"One of the world's largest media companies." "Promises consumers new and high speed digital delivery of content." "A perfectly complementary set of assets." Those the headlines used to describe the NBCU/Comcast merger this week? And they are also the exact same headlines used to describe the AOL Time Warner merger back in January of 2000. Granted the AOL/TW merger was an internet play and this is a cable driven merger, but that's besides the point. It's a great deal for GE and poor move for Comcast.
For GE, it's a great deal. GE gets to offload some debt into the new company, as well as get a cash payout of $6 billion, even though most of that goes directly to Vivendi for their 5% stake in the company (and speaking of bad deals, the Universal/Vivendi merger was another bad idea). GE sheds a non-core low growth asset for a profit in this economy, so its a good deal if you're a GE shareholder.
It's a different story at Comcast. Comcast rolls its cable channels (E! Style, G4, Golf, etc.) together with NBCU's cable networks (CNBC, MSNBC, Bravo, USA, SyFy, etc.) and that's makes good business sense. Cable has long been the growth engine of NBCU. But look what else Comcast gets...They get the #4 network in primetime with the most failed TV strategy of the season with The Jay Leno Show. The same goes for the NBC O&O stations. Theme park attendance is down due to the recession. The movie studio's entire summer was flop after flop - remember Land of the Lost or Funny People - flop, flop. The advertising market is still down significantly in the United States. Basically, every other piece of the NBCU empire, except cable, is low growth with no significant growth on the horizon. So why would Comcast, which has billions of dollars and could buy anything it wanted, possibly want to buy a low growth declining asset like NBC? My guess, pure ego. Comcast made a play for the Walt Disney Company in February 2004 and was spurned by Disney. The owners of Comcast, the Roberts family simply want to own an entertainment company. And that's the whole problem.
CEO/"lyricist" Edgar Bronfman is another example of a purely ego driven deal about follies in the entertainment business. These CEO's aren't looking at the spreadsheets, they're thinking about going to premiere's in Hollywood with George Clooney and Megan Fox, and that's no way to run a company, even if it's your own money. The Bronfman family lost billions of dollars buying Universal. AOL and Time Warner shareholders lost billions in that failed merger. One of the most valuable lessons I learned in business school is to take the emotion out of business. As a CEO, if your primary goal is to maximize shareholder value, spending billions to buy a low growth company is not the way to do it.
Comcast should be spending their billions buying other cable companies. If I was a Comcast shareholder, I would vote against this deal. Comcast, Time Warner, and other cable companies should be buying other cable systems. The high growth revenue in buying cable systems is no longer the cable channels themselves, the real money is in broadband speed. The cable business is a capital intensive business. Cable is under pressure from the phone companies (Verizon's FIOS and my soon to be TV provider - AT&T Uverse) and from the satellite companies for TV delivery (Dish/Echostar & DirecTV). And they are, but where they're under pressure is two areas which can be improved.
My cable box is horrible. It takes too long to scroll through the channels, sometimes it works fine, sometimes it pauses. Cable companies in the United States have effectively missed a huge revenue opportunity with VOD. Why? Because the cable VOD technology is terrible. And the other major issue is customer service. Cable has horrible customer service. AT&T, Verizon, EchoStar and DirecTV have terrific technology and great customer service. All cable needs to do is produce state of the art set top boxes and be more responsive to their customers to beat down their competitive threats.
But the real revenue is in broadband speed. Broadband is like technological heroin. The more you have the more you want. Everyone wants faster broadband. Remember dial up? Could you ever even imagine going back? Now imagine 100 MB broadband speed or 350 MB broadband or 500 MG broadband speed. You Tube videos load and launch as soon as you press the video, instant bill pay, pages load immediately, video chats and conferencing....the possibilities are endless. And the technology already exists in other countries. By 2012, South Koreans will get a 1Gbps broadband connection. To put that in context, that's 100 times fast than your average 5 MB connection in the average American household today. And I will pay for that speed. I would pay $150 for a 100 MB broadband, and that's on top of the $75 for all my cable channels. For cable, the real money is in broadband, and the phone companies service with DSL has been as bad as cables' technological shortcomings.
Instead of buying NBC's low growth entertainment assets, Comcast should have purchased Cablevision New York or Charter. A missed revenue opportunity if there ever was one.
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