In 2001, the merger between America Online (AOL) and Time Warner was accompanied by lofty hopes of synergies between new-world Internet prowess and old-world content delivery. But those hopes were short-lived. Now, with a $30 billion deal to take control of NBC Universal (NBCU), Philadelphia-based Comcast is looking to integrate its cable pipes with many of the channels it distributes. What does Comcast CEO Brian Roberts know that the rest of the media industry doesn’t?

Under a deal announced on December 4, Comcast will own 51% of NBCU. General Electric, the network’s previous owner, will own 49%. The new joint venture that will emerge, pending approval from the Federal Communications Commission (FCC) and Department of Justice (DOJ), features a vast array of programming assets ranging from CNBC and USA Network to NBC Sports, Versus and E! Entertainment Television. The move will also make Comcast-NBCU a top-10 web property with 82 million unique visitors and sites like iVillage, Daily Candy, movie ticketing site Fandango and Hulu (an online video service that provides TV shows and movies from more than 190 content providers) in the fold.

Comcast’s strategy — vertical integration — is guided by the idea that one company can control multiple parts of a revenue chain, such as entertainment. In Comcast’s case, the NBCU acquisition means it would own the content it distributes. Apple has popularized vertical integration by controlling the software and hardware in its products to deliver a better customer experience. Other attempts at vertical integration have failed miserably–most notably the merger of AOL and Time Warner. With AOL, Time Warner never realized any proposed synergies and the cultures of the two companies didn’t mesh; it spun off AOL as a public company on December 9.

While experts at Wharton question the success rate of vertical integration, they acknowledge that Comcast’s decision to let NBCU operate independently without a laundry list of synergy plans is a positive. Wharton marketing professor Pete Fader notes that Comcast has no plans to absorb and integrate NBCU into its org chart. In many respects, it will run just as it did under General Electric. Jeff Zucker, CEO of NBCU, will remain at the helm along with his current team of executives.

The deal makes sense without any synergies, Fader says. Comcast executives repeatedly mentioned that their forecasts for returns on the NBCU deal didn’t include any synergy expectations. If any synergies emerge, they will be gravy. “AOL and Time Warner had a merger that was seeking synergies,” says Fader. “Comcast isn’t coming up with crazy dreams like AOL and Time Warner had.”

Comcast and NBCU are a better cultural match than NBCU and GE, Fader adds. “This one could fit. NBCU wasn’t a bad thing for GE, but the combination just didn’t make sense. Bringing Six Sigma to an entertainment company just doesn’t work,” because entertainment is different than widgets, he notes. “NBC is going from a company that makes turbine engines to one that makes the pipes to the entertainment.”

Cable Meets Content — Again

Comcast has aimed to integrate content with distribution for years. In 2004, Comcast made an unsolicited bid to acquire Disney, only to rescind the offer later. At the time, Comcast said a Disney merger would create “an unparalleled distribution platform and an extraordinary portfolio of content assets.”

Now Comcast has its content portfolio, and the onus will be on the company to prove this media merger is different, say experts at Wharton. “I’m a little suspicious of media mergers, but I’m a fan of the business acumen of Brian Roberts,” says Gerald Faulhaber, a professor of business and public policy at Wharton. “If anyone can make this work,” he can. “This makes as much sense as any content-conduit deal,” adds Wharton legal studies and business ethics professor Kevin Werbach. “It’s hard to bet against Comcast since it has good success with large acquisitions” — such as its acquisition of AT&T’s cable assets in 2002.

Nevertheless, it’s unclear whether Comcast’s cable-meets-content plan will differentiate the company much in the long run. Skepticism lingers about vertically integrated media companies. Stifel Nicolaus analyst Christopher King said in a research note that although the deal makes strategic sense, “we acknowledge the poor performance of past mega-media mergers.”

On a conference call with analysts, Roberts made the case that the new Comcast-NBCU venture will be unique. “Let me stress we really love and believe in the growth of cable and broadband distribution, but we also see real future growth in cable programming and other forms of digital entertainment. We think the combination of both is a real winner for our shareholders and our customers,” said Roberts. “With this transaction, I believe our company is strategically complete.”

Comcast-NBCU should not be compared to previous media mergers, added Roberts. “I think this is a different time and a different deal than any previous transaction. And I think there have been many successful examples, like when Time Warner bought Turner [Broadcasting].” Roberts said that critics can choose to look backward at previous media mergers, but Comcast expects a good return on the NBCU purchase without the synergy plans that doomed previous deals like the AOL-Time Warner merger.

Kendall Whitehouse, director of new media at Wharton, says that most of the properties that NBCU brings to Comcast, such as CNBC, USA Network and Bravo, “are a good strategic fit” in multiple scenarios on cable and the Internet. Also, Comcast has been a content player for years, launching channels such as Versus and the Golf Channel. Faulhaber notes that although the company hasn’t received much credit for doing so, it has proven it can manage content assets well.

One potential challenge awaiting Comcast will be negotiating deals with networks such as Disney’s ABC and CBS, now that Comcast owns a competitor. “Dealing with ABC and CBS will be a tricky balance,” says Whitehouse, who notes that the discussions will not be as clean as if Comcast didn’t own a competing broadcast network. 

Dumb Pipe Defense?

