IHS Global Insight Perspective | |
Significance | Comcast is set to become one of the largest content providers in the United States, taking a controlling interest in the NBC Universal joint venture with General Electric. |
Implications | Convergence of network technologies and the move to video-on-demand and streamed video over the internet are changing the dynamics of the cable industry. Comcast sees a future in which the content carried matters more than the pipes it controls, which face increasing competition from the telcos. |
Outlook | The deal will face some regulatory scrutiny as concerns of media consolidation are examined; there could be some sticking points as the administration has been determined to look more closely at major mergers and acquisitions. |
After months of speculation, Comcast and General Electric (GE) have struck a deal that will see Comcast, the largest cable distribution undertaking in the United States, taking a majority stake and managing NBC Universal, one of the largest content producers in the country. The merged entity would produce content equating to some 20% of all viewing hours and own one in seven channels, including many of the major channels and entertainment brands. These include entertainment TV brands NBC, TeleMundo, Bravo, Global Networks, Munz, Syfy, Sleuth, USA, Universal HD, Chiller, and The Weather Channel. In news and sports it owns NBC News, NBC Olympics, NBC Sports, CNBC, and MSNBC as well as having a host of affiliated local stations across the country. NBC Universal also owns leading web TV-on-demand provider Hulu, NBC-on-demand, DVD company Universal Home Entertainment, and movie houses Universal Studios and Focus Features, which offers slightly less mainstream fare. NBC Universal also owns theme parks in Orlando (Florida), Hollywood (California), and Japan.
Comcast owns a number of TV channels/networks: E! Entertainment Television, the Style Network, the Golf Channel, VERSUS, G4, PBS KIDS Sprout, TV One, and the Comcast Sports Group. Comcast also has online distribution systems based around Comcast.net and fancast.com, which similarly to Hulu streams TV and films online. Comcast also has holdings in sports teams—the Philadelphia Flyers NHL hockey team and the Philadelphia 76ers NBA basketball team—as well as the two arenas in Philadelphia, where it is headquartered. It is the largest cable TV network provider in the country with some 23.76 million subscribers at the end of the third quarter for a penetration of 46.5% of homes passed. It also provides internet service to 15.7 million subscribers and 7.4 million voice service subscribers.
GE is a largely industrial conglomerate but has had interests in TV since the very beginning, founding the first experimental station in the United States—WRGB—in 1928, which became NBC's first affiliate station in 1942. It acquired NBC in 1986 with the purchase of RCA Corporation. GE is set to retain a significant interest in the joint venture, with GE owning 49% while Comcast takes a 51% stake and will exercise management control over the entity. The businesses contributed by GE appear to encompass the NBC Universal portfolio and are valued at US$30 billion. GE will take US$9.1 billion in cash from the deal, which will be borrowed by NBC Universal from third-party lenders. GE will acquire the remaining stake held by Vivendi (20%, as a result of the acquisition of Universal Pictures in 2004) in two tranches, valued at a total of US$5.8 billion by the close of the deal. GE expects to realise approximately US$8 billion in cash after paying down the existing NBC Universal debt and transaction fees. Comcast is contributing properties (its cable networks/channels, regional sports networks, and certain digital properties and certain unconsolidated investments) valued at US$7.25 billion. Comcast will also pay around US$6.5 billion in cash and has rights to acquire additional portions of the joint venture at specified times at a 20% premium to public market value with 50% sharing of upside above the closing valuation. GE can also elect for the joint venture to redeem half its interest at year 3.5 and the remaining interest at year 7.
Outlook and Implications
Comcast is gaining a significant boost to its directly controlled programming and content business, which it appears to intend to consolidate in the long term. It will become a major behemoth competing with the likes of Disney, which Comcast tried to buy back in 2004. This will help it to generate income from content even as it loses some control over TV distribution as the telcos enter the market and online distribution—for which Hulu has been a major innovator and leader—becomes increasingly popular. Time Warner tried a similar trick but spun off its cable TV business—and demerged the AOL online business, citing differing capital requirements and need for operational flexibility—earlier in 2009 (see United States: 1 July 2009: AOL Splits from Time Warner).
The deal has been approved by the board of directors at Comcast and GE, but will also require approvals from regulatory agencies, most notably the FCC. Democrat FCC Commissioner Michael J. Copps has already expressed significant concerns about the deal, noting that he has persistent "…long-standing skepticism about the harms imposed by so few controlling so much". He notes that question of the impact on pricing for consumers, the consolidation of news programming, the effect on minorities and diversity on the airwaves, and the effect on competition in media production and local markets served. He also raised the issue that this makes the need for net neutrality rules (currently under discussion), which would prevent Comcast from prioritising its own content transmissions over the internet, increasingly important (see United States: 23 October 2009: FCC Seeks Comment on Agreed Draft Net Neutrality Rules).