "I'm with Coco" campaign in support of the comedian. O'Brien, who signed a $40 million deal to walk away from the job, used his final monologues to diss the network, and many of his celebrity guests followed suit. "We decided that Jay was broader and had a bigger audience," noted Zucker, who said in an interview with Charlie Rose that he received death threats over the scheduling issue. "Do we wish we'd stepped up and taken Conan off the air early because that wouldn't have given him the platform to bash us? Yes. Do I wish I hadn't given Conan an extra five years [at the network]? No.... I think you have to have the courage to try things, the courage to acknowledge when they don't work out and the courage to move quickly and correctly. It was all very public -- nothing we do is not public. I do think we made mistakes and we could have handled it better, but at the end of the day, we did the right thing."
'You Don't Watch Television'
Many of NBC's struggles, however, are mirrored by all of the broadcast networks. Viewers have hundreds of channels to choose from and an increasing number of cable channels are developing the kind of original programming that was once only found on broadcast stations. As ratings for broadcast networks decline, it's harder for them to justify high prices for advertising. But advertising dollars are what cover the high cost (an average of about $3 million per hour) of producing a show like Law & Order: SVU or Friday Night Lights.
The network business model has taken additional hits from the increasingly diffuse way that viewers consume content. During his Wharton speech, Zucker asked audience members if they watched programming via Hulu.com. About half raised their hands -- the same number who acknowledged using Netflix a few minutes later. But very few responded to Zucker's query about watching the 6:30 p.m. news live on television. "You don't watch television; you watch content on a device somewhere, and you watch it when you want to watch it, where you want to watch it on whatever device you want to watch it. We've got to deal with that because you are the consumers of tomorrow."
Zucker said much of his time as CEO was consumed with talking about different methods of distributing content from NBC Universal and new ways to engage viewers. He was recently deposed for 10 hours by the U.S. Department of Justice in its review of Comcast's bid to control the company, "and we spent about eight of those hours talking about Apple and Hulu and Netflix." At a recent Goldman Sachs investor conference, Zucker said NBC Universal was unlikely to join rival networks in making programming available for the new 99-cent Apple TV rental service because the price point "would devalue our content." Apple has deals in place with Walt Disney-owned ABC and News Corp.-owned Fox.
A few days after Zucker's comments about Apple, however, NBC Universal and Netflix announced an extension of their partnership to bring more of the network's programming to the rental company's streaming service. NBC Universal, along with News Corp., was an architect of Hulu, which allows users to watch episodes of current and classic shows for free online. Hulu is in the process of creating a subscription service that would offer paying customers access to more content. Zucker told the audience at Wharton that one impetus for Hulu was "Lazy Sunday," a 2005 Saturday Night Live music video parody that went viral on YouTube. "'Lazy Sunday' aired on a Saturday night. By the next morning, it was on YouTube, and by Monday morning it was a worldwide phenomenon. A couple of months later, YouTube [was] sold to Google for $1.6 billion," Zucker added. "That was our content. They stole it and that was continuing to happen, so we thought we needed to control our content and be able to profit from our content."
Although Zucker considers Hulu "a tremendous success," he acknowledged that the industry is still without a new business model that will cover its costs. "The reason why we're not just going full in on digital distribution is because it just doesn't make economic sense right now. The money is just not there, be it Hulu, Netflix or the Apple iTunes store," he noted. "We make billions and billions ... each year from the old models that are still in place, [such as] distributing USA and SyFy and CNBC through Comcast and Time Warner Cable. It's expensive to produce the kind of content that we do and to collect the kind of news and information we do. If we forgo all of that because of these new technologies, we'll be out of business right away."
When one audience member suggested that NBC Universal simply cut back on actors' salaries or other personnel costs, Zucker responded that "there's a lot of mansions in Hollywood built on preserving the old system." Although creating a more workable cost structure was one of the priorities Zucker set when he took the helm at the company, he noted that in Hollywood, "there's always somebody who's willing to pay more. We work in an industry where there's always somebody who's driving up the price, and that makes it really hard."