value insights

The Way the Media Industry Works- Valutrics

Early in The Wright Stuff: From NBC to Autism Speaks, by Bob Wright (with Diane Mermigas; RosettaBooks, 2016), the author discusses NBC’s 2003 US$16 billion megadeal with Vivendi Universal’s entertainment branch. This deal brought together a prominent TV network owned by GE and an ailing French-owned cable–video conglomerate, and transformed them into a multimedia enterprise called NBC Universal. Though Vivendi was on the ropes at the time, NBC couched the deal as a merger, not an out-and-out acquisition, because its leaders didn’t just want the properties, which included Universal Studios, major cable networks, and a TV production and distribution company. They wanted to use the deal to wean NBC from its dependence on broadcast television.

Photograph by John Russo

At that time, Wright had been NBC’s chief executive for more than 15 years, and was a member of GE’s core leadership team. He had reported to and worked closely with both of GE’s CEOs during that time: Jack Welch and (starting in 2001) Jeffrey Immelt. Welch had appointed Wright in 1986, just after acquiring NBC as part of RCA. The appointment had been widely criticized because of Wright’s background — only three years in television, as president of Cox Cable; no time as a broadcaster; and major stints as a lawyer and all-around GE executive (in plastics, in energy, and at GE Capital). But Wright had had a clear view of where the television industry was going, and the ability to manage the strong-willed entertainment industry figures who kept NBC’s programming ahead of competitors. Among those who had worked under him were Johnny Carson, Dick Ebersol, Warren Littlefield, Lorne Michaels, Don Ohlmeyer, and Brandon Tartikoff. Between 1986 and 2003, NBC had mastered prime time with its “must-see TV” programming concept, dominated television sports, launched the major financial news network CNBC, and raised its profits to $1.3 billion annually.

Yet Wright feared the network was in jeopardy. The rise of cable, and the prospect of Internet-based video on demand, would soon render old broadcast business models irrelevant. More tactically, NBC’s contract with producer Dick Wolf (of Law and Order) was about to change, shifting millions of dollars in residuals to Universal. The two companies fit well together in other ways, as well. They had complementary capabilities, especially when it came to licensing and commissioning hits. NBC made nearly all its revenues from advertising, whereas Universal was fee-based.

All these factors provided impetus for the deal, but as Wright tells the story, a number of key leaders at both companies, including GE’s relatively new CEO Immelt, still resisted it; furthermore, bureaucratic and legal snags were everywhere. And neither company had a clear idea of the other’s intentions.

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To move toward resolution, Wright and Jean-René Fourtou, the chairman and CEO of Vivendi, focused on personal rapport. They spent several days together at their respective homes, “talking about things like our backgrounds, families, and interests,” Wright wrote. “It turned out Jean-René was not some artificial lump of bricks any more than I was.”

Although other deals foundered on personality clashes (such as NBC’s 1995 effort to buy Ted Turner’s Cable News Network, a deal that suffered from the frosty relationship between Turner and Welch), the NBC Universal deal reached the finish line. It also added $2 billion per year to NBC’s revenues and accelerated the company’s movement into a post-broadcast world. And it paved the way for Comcast to acquire NBC Universal in 2010 for $30.5 billion — a price, according to Wright, that was about $15 billion less than the company’s street value.

The Wright Stuff, which is part candid memoir, part rumination on the future of television and media, and part anthology of comments by Wright’s colleagues, tells many stories, including that of his departure from NBC. Wright retired in 2007 to cofound and lead (with his wife Suzanne Wright) the not-for-profit research, advocacy, and family support organization Autism Speaks. This move was prompted by the discovery, around the same time that he was building rapport with Fourtou, that his grandson Christian was severely autistic. Autism Speaks has been a lifeline of information and community for many autistic people and their families.

Wright met with strategy+business in his offices at Rockefeller Center in New York to talk about his approach to developing business acumen. We also discussed the ever-changing media business; the history of his time at GE; and his advice for the generation of broadcasters, cable operators, and board members poised to bring about the future he envisions.

S+B: The Wright Stuff describes many decisions that proved prescient — but their prescience wasn’t obvious at the time. How do you develop a feel for phenomena so you know what’s happening in advance?
There are some easy techniques to avoid disaster — not every disaster, but a lot of them. Pay attention to your price-to-earnings [P/E] ratio. You should know what the bounds are historically for the type of business that you’re in. They’re well known for every industry. When your P/E moves above or below those boundaries, that’s a trouble marker. If it’s too low, you’re not convincing analysts that you have a very good future. That may be OK if you’re a regulated utility, but if you’re not governed, it’s not so good. When it gets too high, you’re in a bubble.

The other important markers are return on investment and return on equity. There are appropriate ranges for different kinds of businesses. If you’ve moved out of that range one way or the other, it deserves some explanation.

