Television Network Strategy Research Paper
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Television Network Strategy Research Paper

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For our final project in Advanced Business Strategy at the Kellogg School of Management, my team looked at several components of NBCU's TV strategy in light of the Comcast acquisition. This portion of ...

For our final project in Advanced Business Strategy at the Kellogg School of Management, my team looked at several components of NBCU's TV strategy in light of the Comcast acquisition. This portion of the paper examines the strategy for television channel ownership and finds that a diversified portfolio is ideal.

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Television Network Strategy Research Paper Document Transcript

  • 1. MGMT943  –  Advanced  Business  Strategy     Kellogg  School  of  Management  Orlando  O’Neill    NBCU  TV:  Executive  Summary  In  December  2009,  General  Electric  and  Comcast  Corporation  announced  that  after  months  of  negotiations,  they  had  reached  an  agreement  to  form  a  unique  entertainment  company  through  a  new  joint  venture.    Per  the  agreement,  General  Electric  agreed  to  sell  NBC  Universal  to  Comcast,  which  will  manage  the  company  as  the  majority  stakeholder.1    The  new  company,  if  approved  by  the  FCC,  will  be  the  third  largest  television  company,  behind  Disney  and  Viacom,2  and  control  a  diverse  set  of  well-­‐known  cable  and  broadcast  television  networks,  including  NBC,  Telemundo,  SyFy,  and  the  Golf  Channel.    The  company  will  be  capable  of  acquiring,  producing,  and  promoting  content  that  can  be  delivered  to  audiences  in  about  200  countries  via  cable,  internet,  and  mobile  platforms  provided  by  Comcast.3      The  new  company  will  shake  up  the  television  industry,  which  is  characterized  by  fierce  competition  for  viewers  that  exhibit  unpredictable,  ever-­‐changing  tastes  and  have  a  vast  array  of  entertainment  options,  including  books,  videogames,  and  the  internet.    Furthermore,  the  industry  is  still  trying  to  determine  the  best  way  to  navigate  in  an  increasingly  dynamic  environment  that  is  witnessing  the  emerging  prominence  of  new  forms  of  distribution,  based  primarily  on  broadband  and  mobile  internet  access.    These  digital  distribution  channels  could  threaten  existing  business  models;  much  in  the  same  way  that  digital  audio  has  impacted  the  music  industry.      It  is  under  these  circumstances  that  we  have  examined  four  aspects  of  NBC  Universal’s  strategy  in  an  effort  to  provide  recommendations  for  the  organization  going  forward.       1. Online  Strategy  –     2. Broadcast  Station  Strategy  –     3. Television  Network  Strategy  –  In  this  section,  we  examined  if  NBC  Universal  should  have  more   or  less  cable  or  broadcast  television  networks.    The  primary  analyses  looks  at  audience  trends  to   determine  the  strategy  that  will  best  position  NBC  to  grow  its  audience  share.    This  is  important   because  advertising  revenue,  which  contributes  a  significant  portion  of  net  income,  is  closely   linked  to  audience  sizes.    Furthermore,  the  section  touches  upon  how  the  relationships  between   the  different  channels  should  be  structured.   4. Type  of  Content  –    (3  of  the  4  sections  have  been  removed  because  they  represent  work  performed  by  my  teammates  that  I  don’t  have  the  right  to  distribute)        
  • 2. Chapter  3  –  Television  Network  Strategy  Summary  In  response  to  consumer  trends  in  the  industry,  NBC  should  add  to  its  portfolio  of  cable  networks,  either  through  the  acquisition  or  creation  of  new  networks.    Audiences  continue  to  shift  from  broadcast  to  cable  television,  and  there  is  no  indication  that  this  trend  will  slow  down  or  reverse  any  time  soon.    An  expanded  offering  in  the  cable  market  will  provide  the  company  with  more  avenues  to  air  tailored  content  capable  of  attracting  specific  segments  of  the  fragmenting  audience.    Furthermore,  by  continuing  to  organize  the  networks  in  a  commonly-­‐owned  chain  structure,  NBC  will  have  a  better  chance  of  realizing  the  full  benefits  of  this  strategy.    Audience  Fragmentation  For  the  past  30  years,  the  average  Nielsen  ratings,  which  are  based  on  audience  sizes,  of  the  top  television  shows  have  been  steadily  declining.    