Experts at Wharton agree that Comcast’s purchase of NBCU is at least partially driven by worries that the company’s cable infrastructure could become a so-called “dumb pipe” that gets commoditized. Under a dumb pipe scenario, Comcast would lose pricing power and merely become a means to deliver TV and Internet services. That’s why adding content to the mix is key, faculty say.

“In the long run, it’s unclear what will save cable TV. There are so many alternatives to cable, which in the end is just another pipe,” says Joe Turow, a professor at the Annenberg School for Communication at the University of Pennsylvania. What remains to be seen is whether purchasing NBCU really gives Comcast a hedge against becoming a dumb pipe. “It’s a hedge against being just a distribution company,” suggests Fader. “It won’t be enough anymore to just be a distributor of content.”

Werbach agrees. “Any time a network provider acquires content, it’s at least partially because it doesn’t want to be viewed as a dumb pipe…. Any deal is partly about not going the way of the music or newspaper industries” with their outdated and failing distribution models, he notes.

However, Faulhaber says it’s unlikely that the purchase of NBCU will greatly change the long-term prospects for the cable industry. “How does this affect the dumb pipe problem? I’m not sure the NBC deal does anything.” Faulhaber argues that the dumb pipe issue will be more likely cured by Comcast’s ability to make its broadband network smarter for consumers by becoming more interactive and providing value added services.

Another potential threat to Comcast’s relevance is television content delivered over the Internet, or Internet Protocol Television (IPTV), adds Faulhaber. Services like Hulu could ultimately be viewed as a substitute for cable service. Ironically, Comcast will hold a stake in Hulu, which was launched in March 2007 by News Corp. and NBC Universal. (Disney joined as an investor this year.) Faulhaber notes that the video market is changing and the upheaval will accelerate once high-definition video downloads become realistic. “The cable guys need some answer to IPTV. The NBCU deal could be a step in finding that answer, but I’m not sure Comcast needs to necessarily own content.”

Regulatory Approval

A more immediate hurdle for Comcast and NBCU will be regulatory approval. Wharton faculty say it is likely that regulators such as the FCC and DOJ will approve the purchase, but it’s unclear how long the process will take and whether there will be concessions. Analysts expect the approval process to take a year.

One reason the deal is likely to be approved is that there will be minimal impact on consumers. “The consumer won’t see anything different in much the same way the viewer didn’t notice when GE owned NBC,” says Fader. In addition, Comcast won’t have excess market power with NBCU in the fold. “It’s hard to see why regulators would stop the deal,” says Faulhaber. “Time Warner has a bigger content stable and Comcast is a long way from real market power.” He adds that the FCC’s program access rules dictate that Comcast cannot deny consumers content by, for example, not distributing ABC or CBS.

Werbach also expects a thorough review that results in approval. “It’s clear the FCC and DOJ are more aggressive about antitrust issues, but I don’t see this as different in kind to other deals that have gone through.”

Roberts is certainly betting that way. “We believe this is an approvable transaction. It is pro-consumer,” he said on his conference call with analysts. “We are already in the business of cable programming; there are rules that surround making the content available to others and nondiscriminatory.” In addition, Roberts said Comcast is committed to the free, over-the-air broadcast and affiliate model. “I believe that there will be a thorough review that is obviously appropriate; there will be conditions. But we do not foresee, nor would we want to proceed, if they had a material effect on the company, and we don’t anticipate that occurring.”

The Future of Media

While much of the initial focus on the Comcast-NBCU marriage has revolved around cable programming assets, the combined company’s digital properties may ultimately become more important for its long-term survival. For instance, Whitehouse notes that Comcast-NBCU will have enough assets like Hulu, iVillage and a bevy of cable properties’ online sites to create enhanced digital services on the web. “This deal could help Comcast with its ‘TV Everywhere’ strategy,” which seeks to deliver cable programming on demand via the Internet, he says.

Indeed, according to Comcast, the combined company will be a leader in online content for the women-lifestyle category, No. 3 in the news and entertainment categories and No. 7 in sports based on unique visitors.

Stephen Burke, chief operating officer at Comcast, spoke during the analyst conference call about how NBCU fits in with TV Everywhere. Burke said that NBCU-owned cable channels such as CNBC, MSNBC and Bravo would be delivered via TV Everywhere. NBC network shows and other free broadcasts would be delivered via Hulu. “I think in a way Hulu and TV Everywhere are complementary products, and the way NBC Universal [is] managing [content distribution] is very similar to the way we would want to do it when the two companies come together,” he noted.

What remains to be seen is how Comcast and NBCU will mash up their web properties to create new services and online delivery models. On the analyst conference call, Burke said owning more content will lead to more on-demand online offerings. In addition, Comcast-NBCU will also forge ahead on interactive TV advertising and applications. “We are big believers in trying new things and trying to come up with innovative ways to get content out over these platforms.”

Fader says that those digital combinations could be powerful. For instance, Comcast-NBCU could do interesting things with properties such as Fandango, owned by Comcast Interactive Media (Comcast’s online division which includes — in addition to Fandango —, Fancast, DailyCandy, thePlatform, and social networking site Plaxo), and NBCU’s vast movie library. “The web is a big part of this,” says Fader. “Comcast has proven it can play the [Internet] game even if it is not known for it.”