Will the 2010/11 television season be "do or die" for NBC?

The overnight rating numbers for last night are out, and unsurprisingly, Fox won the night by a huge margin due to the "American Idol" finale. However, I'd like to focus more on the other end of the scale. NBC ended the night in fifth place. "How can they finish in fifth place, when there's only four major TV networks in the US?", you ask. NBC actually finished behind Univision, the Spanish-language network, and that's not been an uncommon occurrence. In fact, Univision actually won the entire night last night in the Los Angeles market. Only CW finished lower nationally than NBC.

We know that NBC started the season with the amazingly stupid tactic of putting Jay Leno on at 10 p.m. five nights a week, thus obliterating its ratings for the 10 p.m. period, chasing away viewers from shows in earlier timeslots, and devastating ratings for its affiliates' 11 p.m. news programs and the following "Tonight Show with Conan O'Brien." NBC changed direction mid-season, but the changes haven't made much of a difference. Switching Jay Leno back to the Tonight Show is unlikely to save NBC in late night. Even though he's still beating David Letterman, Leno's ratings are falling below those of Conan O'Brien.

The network has announced its 2010/11 prime time schedule, and a lot of effort has gone into getting better shows on the air. However, if that doesn't work, NBC and its likely new owner Comcast will be in a very difficult position. Comcast is under heavy pressure from some senior U.S. senators and representatives to not make NBC a cable-only network, but even if the Comcast deal doesn't go through and General Electric keeps NBC Universal, GE would have to seriously consider going cable-only if NBC doesn't improve its ratings substantially.

Comcast would undoubtedly like to get the deal done before the the overall results of the 2010/11 season are clear, so it may have to bet that NBC will dramatically improve its performance, but there's not a lot of positive evidence with which to substantiate that bet. There are, however, some things that Comcast could do to get value out of NBC, even if it can't take the whole thing to cable for a while:

• Create an NBC Sports Network to compete with ESPN. NBC Sports still has a strong reputation due to its many years of Olympics coverage and more recent NFL coverage. Rebrand Comcast Sportsnet as NBC Sports, so for example, Comcast Sportsnet Chicago would become NBC Sports Chicago. This would give Comcast significantly more leverage over Disney in its negotiations for ESPN's carriage fees, as well as the opportunity to generate more advertising revenues.
  
• Get the NBC broadcast side out of the news business. Fox is doing fine without a news component in its broadcast network. Move NBC News' assets to MSNBC and CNBC, and simulcast those networks' programming if necessary.

These two moves would leave an NBC that looks much more like USA Network than like ABC, CBS or even Fox. It would make NBC purely entertainment-focused, although it could always source content from its sister networks to fulfill requirements. If the company decides to continue carrying the Olympics, the NBC Sports Network would become the flagship network for that event.

These may be Plan B or even C options for Comcast, but they have to be considered.

Comcast/NBC Universal: It's Not AOL Time Warner

Comcast's acquisition of 51% of NBC Universal from GE has been derided by some observers as the second coming of the AOL-Time Warner deal--two big media companies merging with few real synergies. On the contrary, I think that it's a very good deal for both companies--but it's not without risks.

AOL was "circling the drain" before the merger with Time Warner--subscriptions rates were flattening out, churn was increasing, as were subscriber acquisition costs. The company was hard-pressed to find growth, so it instead engineered one of the dumbest mergers in U.S. history, getting one of the biggest media companies in the world to essentially give itself to AOL. (Let's be clear...the merger was dumb for Time Warner but brilliant for AOL.)

By contrast, NBC Universal is in far better shape than AOL was. NBC's broadcast network is a mess, and the Universal movie studio is questionable (as it's been ever since MCA was acquired by Panasonic years ago), but its cable networks are generally strong, well-run and profitable. It's the cable networks that formed the primary reason for Comcast's interest.

The FCC is almost certainly going to require Comcast to either divest NBC's owned-and-operated television stations in markets where Comcast has cable systems (in Chicago, Philadelphia and Washington, D.C., among other cities) or its cable systems in those same markets. I suspect that it's the television stations rather than the cable systems that will be sold off.

Antitrust arguments against the merger are going to be a lot harder to make; for years, Time Warner owned Time Warner Cable (the second-largest cable operator), a movie studio and a collection of cable networks at least as powerful as those of the Comcast/NBC Universal combination without running afoul of antitrust regulators. Comcast has already pledged to make NBC Universal's cable networks available to competitors. The deal is likely to get done without major concessions beyond those required by the FCC.

