Comcast and NBC Universal: The Rise of a Content King?

Philadelphia-based Comcast, the largest cable company in the U.S., has made a bid to merge its operations with NBC Universal — home to the NBC television network, Universal Studios and popular cable channels including Bravo, USA, CNBC and MSNBC. If the deal goes through, Comcast will own 51% of the new conglomerate. This would create a programming giant, allowing Comcast to produce and distribute content throughout its cable networks and on web sites such as Hulu, which is partially owned by NBC Universal.  Steve Ennen, managing director of the Wharton Interactive Media Initiative (WIMI), spoke with Wharton marketing professor Pete Fader and Ken Shropshire, professor of legal studies and business ethics, about what the deal could mean for content distribution and for consumers.

Edited transcripts of the two conversations follow.

Interview with Pete Fader:

Knowledge@Wharton: This is Steve Ennen, managing director of the Wharton Interactive Media Initiative. I am here with Professor Peter S. Fader, who is the co-director of the Wharton Interactive Media Initiative. We are talking about something that has Philadelphia — if not the entire nation — buzzing: a possible Comcast-NBC Universal union and, in a broader context, what that means for content distribution. Pete, can you give us an outline of what is at play here?

Fader: Well, it is interesting when you have two big, visible but fairly different kinds of companies talking about coming together like this. There has been a lot of talk about Comcast looking to acquire somebody. Almost all that talk was about which other cable operator they would gobble up. There was very little talk about them doing something a little bit bolder like this. That makes it a whole lot more interesting.

Knowledge@Wharton: And it also is a different play on what we might think of as the regular acquisition. We are talking about distribution. We are talking about a content company in NBC Universal. How does that play out for Comcast? Can you see the benefits in a situation like that?

Fader: Well, first it is useful to take a step back. Some folks might remember that it is not the first time that Comcast has tried to dip its toe in the content creation waters. A few years ago, when they tried to buy Disney, Comcast seemed a bit more like an upstart — who are they to be trying to acquire a firm like Disney? It is interesting now that they are seen as relatively equal with NBC. It shows something about how Comcast has moved up in the food chain — and that reflects both Comcast as a company as well as the increasing power, visibility and respect for a distribution-oriented media company.

I think the equation has changed quite a bit, and now it looks like Comcast will likely pull this off. Again, that speaks volumes about the distribution versus content trade-offs that people have spoken about for a long time.

Knowledge@Wharton: It is part of a bigger sea-change though, isn’t it — the idea that distribution companies need content companies and vice versa? We have seen hints of this in some of the Google-Vivendi conversations in the past. Is this a harbinger of things to come? Is this the next evolution of content?

Fader: I don’t think it is a harbinger; it is the way things are. This interplay between content creators and the distribution companies — that is the new reality. Again, there is a power-shift taking place. There are more and more indications that it is the distributors who are holding the cards. Not to diminish in any way the content of a great firm like an NBC, but just the ability to have that direct contact with the user is unlike anything that we have seen before in the media business.

Knowledge@Wharton: It is certainly going to change pricing models, though — the idea that cable is often subscriber based and broadcast relies much on the advertising revenue. How do you see the business model shifting?

Fader: Well, it is great to see that there will be a variety of business models emerging. Too many people see Comcast as just a cable company, but they really are much more than that. They have been creating content on their own. [Then there are] the portfolio companies that they own: A lot of people are very surprised when they learn that familiar names — like Plaxo, Fandango and others — are owned by Comcast. So it is not like Comcast is completely new to this business. Of course, NBC is a much, much bigger player than any of the other content-oriented firms they have already acquired. But Comcast has been building towards this. The only question is whether they have enough of an organizational infrastructure to take something like this on and really find — dare I say — synergies out of it.

Knowledge@Wharton: Taking off on that synergies comment, what does this union say about other distribution operations? What does it say about other content companies? Is [this] something they would have to do to compete?

Fader: I think it is becoming a necessity for the content creators to be more of a distribution player. I think that is basically what caused the demise of the music industry — when they had a very interesting and novel distribution mechanism, Napster, available and they basically squashed it. They are the losers in that battle. I think it is essential for these firms not only to be proactive in making deals and be creative about finding new distribution channels, but to really have an active role in the distribution in a way that they really never thought about before. In fact, in the old days, it was downright illegal to have some of the distribution and content matchups that we see today — [for example] movie theatres in the middle of the 20th century where the studios couldn’t own theaters.

Today we are well beyond that. But, at the same time, we ain’t seen nothing yet. I think there is going to be many more of these content-distribution combinations. Some will work. Some won’t.

Back to the question of business models — whether we can have a la carte or subscription or ad-supported. I think these kinds of combinations are going to make it possible to try out some business models, including ones that we haven’t thought of yet. And it’s nice to see that the winners and losers will be determined more by market forces — that is to say, consumers choosing — as opposed to regulation or just the sheer size of particular firms.

Knowledge@Wharton: What about the consumer? Does this affect choice? Does this affect the options available for the consumer? And, does it affect the price points at which the consumer interacts with these content creators? Broadcast TV is free. We can turn on and watch the Olympics. Through a cable provider, it is a different story.