This  trend  has  persisted  even  as  the  size  of  the  market  has  continued  to  grow  both  in  terms  of  the  number  of  television  households  and  the  average  time  spent  watching  television  in  each  household.  The  decline  can  be  directly  attributed  to  the  increasing  array  of  content  and  distribution  options,  first  on  the  existing  broadcast  networks  and  then  on  the  emerging  cable  networks.    This  effect  is  often  referred  to  as  “audience  fragmentation,”  and  it  is  particularly  troubling  given  its  impact  on  advertising  and  syndication  revenues,  which  are  both  dependent  on  a  network’s  ability  to  attract  audiences  to  its  programming.        NBC  can  offset  the  impact  of  audience  fragmentation  by  using  cable  networks  to  air  content  tailored  to  specific  target  segments,  such  as  male  boys  aged  9-­‐14  or  science  fiction  fans.    These  segments  can  be  thoroughly  studied  via  marketing  research  to  gain  a  better  understanding  of  their  preferences  and  habits  in  order  to  improve  the  company’s  ability  to  create  content  that  will  be  better  accepted  by  the  audiences.    This  in  turn  could  lead  to  more  shows  reaching  syndication,  which  provides  a  major  source  of  revenue.    In  terms  of  advertising  revenue,  the  portfolio  of  networks  will  allow  NBC  to  deliver  more  value  to  advertisers  by  positioning  advertising  on  the  right  channels,  in  the  right  programs,  for  the  right  audience,  and  at  the  right  price.    This  strategy,  which  is  widely  used  by  major  competitors  in  the  cable  market,  including  Viacom  and  Disney,  depends  on  the  ability  to  air  “niche”  programming,  making  it  less  suitable  for  broadcast  networks.        Factors  favoring  consolidation  Due  to  the  unique  nature  and  “brand  promise”  of  cable  television  networks,  companies  must  continue  to  invest  large  amounts  of  capital  to  expand  their  content  libraries  with  relevant  material  for  each  network  and  attract  audiences  to  that  content  via  advertising.    This  reduces  the  ability  to  realize  savings  by  sharing  content  or  advertising  across  networks,  implying  that  these  costs  will  continue  to  increase  for  incumbents.    Unsurprisingly,  both  expenditures  are  in  the  billions  for  cable  television  companies,  such  as  Viacom,  which  spent  ~$3.6  billion  on  content  and  advertising  in  2009,  accounting  for  67%  of  total  annual  expenses,  and  NBC,  which  has  ~$9  billion  in  programming  commitments  as  of  2009.    The  effectiveness  of  advertising  in  attracting  audiences  for  new  shows  and  incumbents’  willingness  to  invest  large  amounts  into  it  causes  the  industry  to  favor  consolidation,  which  is  evident  by  the  leading  companies’  network  portfolios.    Consolidation  is  also  favored  by  the  back-­‐end  savings  that  can  be  achieved  in  areas  such  as  broadcasting  equipment.    Relationship  Structure  In  order  to  realize  the  full  benefits  from  this  strategy,  NBC  must  own  the  networks.    Any  other  arrangement  could  undermine  the  company’s  incentive  to  spend  the  requisite  amounts  necessary  to  advertise  the  content  aired  on  those  networks.    Furthermore,  a  well-­‐developed  brand,  such  as  MTV,  can   Page|2    
  • 3. be  extremely  valuable  in  the  industry  both  for  attracting  audiences  and  launching  “sister”  networks,  but  it  would  be  difficult  to  quantitatively  measure  an  owners’  performance  in  managing  the  brand.    Lastly,  a  strong,  independent  network  would  have  the  incentive  to  deal  directly  with  third  parties  in  order  to  maximize  its  revenue  by  removing  the  middle  man.  This  would  reduce  NBC’s  ability  to  leverage  that  network  to  its  advantage  when  managing  relationships  with  other  companies,  such  as  advertisers.           SOURCES     1. Arango,  Tim.  (2009).  G.E.  Makes  It  Official:  NBC  Will  Go  to  Comcast.  Retrieved  on  June  3,  2010,   from  the  New  York  Times  website  at   http://www.nytimes.com/2009/12/04/business/media/04nbc.html?_r=2&partner=rss&emc=rss .   2. Comcast.  (2010).  A  Valuable  Portfolio  of  Profitable  Cable  Channels.    Retrieved  on  May  12,  2010,   from  the  GE  website  at  http://www.ge.com/newnbcu/.   3. Comcast.  (2010).  A  Partnership  Fact  Sheet.    Retrieved  on  May  12,  2010,  from  the  GE  website  at   http://www.ge.com/newnbcu/.           Page|3    