The NBC television network can be fixed; it fell from first to fourth place in little more than a year, and one or two years of strong program development could turn things around. (To do so, however, Comcast will have to get Jeff Zucker and his cronies away from the network and install a new programming team.) Universal is a bigger problem, in that Comcast will be its sixth owner in less than 20 years, and no one in that time has figured out how to return the studio to success. The solution may be to sell off Universal in parts, keeping its library and selling off the ongoing studio operations.

NBC Universal's digital assets have been called a key reason for the deal, but I think that they're clearly the tail in this deal, not the dog. The most important digital asset is Hulu, but NBC Universal is a minority owner. Comcast will get a seat at the table, and Hulu will get to play in the TV Everywhere initiative, but it's not going to negate News Corporation's and Disney's interests.

I've learned from my own sources is that Comcast is working on its own low-cost, Roku-style set-top box to make its Xfinity service available on television sets without having to replace millions of existing set-top boxes. This could become the "official" mechanism through which Hulu will get to television sets.

In short, this deal makes sense for both Comcast and GE: Comcast gets control of a treasure trove of content, decreases its costs for distributing some of the most popular cable channels (they become internal transfer costs instead of outright expenses) and gets partial ownership of the Internet video distributor that poses the biggest risk to cable operators. GE gets out of the entertainment business without taking a financial bath, and can focus on industrial, medical and financial areas. The merger will almost certainly go through.

Disintermediation, again

Kim Masters was on NPR's "Morning Edition" this morning talking about the concerns that motion picture exhibitors (theater owners) have about the movie studios' plans to change their "release windows". Release windows are the order in which movies are released to different channels, and how long each channel has exclusivity. The issue is a seemingly innocuous request made by the studios to the FCC for "selectable output control" on set-top boxes, Blu-Ray players and other devices. Selectable output control would allow the studios to control whether, when and how much a movie or other video program could be played on a compatible device.
Consumer groups and consumer electronics vendors oppose selectable output control because the studios could use it to prevent their content from being recorded on DVRs and other devices. Now, the National Association of Theater Owners (NATO) has filed opposition to the studios' request because they fear that the studios will use selectable output control to make movies available in the home at the same time that they're in theaters.

I don't support selectable output control because it takes away consumer choice and negates thirty years of progress in consumer electronics since the Betamax decision, but the theater owners' opposition to the studios is more an effort to hold back the ocean than a friendly, consumer-oriented action. Extremely few movies make money in theaters today; theatrical distribution is most valuable for promoting films for future sale as DVDs and Blu-Ray discs. As the sales of DVDs erode and Blu-Ray fails to pick up the slack, the studios are forced to look at online digital distribution as a viable alternative. However, for digital distribution to generate the kind of revenue that physical media does, the movies have to be available much sooner, and that means cutting into the theaters' release window.

Whether or not the studios get selectable output control, theaters' release windows are going to erode; it's just a matter of when and how. When theater patrons are forced to go through metal detectors and hand over their cellphones before going in to watch a movie (as shown on a recent edition of CBS's "60 Minutes") in order to prevent piracy, theaters are not long for this world.

The studios are looking for any and every way to increase revenues, including cutting out the middleman, even if the middlemen are movie theaters. The same thing is happening with broadcast television. Comcast is close to buying 51% of NBC Universal from General Electric, which will give it control of the company. NBC has done such a superb job of running its broadcast network into the ground that it may become the first broadcast network to become a cable network. CBS and ABC are beginning to demand a cut of the retransmission payments that cable operators have to pay broadcast stations for the right to transmit their programming. Those retransmission payments have become the only thing keeping some stations on the air in this recession. Add to that the practice of some networks demanding "reverse compensation" from stations: Instead of paying stations to carry the networks' programming, the networks demand that the stations pay for the right to carry the programming.

Network television affiliates are an endangered species, because the networks can make more money, at lower cost, by dealing directly with the cable and satellite operators. For Comcast, the deal becomes almost a no-brainer, since it would control both the network and the cable systems. It will have to sell off the NBC owned-and-operated stations in cities where it has cable systems; the next step would be to take NBC to cable in city after city as network affiliate agreements expire.

Fifteen years ago, we were talking about disintermediation in retail and wholesale distribution brought about by the Internet; now we're talking about it again, this time in media. The future of theatrical motion picture exhibition and free broadcast television hang in the balance.

Update, December 5, 2009: According to the December 2nd edition of the Chicago Sun-Times, a patron at the Muvico Theater in Rosemont, IL was arrested and spent two nights in jail for videotaping four minutes of "Twilight: New Moon." She claims that she was actually videotaping her sister's birthday party at the theater, and the video on her camera (a still camera that records video segments) supports her contention. Nevertheless, the theater's managers pressed charges against her under a little-used law designed to punish film bootlegging. She faces up to three years in prison. I've lost whatever sympathy I still had for theater operators after this mind-boggling incident.

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