If your stock price is low and you’ve got low return on investment, you’ve got a problem. That means the market doesn’t like what you invested in. You’re going to hit a wall, and you’ll be struggling to get new capital. You’re not going to buy yourself out of it.

Boards can pay attention to markers like these, but they often choose not to. Then they get blindsided. Enron was up to $100 per share just before the end.

We saw a marker like that at GE in the late 1990s. GE stock was selling at $7 a share in 1996, and then it went up to $60 in 2000. Its historical P/E ratio had been around 17, and it went to 40. A board should never let it get that high without saying, “What’s going on here?” Is this a macro problem or is it just your company?

S+B: I would have guessed that GE’s growth occurred before 1996.
The growth came earlier, but GE stock didn’t move, except modestly, before about 1994. We had very difficult problems in the late 1980s and early 1990s. The 1986 savings and loan crisis affected GE Capital. Then, in 1991, Japan began its deflationary lost decade, and we dealt with deflation. We were asking questions like, “Should we buy copper forward for the next 30 years because the price is down so low?” We didn’t know how much lower it would go. A lot of companies were facing the same situation.

Then, in the mid-1990s, the states began to deregulate electric power. All of a sudden, companies like Enron got involved, and the power industry growth rates went way up. The perceived shortage of electrical capacity in the United States ran contrary to every historical analysis, but few people saw the problem.

GE was a big beneficiary at first. By 2000, we had perhaps six times the backlog in power generation equipment — orders waiting to be filled — that we had had three years before. It was a big backlog. People were building power plants on spec and making a decent amount of money. Then in 2001, the bubble broke and Enron went down, along with many others.

S+B: What happened after that?
I have a chapter about it in The Wright Stuff called “Dante’s Inferno.” Except it was a financial hell of GE’s own making. Between 1995 and 2007, we created and lost $530 billion. It was the greatest loss of market capital in business history.

“Between 1995 and 2007, GE created and lost $530 billion. It was the greatest loss of market capital in business history.”

We were constantly struggling. We lost billions of dollars on canceled orders after the Enron collapse. The day Jack Welch’s retirement was originally supposed to take place, the stock [price] was $57 [per share]. He postponed that move, and a year later, when he actually retired, it was $43. Then we got killed in the reinsurance business after 9/11. That took the share price down to $36, and by 2004, it went down to $22. I remember traveling around the country with Jeff Immelt, going to equity funds, trying to explain. In 2008, the deflation of the U.S. housing market cost GE Capital $50 billion, because we were overextended in mortgage-backed securities.

The board, of which I was a member, should have been more vigilant about all this in the late 1990s. We weren’t willing to recognize losses and deal with them promptly, because that would have meant taking a write-off. We sat on billions of low-growth assets that constrained our returns on investment and equity; and we underestimated our vulnerability, particularly with GE Capital. We were caught by our own arrogance, our own blinders, and our own dependence on the seemingly easy income from GE Capital.

Meanwhile, while GE was in freefall, NBC’s fortunes rose — and then, at the start of the Great Recession, we undersold it to Comcast. That was a terrible sale, but we needed capital for GE Capital and the board thought the digital world was going to kill NBC. Comcast came in at the bottom and got the deal of the century.

Today, GE is finally rising above its long-standing $25 share price, where it stagnated for so long. It’s a different company now. With [Trian Fund CEO] Nelson Peltz involved as an activist investor, Immelt is restructuring and dismantling GE Capital, and it looks like GE will emerge from all this as a super-strong multinational industrial company, steered by digital technology.

S+B: How might a board, or a management team, gain the foresight needed to overcome its own blinders?
You have to follow [the financial trends] closely. A lot of times, these things creep in. The P/E ratio continues to track outside the boundaries [mentioned earlier], or the return on investment doesn’t quite match, but it happens so gradually that you don’t pay enough attention. It’s easier when you’re buying a company. Then, if it has a terrible return on equity, you can ask yourself: “Why am I going there? What am I bringing to the table? Is it just cutting costs?” That won’t necessarily bring a lot of profitability in itself.

In The Wright Stuff, I wrote that when you get P/E ratios over 25 or 30, you should have a party. Let everyone — executives, board members, and employees — sell some stock.

Then immediately change your board, before your profitability erodes. The people who brought you to this point, however well-intentioned, won’t be helpful now. They’re too biased to see the mistakes on the way up. Bring in people with a downside perspective, who have operated under low-growth, challenging circumstances. Then, when you start to turn it around again, go back and get people who know how to manage the pickup. Some people are good on the rise; others are good on the fall. But they’re not the same people.

S+B: Have you seen a company do this?
No, and I think that’s one reason many large corporations buy assets at the top and sell at the bottom. When things are going well, board members say, “Harry over there has been competing with us for years. Let’s buy him.” But if you pay Harry with anything but stock, that’s foolish. If you use stock, that’s fine — but you’re giving Harry stock that’s inflated.