  • 4. NBCU  TV:  Detailed  Chapters    Chapter  3  -­‐  Television  Network  Strategy      In  order  to  remain  competitive  in  the  industry,  NBC  should  add  to  its  portfolio  of  cable  networks,  which  will  include  amongst  others  E!,  SyFy,  Oxygen,  and  USA,  the  top  cable  channel  by  primetime  rating.1  This  will  provide  the  company  with  several  benefits  for  managing  revenue,  costs,  and  programming.  By  continuing  to  organize  these  relationships  as  a  commonly-­‐owned  chain  structure,  NBC  will  have  a  better  chance  of  ensuring  the  realization  of  these  benefits.    Owning  a  broad  portfolio  of  networks  will  help  NBC  react  to  changing  market  conditions  that  threaten  traditional  revenue  models.      In  particular,  as  consumers  are  provided  with  an  increasing  array  of  options  for  consuming  media,  audience  fragmentation  continues  to  reduce  the  size  of  television  show  audiences.  During  the  last  30  years,  the  average  Nielsen  Ratings,  a  proxy  for  total  audience  size,  of  the  top  annual  television  programs  have  been  steadily  decreasing,  with  top  programs  now  drawing  less  than  50%  of  the  audience  size  that  was  once  possible  (Exhibit  1).2    As  can  be  seen  in  the  chart  below,  the  decline  has  been  relatively  parallel  on  both  ends  of  the  spectrum,  so  audience  cannibalization  appears  to  be  due  to  an  outside  factor,  which  we  will  show  to  be  the  growing  availability  of  alternate  programming.     Exhibit  1  Average  Nielsen  Ratings  of  #1  and  #30  Ranked  Program   40   Average  Nielsen  RaEng   30   20   10   0   1975   1980   1985   1990   1995   2000   2005   2010   #1  Nielsen  Raung   #30  Nielsen  Raung      The  average  Nielsen  Rating  for  the  top  show  is  projected  to  continue  decreasing  by  ~2.7%  annually  with  a  95%  confidence  interval  of  {-­‐3.24%,  -­‐2.14%},  signifying  smaller  audiences  for  even  the  most  popular  shows.    This  estimate  was  arrived  at  by  taking  a  semi-­‐log  regression  of  the  average  Nielsen  rating  for  the  top  show  every  season  by  year,  with  1980  serving  as  the  base.    The  resulting  equation  is  below.       LN(Avg  NiRating  for  Top  Program)  =  3.436  –  0.027*(Current_Year  -­‐  1980)    After  correcting  for  the  log  bias,  the  average  Nielsen  Rating  of  the  top  show  in  2010  should  fall  between  11.83  and  16.46.    The  rating  of  the  top  shows  for  the  weeks  of  April  25,  2010,  the  NCAA  Basketball  Championships,  and  May  3,  2010,  Dancing  with  the  Stars,  was  14.2  and  12.5  respectively.3  This  is  in  line  with  the  estimates  based  on  the  regression  equation,  though  these  are  only  point  samples,  not  full-­‐season  averages.             Page|4    
  • 5. The  regression  points  to  a  continuing  decline  in  audience  sizes  in  the  near  future,  a  notion  that  is  further  corroborated  by  the  two  ratings  samples  taken  this  year.    Given  that  this  projection  is  based  on  past  data,  it  is  impossible  to  accurately  predict  how  long  it  will  remain  valid.    External  factors,  such  as  the  programming  strategies  employed  by  media  companies,  may  accelerate,  decelerate,  or  reverse  the  decline.      Before  accepting  the  increasing  number  of  options  as  the  source  of  the  declining  audience  sizes,  there  are  two  other  possible  explanations  that  must  be  considered:  1)  a  decline  in  the  total  number  of  television  households  and  2)  an  increase  in  the  popularity  of  substitutes,  such  as  videogames  or  books.    Data  released  by  the  Nielsen  Company  refutes  the  validity  of  both  of  these  alternate  explanations.    According  to  the  company’s  estimates,  the  number  of  television  households  continues  to  increase,  though  this  last  year  saw  “the  smallest  increase  in  the  last  10  years”  (Exhibit  2).4       Exhibit  2  Estimated  Number  of  U.S.  Television  Households        On  the  point  of  substitutes,  the  data  shows  that  television  remains  a  very  popular  American  pastime.    The  average  amount  of  time  per  day  spent  watching  television  is  at  the  highest  level  ever  recorded  and  has  been  increasing  for  the  past  decade  (Exhibit  3).5     Exhibit  3  Average  Daily  Television  Viewing         Page|5    
