Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (21 page)

So Comcast wins either way. Inside its own territory, it can turn all the dials—access to content, access to a guaranteed connection—to block any online video package seeking to compete with its own products. Outside its territory, it can underprice the other operators’ packages. John D. Rockefeller would love such brutal elegance.

6

The Peacock Disappears

WHEN THE ANTITRUST POLICY FIREBRAND
Senator Herb Kohl (D-Wis.) launched the Senate Antitrust Subcommittee hearing on the Comcast merger in February 2010, he was clearly focused on the programming assets NBC Universal would contribute to the deal: “NBC Universal … includes the family of NBC broadcasting and cable networks, 25 local NBC and Telemundo stations in some of the nation's largest cities, and the Universal Pictures Movie Studios. NBC has some of the most popular programs on television—from the Olympics, to NFL football, to NBC news programming, to entertainment programs ranging from ‘The Tonight Show’ to ‘The Office,’ to give just a few examples.” With such a trove of assets, Kohl, like Senator Al Franken, was worried about the power the combined company would have. He asked that the witnesses from Comcast and NBC Universal “explain to us … and the American people how the creation of this media conglomerate will serve the interests of the American people, not just the interests of your companies.”
¹

The witness for NBC Universal was its president and CEO, Jeff Zucker. Seated next to Brian Roberts, he was a study in Hollywood earnestness,
prepared to back up whatever Roberts had to say. He had joined the network right out of college, answering a phone call from NBC during his graduation ceremony at Harvard in 1986 that landed him a job as a researcher for the 1988 Seoul Olympic Games. For Zucker, NBC Universal was both an “iconic” media company and his emotional home; he had been, in rapid succession, executive producer of the
Today Show
, president of NBC Entertainment, CEO of NBC, and, since 2007, the head of NBC Universal.
²

Nevertheless, most people watching the hearing saw Zucker as a doomed man. Brian Roberts had steadfastly denied that he had plans to send Zucker to career Siberia, telling UBS analysts right after the deal was announced: “We are big believers in decentralization. We are not going to run NBC Universal; Jeff Zucker is.”
³
But no one bought it. Just months after the hearing—and a full four months before the deal was approved by the regulators and the Department of Justice—Zucker was out, telling friends (according to the
New York Post
) that he was taking an exit package of $30 million to $40 million to leave NBC Universal following completion of the merger; in his place would come longtime Comcast chief operating officer Steve Burke.
⁴

With NBC running fourth in ratings among the four networks and Zucker himself the subject of public disdain for his management record (including his disastrous decision to replace late-night host Jay Leno with Conan O'Brien), it was pretty clear that Comcast saw him as a liability.
⁵
As
PaidContent
, a news and information source focusing on subscription-based media businesses, put it, “Not since Gerald Levin [former CEO of AOL Time Warner] destroyed about $200 billion in shareholder value has a more maligned executive emerged from the media world, which is really saying something.”
⁶

Zucker apparently didn't see his ouster coming. His testimony that day was characteristically upbeat: “I could not be more excited about the future of this company,” he said, his chin up, rimless glasses flashing, and bulldog voice resounding in the hearing room. “This deal will give us the resources and the tools to innovate and adapt in an unpredictable media world and meet the needs of 21st century consumers.”
⁷
That “us” would not include Zucker, but he had already played his part in laying the foundation for a successful post-merger company. He had presided over NBC Universal as
it had built its strength as a cable network—which is what the deal was about—not the NBC broadcast peacock but the clutch of powerful cable channels controlled by NBC Universal, holdings that generated mountains of cash at margins of more than 50 percent. At the end of 2011, the NBC Universal cable channels (including USA, Syfy, CNBC, and Bravo) were providing the profits for the division, increasing in value each quarter, while the broadcast network's revenue continued to descend—swooning by 7 percent for the year.
⁸
As the media analyst SNL Kagan put it in late 2011, the cash flow margin of cable networks was “amazing.”
⁹

Thomas Edison made mass communication possible. He invented the phonograph and the telegraph and figured out how to distribute electrical power. He also founded General Electric, which commercialized his inventions and is today one of the largest publicly traded companies in the world. General Electric made everything from microwaves to jet engines—and thanks to its 1986 purchase of RCA, it owned NBC, too.
¹⁰

When deal discussions began in 2009 between Comcast and GE over NBC Universal, Edison's old company, for all its size and breadth, was not doing well. Profits were down, losses within its finance arm, GE Capital, were enormous, and, as part of the constellation of businesses that had profited from elaborately complicated securitizations of subprime mort-gages, GE was being blamed as a participant in the country's financial near-collapse. GE Capital had been started in the 1930s as a middleman operation, smoothing transactions between factories and consumers on durable goods like washing machines; eventually it moved into turbines, real estate, and a host of other areas. By 2009 it was deeply involved in the subprime credit market and needed $50 billion in bailout assistance.
¹¹

Following a 56 percent drop in revenue in 2008, trust in the company was eroding fast.
¹²
Jeffrey Immelt, General Electric's CEO, needed to show that his company had a plan, that it was slimming down and exchanging assets for strength on its balance sheet. Although he had emphatically asserted in March 2008 that offloading his company's key media asset was unthinkable, as the financial world crumbled around him in 2009 selling NBC Universal began to make sense.
¹³

Jack Welch, for two decades GE's famous CEO, had made the deal back in 1986 to bring NBC within the GE family. Later, Immelt bought up $21
billion in additional assets, tripling the size of GE's entertainment business in 2004 by buying cable, film, and Universal theme-park assets from Vivendi, which became a minority partner in the new company, NBC Universal.
¹⁴