Fader: I think it affects the consumer very, very little. I think it goes back to NBC’s current owner: Does anyone know or care that NBC is owned by GE? Does that mean anything? Not really. I think GE was wise to let NBC create content, continue to build their brand, get involved in other deals such as Hulu. And I think Comcast would do the same thing. So, from the consumer’s standpoint, it is no big deal.

Now, there could be other arrangements arising. So while I mentioned Hulu, there is also TV Everywhere, an interesting arrangement that Comcast has been working on with Time Warner Cable and a bunch of others to try to make TV content available to cable subscribers [through the internet]. This will certainly help them in that regard. Will that mean higher prices for the consumer? Maybe, but not necessarily because of monopoly power. It would be because there is more content available. So I don’t see this as a case of the consumer being squeezed. It might be the case of a consumer being delighted with more content being available through more points of distribution.

Knowledge@Wharton: And some of those points of distribution include the Internet — properties like Plaxo and, more relevant to this conversation, Hulu. What does that do to the model of content distribution networks — the capacity to stream content over the Internet?

Fader: You shouldn’t use the singular word “model” because there are so many models that are already in place and many more that are arising. I am a big fan of Hulu, not only as a consumer using it but for some of the very innovative things they have been trying — a lot of interesting experiments with pre-roll ads and so on. It’s an interesting alternative to YouTube. And I think there are many other players out there. I mentioned TV Everywhere. Hulu is here to stay. There hasn’t been a lot of speculation yet about what this particular deal might mean for Hulu. I don’t think it will mean much. Comcast would be unwise to hurt it in any way. I think Hulu is building a brand of its own, independent of the companies that currently participate in it. Again, it will just open up other horizons.

One of the real treasures of Comcast that a lot of people don’t know about is Comcast Interactive Media. Again, they are the ones who own a lot of these Internet-based properties. It is going to be great to give them a little bit more of the limelight. NBC has been trying a lot of different digital initiatives on their own. They haven’t been particularly well organized [but they are] trying a lot of different things. Give NBC credit for being proactive, but it will be nice to pull a lot of that stuff together, and maybe that will happen in a slightly more organized fashion under Comcast.

Knowledge@Wharton: So, this move is indicative of where we are now as consumers — where we are in the ecosystem of the Internet and content and distribution. And there are a lot of positives that can come from this. I guess it is really a wait and see right now as to whether or not the deal goes through, of course, and what type of impact it will have the industry overall.

Fader: As I said before, it is fun to talk about this because they are big name firms. They are firms that don’t often show up in the very same sentence. That gives us — academics, consumers, or just fans of business — some entertainment value. But I think in the end, for the consumer, it really doesn’t matter that much. I think that both companies will go ahead focusing on their core businesses in the way that they have done before. As I said, I don’t necessarily see huge synergies. But I don’t see a lot of bad issues either. There are different corporate cultures there. Who knows how those things work out? But it will be fun to wait and see and how we look back at this five or ten years from now. Will it be something we look back at — like AOL-Time Warner — and shake our heads, [saying]: “What were they thinking?” Or will it be a more productive merger that we all look at and say, “Why didn’t this happen sooner?”

 

Interview with Ken Shropshire:

Knowledge@Wharton: I am here with Ken Shropshire, who is a professor of legal studies and business ethics at Wharton and director of the Wharton Sports Business Initiative. The entire industry, and certainly the Philadelphia region, is abuzz about the possibility of Comcast and NBC joining in some sort of endeavor going forward. And, of course, one area for us to examine is the impact it might have on sports. It could give great leverage to different parties in [terms of] sports coverage and sports content consumption. Can you give us an overview of what you see in this Comcast and NBC Universal initiative, and what that might mean to the sports economy in general?

Ken Shropshire: It is potentially a huge deal. The biggest piece that we would see — as consumers and as business people — is the size. There would be a new competitor out there competing with ESPN. You would have two big sports [content] players. The other side of it is the added power that Comcast would have in terms of doing deals. It is not only their small sports franchise now — Versus and the Golf Channel. If they add on this NBC piece, they get the Olympics for a couple of years. They get Sunday Night Football. That gives them a lot more leverage to say, “We don’t really need you as severely as we did before.” And they could strike better deals.

Knowledge@Wharton: Would that have an impact on some of the leagues and the relationship that NBC currently has with different leagues at the major level?

Shropshire: I think it does. One of the things that you can look at is the way that the NFL network had difficulty with Comcast in trying to strike a deal there. The NFL is used to being the 500-pound gorilla when doing transactions, and when they ran up against Comcast, they weren’t able to leverage in the way that they normally are able to in order to get a deal that is highly favorable to them. So I think this just gives [Comcast] more power … in terms of striking deals with various leagues, various teams — whatever kinds of deals they choose to do.

Knowledge@Wharton: Would that change the sports economy? Would that drive prices up for player talent, tickets, users?