  • 6. The  increase  in  television  households  and  average  viewing  per  day  implies  that  audience  fragmentation  is  indeed  a  result  of  increasing  options,  both  in  terms  of  programming  content  and  distribution.      The  fragmenting  audiences  are  increasingly  finding  their  way  to  basic  cable  offerings.  Exhibit  46  below,  which  was  generated  from  Nielsen  Ratings  data,  shows  the  increasing  percentage  of  households  that  are  tuning  in  to  basic  cable  during  primetime,  which  has  long  been  considered  the  most  critical  block  of  programming.     Exhibit  4  Primetime  Viewing  Audiences  by  Households          From  this  data,  primetime  viewership  for  broadcast  networks  is  projected  to  continue  decreasing  at  a  rate  of  about  2.3%  with  a  95%  confidence  interval  of  {-­‐2.6%,  -­‐2.0%}.    This  projection  is  in  line  with  the  2.7%  decline  calculated  above  for  the  ratings  of  the  top  individual  programs,  which  continue  to  be  dominated  by  broadcast  network  shows  that  can  attract  larger  audiences.  Primetime  viewership  is  projected  to  increase  at  a  rate  of  about  10.2%  with  a  95%  confidence  interval  of  {8.8%,  11.6%}.    As  before,  these  estimates  were  calculated  by  taking  semi-­‐log  regressions  of  the  data,  with  1984  serving  as  the  base,  and  yielded  the  following  equations.     LN(Primetime  HH  Rating  for  Network  Affiliates)  =  3.8  -­‐  0.023*(Current_Year  -­‐  1984)   LN(Primetime  HH  Rating  for  Ad/Basic  Cable)  =  1.65  +  0.102*(Current_Year  -­‐  1984)    Broadcast  network  television  continues  to  be  a  successful  medium  for  live  programming7,  such  as  major  sporting  events  like  the  Superbowl,  which  continues  to  attract  larger  audiences.8  Therefore,  NBC  should  hold  on  to  its  broadcast  networks,  but  going  forward,  it  should  focus  any  channel  expansion  in  the  cable  television  market.    If  the  viewership  trends  continue  to  hold,  then  cable  will  eventually  provide  the  most  attractive  opportunity  for  attracting  audiences  to  new  programming.    Audience  fragmentation  is  particularly  troubling  given  its  impact  on  both  advertising  revenue,  which  has  historically  been  tied  to  a  program’s  audience  size,  and  licensing  revenue,  which  is  contingent  upon  a  show  airing  for  three  to  four  seasons.  Both  sources  of  revenue  help  offset  the  high  cost  of  acquiring  and  producing  new  programming.    For  example,  NBC’s  cost  to  produce  one  hour  of  primetime  programming  for  a  drama  can  reach  $4  million9.  At  Viacom,  annual  programming  and  production  costs  were  $2.95   Page|6    
  • 7. billion  in  2009,  accounting  for  74%  of  the  company’s  operating  expenses;10  at  CBS,  annual  programming  and  production  costs  of  $5.9  billion  accounts  for  68%  of  the  company’s  annual  operating  expenses;11  and  at  NBC,  the  company  has  programming  commitments  totaling  $8.9  billion  as  of  2009.12      Cable  channels  offer  attractive  incentives  that  can  help  mitigate  the  impact  of  audience  fragmentation  on  the  bottom  line,  including  targeted  audiences  and  two  main  sources  of  revenue.    Cable  channels  have  the  benefit  of  earning  revenue  through  both  advertising  and  subscription  fees.    Although  the  subscription  fees  may  be  small,  the  resulting  revenue  can  be  substantial  when  factored  across  a  large  subscriber  base.    At  CBS,  which  owns  the  cable  networks  Showtime  and  CBS  College  Sports  Network,  cable  revenue  accounted  for  10%  of  total  revenue  in  2009,  and  their  affiliate  and  subscription  fees  increased  by  13%  to  $1.46  billion.11  After  the  merger  between  NBCU  and  Comcast,  cable  channels  will  provide  82%  of  new  joint  venture’s  operating  cash  flow.13    Unlike  broadcast  networks,  which  have  to  air  programming  that  appeals  to  a  wide  range  of  audiences,  cable  channels  can  make  specific  “brand  promises”  to  target  specific  audiences.    For  example,  when  a  viewer  tunes  in  to  SyFy  or  Oxygen,  they  know  that  they  can  expect  a  certain  type  of  programming,  such  as  “Stonehenge  Apocalypse”  or  “DinoShark.”14  Viacom,  Disney,  and  TimeWarner  are  known  to  position  channels  to  target  certain  demographic  groups.    Viacom’s  annual  report  states  that       Our  media  networks  properties  target  key  audiences  considered  particularly  attractive  to   advertisers.  For  example,  MTV  targets  teen  and  young  adult  demographics,  Nickelodean  targets   kids  and  their  families  and  BET  targets  African-­‐American  audiences.10    Audience  segmentation  makes  producing  content  that  appeals  to  the  audience  and  has  a  better  chance  of  reaching  syndication  less  of  a  gamble,  since  the  audience  segment  can  be  better  understood  and  catered  to  in  a  process  akin  to  marketing’s  Segment-­‐Target-­‐Position.      