Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (22 page)

But interest in NBC-the-network was not driving the deal: after decades of media leadership, the network's most valuable assets were likely to be its
federal licenses to use spectrum and its rights to be transmitted by the cable company. As a programming entity, it was not worth much.

Still, if the NBCU sale made sense from Immelt's point of view in 2009, it remains to be asked: how did NBC-the-network, once among the most powerful media entities in the world, get to be fodder for the chopping block? What changes in the media and communications landscape had made it an unwanted asset of an American manufacturing company, almost lost in the rounding? What had happened to the proud NBC peacock?

NBC, the Radio Corporation of America's broadcasting arm, became the first television station to transmit broadcasts in the country when it covered a speech by President Franklin D. Roosevelt launching the New York World's Fair in 1939.
²⁸
After World War II, the television industry boomed: in 1948 there were 350,000 television sets, primarily along the eastern seaboard; six times that many were sold in 1949.
²⁹

RCA had started its television broadcasting operation as a way to sell RCA television sets, but it came into its own as a broadcaster in the late 1940s, when stars like Milton Berle and programs like
Texaco Star Theater
gripped the popular imagination.
³⁰
Sports rights were already expensive: according to
Television History—The First
75
Years
, an online cataloguing project, in 1948 television rights in the New York City area for baseball games cost $700,000, or the equivalent of $7.7 million today.
³¹

RCA-NBC was also first in color programming, transmitting a
Dragnet
episode in Technicolor. NBC competed strongly with CBS in sports programming in the 1950s and was “all color” by the summer of 1966.
³²
Although the early 1970s were not good years, as it fell behind ABC and CBS, NBC restored much of its former magnificence in the 1980s with several major hits—
Cheers, Golden Girls, Miami Vice
, and the
Cosby Show
among them.
³³
In 1986, General Electric bought NBC's parent company, RCA, for $6.3 billion.
³⁴

In the tussles between distributors and programmers that have shaped the American media narrative, NBC initially played the role of distributor. As Senator Franken reminded Zucker at the February 2010 hearing, until the 1990s, the FCC's Financial Interest and Syndication (fin-syn) Rules prevented broadcast networks from owning long-term rights in the
programming they aired. The Commission was concerned that vertically integrated networks—controlling production as well as distribution—would have an incentive to favor their own programming, and it wanted to shore up independent (and thus diverse) programming by allowing independent producers to run the lucrative market in syndication.
³⁵

In the early 1990s, the fin-syn rules were taken off the books after NBC and others argued that getting rid of them would not lead the networks to favor their own programming.
³⁶
As Bob Wright, then president of NBC, said at the time, “It is in our self-interest to do everything we can to promote a strong independent production community.” NBC pointed out that it was unfair to allow media companies like Time Warner to be vertically integrated while locking broadcasters out of the game. But the attraction of favoring its own programming proved to be too great.
³⁷
By 2005, NBC was the largest supplier of the shows aired over the network; more than 75 percent of NBC's primetime programming was produced by companies owned or controlled by its corporate parent.
³⁸
In exchange for the privilege of broadcast distribution, the networks were asking for at least part ownership of any show they put on the air.

As Senator Franken said to me in September 2010, “As soon as they got what they wanted, they just let it out, they let it be known to the creative community that they were interested in owning as much of the programming as possible. And they let it be known to their affiliates and everybody, that they were going to have—and I was at NBC, so I saw it at affiliate meetings—they were basically saying, NBC is going to own at least half its own programs. I mean, they were very blatant about it. Then the creative community in Hollywood and to some extent New York were basically told that if you want a get a good time slot, you want to get on, you might want to sell us, or give us, essentially, a piece of your show.”
³⁹

Getting rid of the fin-syn rules led to substantial media consolidation: Disney bought ABC TV; Paramount bought CBS.
⁴⁰
The broadcast networks ceased standing alone; it made much more sense, now that they could vertically integrate, to fold them into larger conglomerates that could funnel product down the distribution chain with total control.

Zucker, testifying in 2010, had the same challenge as Bob Wright had faced during the fin-syn discussions of the early 1990s: assure legislators
that a mega-distribution company would continue to act in the best interests of capitalism and consumers once it controlled valuable content. When Zucker was asked by Representative Charles Gonzalez (D-Tex.) whether the new merged entity would have any “advantages as to other providers that may not have the access to the content that you are going to have,” Zucker replied: “It is in our interest to make sure that our programs are as widely distributed and seen by as many people as possible. So that is the way that we will recoup the tremendous investment that we make in entertainment, news and sports. And so from our perspective, we want to make sure that our programs are as widely distributed as possible.”
⁴¹
(The phrase “it is in our interest” is usually a warning flag.)

Since the elimination of the fin-syn rules, the NBC broadcast network had been on a bit of a roller-coaster ride. Ratings surged with
Friends
and
Seinfeld
in the 1990s but collapsed in the 2000s. On the plus side, NBC bought Telemundo, the nation's second-largest Spanish-language television network, in 2002.
⁴²
Its news and sports operations remained strong, with
Nightly News
,
Today
, and
Meet the Press
on the news side and the Olympics, the Super Bowl, and
NFL Sunday Night Football
at the top of the sports list. But as a whole, NBC broadcast faltered.