Shropshire: Probably not in the short run. And this whole media piece is so fluid. It keeps changing. Who knows how long this snapshot will be there before we move on to something else? Who knew that this whole idea of On-Demand and interactive options would be what is driving these deals now? And who knew when they put these clauses into contracts years ago for these kinds of rights that they … would be something that could be monetized now. So we can’t really be sure. In the short run, if the deal goes through, it does make Comcast a much more powerful player and someone that you begin to look at not exactly in the same way that you look at ESPN, but you have to think of them as this big media player in the sports world.

Knowledge@Wharton: What does that do for the sports fan — my ability to consume content that was once broadcast out, [or] the ability to turn on the Olympics at any time? Do you foresee any change in the way that content is delivered?

Shropshire: That is interesting. This is where the regulators will come into play. Certainly, without regulation Comcast could think, “How do we monetize this to the hilt” — and make money off of everything possible from the Olympics to Sunday Night Football to whatever else they have. But they are not going to be allowed to do that — so dramatically.

They certainly will create more of an On-Demand kind of option for the fan that wants greater variety. Much like those people who use DIRECTV to get the games they want, there may be some broader options available. But I don’t think it is going to have a severe monetary impact on the consumer. The [positive] side is that it could provide greater options for [viewing] those games that you haven’t been able to see, that you can’t find anywhere and you have been scouring the Internet trying to find. You will know that you can go to Comcast; you will probably have to pay for it, but it may be available.

Knowledge@Wharton: So, in your opinion, if I can paraphrase, this could offer greater choice and variety to the consumer. Is it possible that Comcast could pull the plug on the broadcast model in general? Go more to subscription? How do you see the possibilities of their delivery system changing with some of this content?

Shropshire: In an unregulated way, sure. That is certainly the kind of thing that could happen. This is where we will begin to see the FCC take the kinds of steps that they can take to ensure that consumers still have access. This is an ever-changing model, so we’re not sure where it is going to end up. But in the end, Comcast is not going to be able to absolutely control the outcome. So it will be something interesting to watch. If this deal goes through, part of what Comcast has said is that they want to build this franchise up — they want to focus more on the sports world — so certainly there is a business theory that they have in mind, and they will have to deal with regulators in executing it.

Knowledge@Wharton: Now there is the online component, of course, too. You look at something like ESPN 360 — the ability to access a lot of that content. To your earlier comment about this offering greater variety and greater accessibility to sports fans, do you see anything that would preclude them from moving more and more content online, farther and farther away from that traditional broadcast model?

Shropshire: No, not at all. I think this is the chance to have a version of Comcast 360, which will have much more content than they have been able to have so far. They certainly have the various platforms where they can feed in this new content that they can acquire. So that is a potential big upside. The qualifier on all this is what kind of price Comcast would put on these things — put on access to getting these.

[The flip side] is to think about what can Comcast do that NBC Universal wasn’t able to do in terms of distribution and in terms of putting things out there? In some ways, if you step back from the business standpoint, this is the kind of deal that people look for in terms of two parties coming together that have different qualities. That is the plus. If it is done with the consumer in mind, and everybody deserves to make some profit off their business model, this could turn out to be very positive.

Knowledge@Wharton: Certainly, it is emblematic of a sea-change in the way content and distribution are working together as we move into a new interactive multi-media environments. Can you foresee something like CBS Sports and YouTube?

Shropshire: Anything is possible. CBS has its own interactive model now in that business. If you think about who the potential losers are — CBS is certainly one of the potential losers in this. Fox is one of the potential losers in this, because now ABC and potentially NBC will have these broader platforms. So in terms of networks trying to figure out what to do … you certainly have to think about YouTube or anything else that is out there — “Should we think of ways to partner with other platforms that can help us distribute what we have?”

Knowledge@Wharton: That is a great point. So what can CBS Sports or Fox do?

Shropshire: I don’t know. What is interesting about this is that it is a great move by NBC Universal to partner. This is a little bit of musical chairs, to find the big partners while they are still available. So this is a great move. And you have to assume that CBS and Fox are contemplating what their move should be, and I’m not sure what they are.

Knowledge@Wharton: As people follow this in the news, are there a couple of issues — especially related to the sports business economy — that you think will be very salient or that might surface as this deal progresses — if it progresses?

Shropshire: What will become very evident is the new monetary clout that exists in this Comcast-NBC Universal [venture] in terms of bidding for rights for league broadcasts, for the Olympics, for Wimbledon, for various sporting events. It will be interesting to see how this enterprise will be able to compete with the ABC-ESPN behemoth. It was so novel that they came in and were able to take Monday Night Football and move more aggressively in areas — to put things on cable, on ESPN that we never thought would happen. In the same way, it will be interesting to see the power that this new enterprise could have

Knowledge@Wharton: Good thing for the user? The viewer? The sports fan?

Shropshire: The jury is out. It could potentially be. For those of us who try to figure out where we can see that game that we want to see that is not broadcast locally, is this going to be another route for us to take? And is it going to be priced reasonably? If the answer to those is positive for the consumer, then it could be a great deal.

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