That  same  framework  suggests  that  creating  popular  programming  on  broadcast  television  will  continue  to  be  a  difficult,  unpredictable  task  because  of  the  challenge  of  trying  to  be  “all  things  to  all  people.”  In  the  event  that  one  channel  suffers  due  to  unsuccessful  programming,  the  other  cable  channels  in  the  portfolio  can  buffer  it  until  new  programming  can  be  produced  to  turn  it  around.    For  example,  the  2009  GE  Annual  Report  states  that  “lower  earnings  in  our  broadcast  television  business  ($02  billion)  were  partially  offset  by  the  gain  related  to  AETN  ($06  billion)  and  higher  earnings  in  cable  ($02  billion).”12    The  targeted  audiences  that  cable  channels  draw  can  also  improve  the  value  of  those  channels  to  advertisers,  which  have  steadily  increased  their  annual  cable  advertising  expenditures  (Exhibit  5).15         Exhibit  5  Annual  National  Television  Advertising  Expenditures   Page|7    
  • 8. 40,000   Ad  Expenditures  (Billions)   35,000   30,000   25,000   20,000   15,000   10,000   5,000   0   1980   1982   1984   1986   1988   1990   1992   1994   1996   1998   2000   2002   2004   2006   2008   Network  Broadcast  TV   Nauonal  Syndicauon     Nauonal  Cable  TV    Although  the  size  of  the  audience  is  still  an  important  consideration  for  advertising  decisions,  advertisers  also  emphasize  the  type  of  audience  that  can  be  reached.  In  Disney’s  annual  report  the  company  states  that  for  its  television  networks,       The  ability  to  sell  time  for  commercial  announcements  and  the  rates  received  are  primarily   dependent  on  the  size  and  nature  of  the  audience  that  the  network  can  deliver  to  the  advertiser   as  well  as  overall  advertiser  demand  for  time  on  network  broadcasts.      This  might  explain  why  the  recent  decision  by  the  president  of  Turner  Entertainment  Networks,  Steve  Koonin,  to  hire  Conan  O’Brien  in  an  effort  to  target  a  “youthful  audience”  has  already  caused  two  advertisers  to  take  the  “the  unusual  step  of  calling  Koonin  at  home  to  make  sure  there  would  be  room  for  them  on  OBriens  show.”16  CBS  has  identified  this  benefit  as  a  threat  in  its  annual  report,  which  states  “more  television  options  increase  competition  for  viewers  and  competitors  targeting  programming  to  narrowly  defined  audiences  may  gain  an  advantage  over  the  Company  for  television  advertising  and  subscribing  revenues.”11    The  last  piece  of  evidence  favoring  an  expansion  in  cable  channel  ownership  has  to  do  with  the  long-­‐run  industry  structure  analysis  for  the  television  industry.    This  analysis  favors  consolidation  given  the  effectiveness  of  advertising  in  the  industry.    The  cost  of  entry,  F,  for  starting  a  television  channel  is  high,  but  even  if  that  decreases  and  the  market  size  continues  to  grow  in  the  future,  advertising  will  continue  to  buoy  the  cost  to  enter  competitively.    Networks  must  spend  money  on  advertising,  which  plays  a  critical  and  expensive  role,  every  year  to  promote  the  channel  and  new  programming  to  attract  audiences  for  the  shows.    Viacom,  one  of  the  largest  cable  channel  owners  that  relies  on  cable  channel  revenues  to  the  same  extent  as  the  proposed  NBCU/Comcast  venture,  spent  $1.3  billion  (24%  of  total  annual  expenses)  on  advertising  in  2009,  and  that  represents  a  decrease  over  the  $1.6  billion  it  spent  during  each  of  the  two  prior  years.10      Hulu’s  Superbowl  advertisement  in  2009  is  a  testament  to  the  effectiveness  of  this  advertising.    After  airing  the  ad,  “viewership  on  the  video  Web  site  surged  55  percent  to  7.8  million  in  February.”17  Although  Hulu  is  in  a  different  role  as  an  online  video  distributor,  there  are  similarities  in  its  competitive  environment  that  allow  a  comparison  to  be  drawn;  in  particular,  Hulu  competes  with  a  number  of  other  companies,  including  YouTube,  for  viewers  through  advertising  and  content.    A  similar  example  is  available  in  SyFY’s  extensive  marketing  campaign  for  a  new  television  series  that  was  able  to  acquire  a  1.5  million  pre-­‐premier  audience  for  the  pilot.18   Page|8    