NBC seemed to be symbolic of the broadcasting business generally. As Craig Moffett, an analyst for the investment firm Bernstein Research, said in 2009, “Broadcasting is the sick man of media and NBC is ailing worst of all.” In the fourth quarter of 2009, the NBC broadcast network saw its revenue fall by 2 percent and its operating profit sharply decrease. Meanwhile Universal, the movie studio, lost 25 percent of its revenue in the fourth quarter, mostly because of a huge fall-off in DVD sales—64 percent lower than the previous year—and money-losing movies like
Land of the Lost, The Incredible Hulk
, and
The Mummy: The Tomb of the Dragon Emperor
. Although Brian Roberts testified in early 2010 that “at the heart of NBCU's content production is the National Broadcasting Company, the nation's first television broadcast network and home of one of the crown jewels of NBCU, NBC News,” the fact was that NBC-the-network was a small, cold, and distant planet in the NBCU galaxy of content.
⁴³

The traditional broadcast networks’ business model was based for decades on big brand-name advertisers buying millions of dollars’ worth of
bulk advertising. Advertisers spent that money because the Nielsen ratings agency told them that people were watching particular shows—and Nielsen collected its data by tracking a few thousand households and scaling up the numbers.

But now that market is no longer functioning the way it used to. CBS and ABC have weathered the change better than NBC has, thanks to cannier programming choices, but the trend is unmistakable: except for political ads and prescription drugs, spending on broadcast-television advertising has markedly and steadily decreased. Even the Olympics do not give much return for advertising dollars on broadcast: GE spent $2 billion in 2003 for rights to the 2010 Winter Olympics and the 2012 Summer Games, but ended up losing at least $250 million on the former, in part because advertising revenues did not live up to projections.
⁴⁴

Cable channels, meanwhile, are getting a bigger share of the total ad dollar; by 2008, they had $21.6 billion in total advertising spending, up 15 percent from just ten years earlier, and drew in 39 percent of all television advertising dollars.
⁴⁵
(The Internet, meanwhile, has grown nearly twice as fast as cable television, as measured by ad revenues.)
⁴⁶
According to Nielsen, ad spending on national cable networks went up 16 percent, to $19.1 billion, in 2009, while broadcast network advertising fell around 10 percent, to $20.3 billion.
⁴⁷
Even though each cable network may attract only a small slice of the audience, cable as a whole has the broadest scope and is the easiest way to reliably reach a mass audience. Meanwhile, broadcasters’ costs remain extremely high: NBC labors under at least $3.5 billion in annual program production costs.
⁴⁸
So with advertisers moving to cable, broadcasters are looking for other sources of revenue.

That means that NBC Universal's traditional flagship, the broadcast network, has taken a backseat to the company's cable offerings, including USA (the number one–rated cable channel), Bravo, Syfy, CNBC, and MSNBC.
⁴⁹
These are enormously popular brands with a huge market share; collectively, they represent 80 percent of NBC Universal's value.
⁵⁰
USA is available in 82 percent of all U.S. homes (about 90 million households) and is a hugely popular source for original series, movies, and sports events. Syfy provides what it bills as “imagination-based entertainment,” including a strong dose of horror, science fiction, and fantasy. Bravo is seen
in 75 million households, is the fastest growing Top 20 ad-supported cable entertainment network, and is the home of both
Top Chef
and
Real Housewives
programming. CNBC has 85 percent of the market for business news and is seen in more than 340 million homes worldwide, including more than 95 million households in the United States and Canada. MSNBC, launched in 1996 as a joint venture between NBC and Microsoft, is a market leader in news, particularly online.
⁵¹
During the fourth quarter of 2009, NBC Universal's cable networks grew by 8 percent in both revenue and operating profit, with Syfy, Oxygen, and Bravo all growing operating profit by double digits, and CNBC by 7 percent.
⁵²

Comcast saw NBC Universal's cable channels as a new cash cow: the NBCU cable programming would generate torrents of cash while giving Comcast control over a product that all video distributors—the telcos, satellite companies, and competing cable companies—would need to resell. The rest of the company—the NBC network
and
the theme parks
and
the movie studio
and
movie library holdings—amounted to less than 25 percent of the deal's announced $30 billion value. Although the NBC TV Network generates 67 percent of NBC Universal's broadcast segment revenues, it generates only 8 percent of the division's profits.
⁵³
It may be surprising to many Americans over forty who grew up in the era of the grand television networks, but NBC itself was almost lost in the rounding. As the writer John Dillon told Brian Stelter of the
New York Times
when the deal was announced, “in the 2,742-word press release about the deal, the broadcast network was not mentioned until word 2,170.”
⁵⁴

The reason NBC Universal makes so much more from its cable offerings is not just a shift in advertising; it is also a shift in the relationship between broadcasters and cable providers—between content providers and content distributors. And it is this shift, which has been taking place over the past twenty years, that made the NBCU-Comcast deal so compelling and consequential.

As discussed in Chapter 2, the FCC must-carry requirement means that a local broadcaster must permit its signal to be carried on cable systems, and a local cable system must carry it—but the local broadcaster is not paid for this automatic carriage. Under existing law, local broadcasters can, instead of must-carry, opt for “retransmission consent,” which under the
1992 Cable Television Consumer Protection and Competition Act gives the broadcaster the right to negotiate with a cable-systems operator every three years for carriage of its broadcast programming. (The choice is with the broadcaster, not the cable system.) The broadcaster (or the network, if it owns the local broadcaster) can make a deal with the local cable-systems operator for any form of compensation.
⁵⁵

Larry Tisch, the head of CBS when retransmission consent was set up in 1992, claimed at the time that it would be the salvation of free broadcast television because local broadcasters stood to make a billion dollars a year. The day after the act was passed, John Malone, then head of cable giant TCI, growled that he wasn't paying a cent; “I don't intend to pay any money,” he said. “I will scratch backs.” All the cable operators followed suit in refusing to pay for retransmission consent. As a result, broadcasters that chose retransmission consent received no cash; they got, instead, permission to distribute additional new cable channels and some advertising concessions.
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