But being in the media business did not make sense for GE, and being inside GE's giant world of turbines, jet engines, commercial loans, and air conditioners did not make sense for NBC. NBC employees had little to offer when they were summoned to be part of annual GE Imagination shows, and GE's factory floors were a universe away from the set of
Saturday Night Live
. As NBC faltered—moving from first place among the networks in 1996 to a seemingly permanent fourth spot starting in 2001–2, its position as part of General Electric made even less sense.
¹⁵
In the first nine months of 2009 NBC made 27 percent less profit than in the same period in 2008. Even though overall profits for the entertainment division remained healthy—bolstered significantly by NBCU cable-channel revenue from CNBC, USA, and Bravo—and NBC Universal as a division contributed about 12 percent to GE's enormous bottom line according to
Bloomberg
data, analysts considered the division the odd man out within GE.
¹⁶

General Electric kept NBC Universal partly out of corporate vanity and a desire for political influence. Executives seemed to revel in their power over NBCU editorial decisions, which rankled NBC employees. During the summer of 2009, GE allegedly directed an MSNBC journalist not to criticize Fox, and, as the parent company aimed to capture lucrative stimulus funding for green energy developments, allegedly ordered NBC to cover President Obama's health-care summit.
¹⁷
Rumors flew about GE's role with the administration; Immelt was reported to be making calls to Capitol Hill supporting Ben Bernanke's renomination as chairman of the Federal Reserve.
¹⁸
The same week the Comcast-NBCU merger was approved by the Obama administration in January 2011, Immelt was appointed to lead President Obama's Council on Jobs and Competitiveness, replacing former Federal Reserve chairman Paul Volcker.
¹⁹

But NBC Universal was also pursuing other options. Zucker considered encouraging Vivendi to go public with its 20 percent stake (if Vivendi decided to exercise its option to sell, which was available each year from November 15 through the first full week of December). He brought in a parade of bankers, who probably discovered what Comcast's team found
out at about the same time: NBC Universal's books were in shabby shape. It was hard to tell how things added up. An IPO seemed unlikely.
²⁰

However much Zucker may have dreamed of independence, in 2009 Immelt needed a comeback story for investors. Shedding NBC Universal would give him a $30 billion headline and let him claim a large deal that would make GE's operations more coherent. He could then move on with GE's enormous core businesses in power generation, aviation, and medical imaging; save his reputation; and divert attention from doubts about his standing as CEO.

By early 2009, with GE stock at a fourteen-year low,
²¹
Immelt was ready to sell. The investment banker Jamie Dimon, head of JPMorgan, met with Brian Roberts and Steve Burke on March 3, and in July JPMorgan Chase's vice chairman James B. Lee set up a meeting with both Brian and patriarch Ralph at the annual Allen & Company Sun Valley media conference. By December, Ralph had signed off on the deal, saying, according to the
New York Times
, “I've done a lot of deals in my life. Every deal has its time. This is the right time.”
²²

Talks between General Electric and Comcast during the summer of 2009 were volatile and irritable. The goalposts kept moving as valuations shifted and GE intermittently demanded more cash. Comcast wanted to put as little cash into the deal as possible, and argued that its existing programming properties were highly valuable; meanwhile, GE was having trouble getting Vivendi to sell its stake at a reasonable price.
²³
The television comedy
30
Rock
lampooned the negotiations in 2011:

At particularly difficult moments, Comcast's chief financial officer, Mike Angelakis, met with Keith Sherin, his GE counterpart, to rescue the relationship and solidify the basic terms on which NBC Universal and Comcast would join forces. During all those months, NBC Universal network executives, including Zucker, were left out of the negotiations.
²⁵

And the deal worked. Sort of. The news leaked the day NBC Universal executives were told about it at the end of September 2009; the leak made it seem as though NBC Universal wanted to scuttle the talks by making Comcast's investors balk at the company's apparent plans to spend $30 billion for NBC Universal. If the investors were sufficiently spooked, they would sell and lower Comcast's share price—making it more likely that NBC Universal could strike out on its own. NBC Universal may have been nervous about being a tiny part of a cable-distribution company; there was still a broadcasting cachet that did not mix with the cable-guy cowboy culture. Zucker sent a proud e-mail to NBCU employees the day after the leak was published in
The Wrap
, a trade blog: “Given the attractive nature of our assets,” he wrote, “there is always significant interest in NBC Universal. That has been amplified lately by the annual discussion with Vivendi about its 20 percent ownership of our company. Vivendi … have not yet made us aware of any final decisions about their future with us; should they choose to exit, there are a number of possible things that could happen.”
²⁶

Brian Roberts was furious at the leak: he did not want investors thinking that Comcast was putting its own money at risk in buying NBC Universal. Before the deal terms were made known, the headlines might have trumpeted that Roberts was off on another Disney-like detour. Comcast held its collective breath, and its stock price stayed firm. When the deal was formally announced, in December 2009, analysts applauded Immelt's focus, but Comcast's institutional investors were puzzled. There seemed to be a lot of hot air in the numbers, making the $30 billion fanfare overstated. There were no particular synergies—since Comcast could get access to NBC Universal programming through contracts, why did it have to buy the company?
²⁷

On the whole, however, the logic of getting NBC Universal out of GE overwhelmed the media industry's hesitations over putting it into Comcast. In particular, making NBC-the-network more successful might help the rest of the broadcasters. Keeping media companies together might be good for the overall ecosystem.