  • 9.  Now  that  the  case  has  been  made  for  owning  more  cable  channels,  the  next  step  is  to  address  why  ownership  is  a  better  option  for  structuring  those  affiliations  than  contracts  or  other  agreements.    This  section  provides  a  cursory  treatment  of  the  subject  mainly  focused  on  the  benefits  of  ownership  identified  below  in  Exhibit  6,  where  the  items  have  been  grouped  into  broad  categories  and  ordered  by  perceived  importance.    This  discussion  should  be  considered  a  starting  point  for  further  analysis.     Exhibit  6  Pros  and  Cons  of  Cable  Network  Ownership   PROS       CONS   FINANCIALS       FINANCIALS   Acquire  all  advertising  and  subscription   Acquire  all  expenses  and  liabilities   revenue       Protection  against  consolidation       Risk  overpaying  for  the  network   Production  scale  economies       Potential  for  network  to  eventually  fail   PROGRAMMING       PROGRAMMING   Brand  Ownership   Require  programming  to  fill  the  networks       schedule   Full  benefit  of  advertising  and  programming   Need  to  track  consumer  preferences  for   expenses       multiple  groups   Control  over  program  scheduling       Increased  possibility  of  fines,  bad  publicity,  etc.   Increased  utilization  of  content  library       COMPANY  MANAGEMENT   More  touch  points  to  track  consumer   Complexity  of  managing  a  larger  company   preferences       RELATIONSHIPS       Increased  need  for  skilled  managers,  staff,  etc   More  leverage  over  content  producers       Increased  scrutiny   More  leverage  over  multi-­‐channel  video   Risk  diluting  brand  strength  with  central   service  providers       management   Opportunity  for  bundled  advertising  deals       Risk  that  employees  will  “just  sort  of  relax”    There  are  financial  incentives  that  can  only  be  exploited  through  ownership  of  additional  cable  networks.    First  and  foremost,  NBC  gains  all  of  the  network’s  subscription  and  advertising  revenue,  which  is  a  valuable  source  of  the  funding  necessary  to  continue  operations.    As  was  discussed  above,  cable  channels  benefit  from  having  two  sources  of  revenue,  advertising  and  subscriptions  fees.    For  example,  the  cable  networks  that  Disney  owns  “derive  a  majority  of  their  revenues  from  fees  charged  to  cable,  satellite  and  telecommunications  service  providers.”19  If  NBC  structured  the  relationship  contractually,  it  is  uncertain  how  much  of  this  revenue  NBC  could  negotiate  for  from  an  independently-­‐owned  network.    By  owning  cable  networks,  NBC  will  protect  itself  from  similar  expansion  by  other  companies  that  is  likely  to  occur  given  the  industry  characteristics  favoring  consolidation.    If  NBC  maintains  a  static  portfolio  of  channels,  it  may  see  its  audience  share  and  related  revenue  decline  from  audience  fragmentation  to  the  point  that  its  ability  to  operate  is  significantly  compromised.    This  could  easily  lead  into  a  self-­‐reinforcing  cycle  where  lower  revenue  makes  it  difficult  to  produce  and  acquire  the  programming  necessary  to  attract  and  retain  audiences,  resulting  in  a  cyclical  decline  in  audience  share  and  revenue.    This  threat  is  acknowledged  by  multiple  companies  in  their  annual  reports,  such  as  Disney’s  statement  that     Page|9    
  • 10. The  success  of  our  businesses  depends  on  our  ability  to  consistently  create  and  distribute  filmed   entertainment,  broadcast  and  cable  programming,  online  material,  electronic  games,  theme   park  attractions,  hotels  and  other  resort  facilities  and  consumer  products  that  meet  the   changing  preferences  of  the  broad  consumer  market.    Finally,  there  are  production  scale  economies  that  a  company  can  exploit  by  having  multiple  networks  because  “once  you  air  one  channel,  you  can  distribute  a  lot  of  channels  cheaply.”7  This  includes  operational  cost  efficiencies,  such  as  shared  resources,  and  other  back-­‐end  savings,  including  shared  access  to  the  content  library.        When  NBC  purchases  a  network,  it  not  only  acquires  the  channels,  but  more  importantly,  it  acquires  the  associated  brands,  which  can  be  used  to  create  affiliated  channels  where  excess,  similar  content  can  be  placed,  such  as  the  MTV  or  Disney  channels,  to  enhance  its  value  to  the  company.    Developing  a  brand  is  an  expensive  undertaking,  but  once  established,  it  can  be  a  valuable  resource  to  attract  audiences  and  “lift”  associated  content.    If  NBC  allowed  its  channels  to  be  independently  owned,  it  would  be  difficult  to  ensure  that  the  owner  maintained  a  consistent  brand  given  the  incentive  to  air  popular  shows,  regardless  of  their  characteristics  or  source.    