Then, when things get tough, companies look for places to cut. They say, “Harry’s division didn’t work. It’s killing us. Let’s sell it and get it off the balance sheet.” But the time to sell it was back when the valuation was higher. And it’s only when the market cracks that you should be out looking for acquisitions.

Private equity investors and hedge funds understand this. They know that most corporations tend to buy at the top and sell at the bottom. They thrive by being there to catch those deals. There are two good prospects for acquisition right now in the media industry: first, well-structured companies in a cyclical business that happen to be at a bad moment; and second, growing businesses that can’t, for one reason or another, get affordable capital.

S+B: Where are the bright prospects for media companies right now?
One of them is right there [gestures at a large-screen television mounted on the wall]. The other is here [holds up a smartphone].

The quality of visual reproduction has improved incredibly in the past few years. You can buy a 70-inch video screen for about $5,000; it used to be $25,000. You see sports there jumping right out at you. The beneficiaries are the football, baseball, and basketball leagues. They didn’t invest a nickel. Meanwhile, it took some real effort to get a little smartphone screen to be attractive for video.

Cable operators are well positioned now as a result. Every cable operator is an Internet provider, so they all have at least two businesses going. They might also have voice phones and home security, all running off the same platform.

I sit on boards with cable company executives, and they get aggravated about, for instance, the price they have to pay for programming such as VH1. They are analyzing the viewership for every cable channel, to see which ones they can drop.

But if you’re in that business, I would advise you not to worry so much. You need to retain your cable customers, even when the margins stink, because those customers are also on the Internet. If you price out cable customers, you run the risk of losing their Internet business, and that’s where the margin is.

On the Internet side, the cable companies have wanted to charge extra for high speed, because they’re adding more capacity to the network to pay for streaming to cell phones. But then others raised the public policy issues involving net neutrality. In the past, when cable companies charged everybody equally, people who didn’t stream were paying too much to cover the costs of people who did. Now everyone is streaming; all boats are rising. The cable company is now like a data utility — with Internet, telco, security, and all kinds of new services, anything that can be translated into data. And it’s getting paid accordingly.

When a television program moves from broadcast or cable TV to the Internet, everybody says, “Oh, too bad for Comcast.” But how do they think people are getting that program? It creates more Internet usage.

When young people ask me how to break into marketing for television, I advise them to work on the technical side instead. Become an intern and work on switching, maintenance, or capacity issues. You open yourself up to other business opportunities. Once you have some sense of these technical issues, you’re more prepared to be in the business. It’s all driven by technology now, and not by marketing.

S+B: What will happen to the advertising and marketing professions?
Clients want more efficiency now; they’ve got access to numbers showing what they’ll get out of any given ad or promotion, who is paying attention, how much they’re clicking through, and in many cases what they’re buying and how they’re paying for it. That changes the offer made to a customer.

Part of the difficulty right now is that media has become the domain of venture investment. That’s where the many new apps are getting their investment from. This is different from hedge funds or private equity. Media has some inherent constraints; it’s harder to make back the investment through initial public offerings. In fact, the IPOs in every industry have slowed way down, because people have been burned badly. There is more widespread traditional examination of these IPOs.

S+B: Are we heading toward some sort of resolution, a new normal in media?
There is a new world for media, and it is going to be exciting. I am on the board of AMC, a cable channel owner and independent film production company. I think it should have a very bright future. So should much larger content companies, including NBC Universal and Comcast.

Looking back, Universal to me was the best acquisition that we could possibly have made at NBC. Besides its subscription revenues and excellent film and television production companies — which would have been extremely difficult to create from scratch — it brought a vast library of motion pictures and television programming [to the deal]. Those libraries contain material that would be much too expensive to try to re-create.

“Any serious media company is paying attention to content creators all over the world, looking for people who are undervalued, and buying into their work.”

As technology drifts toward the Internet, all that material is usable in different ways than it was in the past. It’s like a Fort Knox. It may look old and stodgy, but all the gold is in there. AMC was formerly a cable channel, but now it’s primarily a production company. With every new program, we have many options. We know we’re going to run it on AMC. But do we also want to sell it to Netflix? Or to Amazon or Hulu? Do we want to rent it to them? Do we want to sell it permanently? Do we want to sell it separately in Europe and Asia? Those kinds of decision represent the company’s future.

Any serious media company is now paying attention to content creators all over the world, looking for new people and people who are undervalued, and buying into their work. Creating new and exciting programming is critical, and it’s not easy to do. It’s high-risk. But some of these companies are big enough now that they can take risks and good enough that their batting average will be consistently high. Those companies, the ones with a knack for cultivating talent, will be the owners of the media future.