Furthermore,  the  independent  network  may  not  possess  the  capital  necessary  to  build  up  its  brand  relative  to  competitors.    In  this  situation,  NBC  would  want  to  advertise  its  programming  to  improve  ratings,  but  that  could  ultimately  have  negatives  consequences.    Any  advertising  by  NBC  would  have  the  potential  to  improve  the  brand  strength  of  the  independently-­‐owned  network.    This  would  make  the  network  more  attractive  to  competitors  and  increase  its  bargaining  leverage  when  it  comes  time  to  renegotiate  the  relationship.    By  owning  the  networks,  NBC  ensures  that  it  is  the  primary  benefactor  from  its  expenses  in  advertising  and  programming.    Given  that  production  and  programming  costs  are  the  largest  operating  expenses  for  media  companies,  there  is  a  strong  incentive  to  capitalize  on  that  programming  as  much  as  possible.    One  way  to  do  this  is  to  place  the  programs  in  attractive  time  slots  that  are  more  likely  to  result  in  a  larger  audience.    Scheduling  can  ultimately  lead  to  the  success  or  failure  of  a  season  for  a  network.    Fred  Silverman,  who  served  as  president  of  NBC  for  a  brief  period  of  time,  was  known  for  his  skill  in  “the  art  of  scheduling  –counterprogramming,  stunting,  lead-­‐ins  and  lead-­‐outs.”20  Unless  NBC  owns  the  channels  that  it  contributes  content  to,  it  will  have  to  negotiate  for  the  best  timeslots.    An  independently-­‐owned  channel  would  have  the  incentive  to  maximize  the  benefits  it  receives  for  these  limited  timeslots  to  the  detriment  of  NBC.    If  one  of  NBC’s  shows  becomes  a  hit  on  that  network,  it  may  have  leverage  over  NBC  based  on  the  timeslot  requirement  during  any  renegotiations  depending  on  how  the  contract  is  structured.      NBC  would  have  incentives  to  keep  the  show  from  being  moved  into  a  less  attractive  timeslot,  such  as  the  “Friday  Night  Death  Slot.”21      Control  of  the  programming  schedules  also  provides  NBC  with  the  opportunity  to  utilize  more  of  its  content  library.  Networks  spend  a  large  amount  of  money  to  build  and  expand  a  content  library,  and  there  is  always  a  possibility  that  they  may  have  to  incur  losses  from  write-­‐downs  on  the  value  of  this  content  over  time.  CBS,  which  earns  a  substantial  portion  of  its  revenue  from  licensing,  states  that  “if  the  content  of  its  television  programming  library  ceases  to  be  widely  accepted  by  audiences  or  is  not  continuously  replenished  with  popular  content,  the  Companys  revenues  could  be  adversely  affected.”11  NBC  is  exposed  to  the  same  risk  given  its  programming  commitments  detailed  earlier  and  its  existing  library.    This  should  place  a  sense  of  urgency  on  the  company  to  utilize  content  while  it  is  still  relevant.    Finally,  by  owning  cable  networks,  NBC  gains  an  advantage  in  managing  its  external  dependences  with  advertisers,  content  producers,  and  multi-­‐channel  video  service  providers.    In  the  television  industry,   Page|10    
  • 11. “competition  for  popular  programming  that  is  licensed  from  third  parties  is  intense.”11  Contracts  with  top  content  producers,  and  even  television  stars,  for  shows  may  require  guaranteed  commitments  to  purchase  additional  programming,20  which  is  relatively  cheap  to  offer  when  a  company  already  owns  multiple  channels  that  all  have  programming  needs.    NBC  could  also  use  its  ownership  of  popular  channels  as  bargaining  chips  in  its  negotiations  with  service  providers.    These  negotiations  occasionally  lead  to  disputes,  where  the  provider  threatens  to  drop  a  channel  in  order  to  gain  more  attractive  fee  agreements,  as  is  currently  the  case  with  Dish  and  The  Weather  Channel,  which  is  partially  owned  by  NBC.22  If  its  affiliations  with  the  other  networks  were  contractual,  it  would  be  much  harder  to  use  them  as  bargaining  chips  because  the  service  provider  would  just  as  easily  be  able  to  negotiate  independently  with  those  networks,  which  would  have  strong  incentives  to  ensure  the  provider  continues  carrying  their  channel  to  protect  revenues.                                   Page|11    
  • 12. SOURCES     1. Federal  Communications  Commission.  (2009).  13th  Annual  Assessment  of  the  Status  of   Competition  in  the  Market  for  the  Delivery  of  Video  Programming.  Top  20  Programming  Services   by  Prime  Time  Rating,  Table  C-­‐6,  197.  Retrieved  on  April  25,  2010,  from  the  FCC  website  at   http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-­‐07-­‐206A1.pdf.   2. Brooks,  Tim  and  Earle  Marsh.  The  Complete  Directory  to  Primetime  Network  and  Cable  TV   Shows:  1946-­‐Present  (9th  Edition).  New  York:  Ballantine  Books,  2007.   3. Nielsen  Wire  Blog.  (2010).  Weekly  TV  Ratings.  Retrieved  on  April  25,  2010,  and  May  15,  2010,   from  the  Nielsen  Wire  website  at  http://blog.nielsen.com/nielsenwire/weekly-­‐tv-­‐ratings/.   4. Nielsen  Wire  Blog.  (2009).  114.9  Million  U.S.  Television  Homes  Estimated  for  2009-­‐2010  Season.   Retrieved  on  May  20,  2010,  from  the  Nielsen  Wire  website  at   http://blog.nielsen.com/nielsenwire/media_entertainment/1149-­‐million-­‐us-­‐television-­‐homes-­‐ estimated-­‐for-­‐2009-­‐2010-­‐season/.   5. Nielsen  Wire  Blog.  (2009).  Average  TV  Viewing  for  2008-­‐09  TV  Season  at  All-­‐Time  High.   Retrieved  on  April  25,  2010,  from  the  Nielsen  Wire  website  at   http://blog.nielsen.com/nielsenwire/media_entertainment/average-­‐tv-­‐viewing-­‐for-­‐2008-­‐09-­‐tv-­‐ season-­‐at-­‐all-­‐time-­‐high/.   6. Gorman,  Bill.  (2008).  Updated:  Where  Did  The  Primetime  Broadcast  Audience  Go?.    Retrieved  on   April  15,  2010,  from  the  TV  By  The  Numbers  website  at   http://tvbythenumbers.com/2008/12/03/updated-­‐where-­‐did-­‐the-­‐primetime-­‐broadcast-­‐ audience-­‐go/9079.   7. NBC  Universal  employee.  Telephone  Interview.  May  5,  2010.     8. Gorman,  Bill.  (2009).  Superbowl  TV  Ratings.  Retrieved  on  June  5,  2010,  from  the  TV  By  The   Numbers  website  at  http://tvbythenumbers.com/2009/01/18/historical-­‐super-­‐bowl-­‐tv-­‐ ratings/11044.   9. Comcast  and  NBC.  (2010).  The  Comcast/NBCU  Transaction  and  Online  Video  Distribution,  20.   Retrieved  on  May  11,  2010,  from       http://www.comcast.com/nbcutransaction/pdfs/ISRAEL%20KATZ%20-­‐ %20Public%20Version%20Stamp%20In.pdf.   10. Viacom.  (2010).  Form  10-­‐K:  2009  Annual  Report.  Retrieved  on  May  11,  2010,  from   http://phx.corporate-­‐ir.net/phoenix.zhtml?c=85242&p=irol-­‐sec.   11. CBS  Corporation.  (2010).  Form  10-­‐K:  2009  Annual  Report.  Retrieved  on  April  27,  2010,  from   http://investors.cbscorporation.com/phoenix.zhtml?c=99462&p=irol-­‐sec.     12. General  Electric.  (2010).  Form  10-­‐K:  2009  Annual  Report.  Retrieved  on  April  25,  2010,  from   http://www.ge.com/ar2009/downloads.html.   13. Comcast.  (2010).  A  Valuable  Portfolio  of  Profitable  Cable  Channels.    Retrieved  on  May  12,  2010,   from  the  GE  website  at  http://www.ge.com/newnbcu/.   14. SyFY.  (2010).  Catalog  of  SyFY  Original  Movies.  Retrieved  on  May  23,  2010,  from   http://www.syfy.com/movies/originals/.   15. Magna  Global.  TV  Basics:  Television  Ad  Expenditure  Components.  Retrieved  on  June  5,  2010,   from  the  Television  Bureau  of  Advertising  website  at   http://www.tvb.org/nav/build_frameset.aspx.   16. Bauder,  David.  (2010).  Steve  Koonin:  The  Man  Who  Lured  Conan  To  TBS  (And  Now  Gets  Fan  Mail   For  It).  Retrieved  on  May  10,  2010,  from  the  Huffington  Post  website  at   http://www.huffingtonpost.com/2010/05/10/steve-­‐koonin-­‐the-­‐man-­‐who-­‐_n_569821.html.   17. Albanesius,  Chloe.  (2009).  Hulu  Jumps  in  February,  Thanks  to  Super  Bowl.    Retrieved  on  May  14,   2010,  from  the  PC  Mag  website  at  http://www.pcmag.com/article2/0,2817,2343547,00.asp.   Page|12    
  • 13. 18. Seidman,  Robert.  (2010).  Syfy’s  Innovative  Caprica  Marketing  Generates  1.5  Million  Pre-­‐Premier   Audience.  Retrieved  on  May  24,  2010,  from  the  TV  By  The  Numbers  website  at   http://tvbythenumbers.com/2010/01/19/syfys-­‐innovative-­‐caprica-­‐marketing-­‐generates-­‐1-­‐5-­‐ million-­‐pre-­‐premier-­‐audience/39280.   19. Disney.  (2010).  Form  10-­‐K:  2009  Annual  Report.  Retrieved  on  May  23,  2010,  from  the  Disney   website  at  http://corporate.disney.go.com/investors/annual_reports.html.   20. Hill,  Douglas  and  Jeff  Weingrad.  Saturday  Night:  A  Backstage  History  of  Saturday  Night  Live,   pp362-­‐370.  New  York:  William  Morrow  &  Co,  March  1989.  Print.   21. Wikipedia.  (2010).  Friday  night  death  slot.    Retrieved  on  May  23,  2010,  from  the  Wikipedia   website  at  http://en.wikipedia.org/wiki/Friday_night_death_slot.   22. Adegoke,  Yinka.  (2010).  Dish  to  drop  Weather  Channel  in  fee  dispute.    Retrieved  on  May  23,   2010,  from  the  Yahoo  website  at   http://news.yahoo.com/s/nm/20100520/media_nm/us_dish_weatherchannel.       Page|13