The Comcast/NBCU Split (Part 2 of 3): "Bigger Is Better" Is Dead; Long Live "Bigger Is Better!"
Comcast's decision to spin off NBCU isn't a ruse, and it doesn't mean that scale has suddenly gone out of style — only that, in the eyes of our investor overlords, not all scale is created equally.
I’m not usually the type who tries to understand the world in terms of fables and fairy tales. Even so, I can’t help but think about the industry’s reaction to last Monday’s announcement by Comcast, that it planned to spin off NBCUniversal and Sky into a new standalone publicly-traded entertainment and media company, in terms of one of the most famous fairy tales of them all: Goldilocks and the Three Bears.
Last week’s post was my response to the industry’s Mama Bears — those whose reactions were, in my opinion, a bit too cold or too soft for news that marks the beginning of what I think will prove to be lasting and transformational change for the industry (and certainly, at the least, for two of its most historic brands in NBC and Universal).
Today’s post addresses the Papa Bears — those who strike me as running too hot, too stiff, making too much of the news.1 In some cases, it’s trade press editors wildly overextrapolating in search of an attention-grabbing headline. In others cases, I see industry lifers too jaded by recent experience to take any news at face value. And really, I’m no less cynical than they are — I just land somewhere a bit more nuanced.
NBCU Spinoff Overreaction #1: Bigger Is No Longer Better!
One headline I’ve seen stands above all others in capturing the trade press’s thirstiness to squeeze a big headline out of this story. Care of Deadline on June 30 (the day after Comcast’s announcement):
Comcast Split Shows Bigger Is No Longer Seen As Better In The Media Business
You hear that, everyone? Now that we think about it, there was really no reason for the industry to have contracted from six major studios to (soon) four, or from eight premier streaming services to four or five or however many we end up with. Were we saying bigger was better before? Just kidding! Sounds like we won’t have to worry about several more years of ever-churning M&A&S2 activity after all.
Don’t get me wrong: I’m not here to sing the praises of corporate consolidation. I’m on record as being deeply skeptical of these big combinations — not least because, in my own experience at major corporate conglomerates like Amazon, Sony, and pre-Skydance Paramount Global, I saw firsthand just how bad all of these companies were at promoting collaboration and unlocking value across intuitively complementary business units. “Consolidation” and “efficiency” are stories that sell well to investors, but are seldom actually operationalized effectively.
But that doesn’t mean that the spinoff of NBCU and Sky into a standalone unit — in essence, their vertical de-integration from Comcast’s broadband/pay TV business — signals a broader reconsideration by investors and corporate leaders of their obsession with scale as a business strategy unto itself. Rather, it just reflects an ongoing pendulum swing, in both market sentiment and regulatory focus, between horizontal and vertical integration as the leading models of corporate strategy and growth. Bigger is still “better.” The question is: what kind of bigger?
“Bigger” Like Wider, or “Bigger” Like Taller?
To start, let’s define two common and familiar terms that are essential to understanding not just Comcast’s decision to spin off NBCU, but our industry’s ongoing obsession with consolidation and scale more generally: horizontal integration and vertical integration.
“Horizontal integration” refers to the combination of companies that are in essentially the same business — i.e., competitors buying competitors so that they can increase their revenue through the exercise of greater market power, and reduce their costs thanks to “eliminating redundancies”3 and achieving economies of scale. “Vertical integration” refers to the combination of companies that are separate links in the chain by which products and services are created and brought to consumers — a company buying its own suppliers or distributors in order to “maximize efficiencies” and capture the profit available at each link in the value chain.4
In the context of the entertainment business, then, a movie studio combining with another movie studio with more or less the same business is an example of horizontal integration; a movie studio acquiring physical studio production spaces or a theatrical exhibition chain is an example of vertical integration.
A Trip Down Antitrust Memory Lane
The foundational American antitrust statutes of the Progressive Era — the Sherman Antitrust Act of 1890 and Clayton Antitrust Act of 1914 — were enacted in an effort to rein in massive horizontal combinations such as Standard Oil, U.S. Steel, and American Tobacco, which exercised overwhelming market power within their respective industries as a result of their extraordinary scale.
Through the end of the 1920s, in the face of a legislative and regulatory environment that had become increasingly hostile toward horizontal trusts, American businesses pivoted toward vertical integration as the next big thing in corporate consolidation. In Hollywood, this took the form of the so-called “Studio System,” in which the industry’s major powers each owned and controlled all of the steps in the chain of film production, distribution, and exhibition.
The New Deal swung the political climate back against corporate concentration, with a new skepticism toward vertical integration in particular. In the entertainment industry, this shift culminated in the U.S. Supreme Court’s landmark decision in 1948’s United States v. Paramount Pictures, which effectively dismantled the “Studio System” that had dominated the 1920s, 30s, and 40s.
Throughout the 1950s and 60s, an obviously hostile political, legal, and regulatory posture toward both horizontal and vertical combinations resulted in the agglomeration of large, diversified conglomerates without any obvious corporate efficiencies — think Gulf + Western Industries, which grew from a 1934 auto parts maker into a massive empire of over 100 businesses spanning mining and resource extraction, film and TV production, cigar manufacturing and distribution, and more.
By the 1970s, however, the so-called “Chicago School Revolution,” driven by the scholarship of Judge/Professor/Crank/Supreme Court Reject Robert Bork, reimagined antitrust law as essentially indifferent to any corporate consolidation that didn’t obviously result in higher prices or reduced choices for consumers. During the Reagan era and beyond, the predominance of this theory of antitrust created a permissive legal climate toward consolidation, especially vertical deals, which eventually gave rise to AOL’s disastrous acquisition of Time Warner, Comcast’s fairly smooth acquisition of NBCUniversal (and, later, Sky), and AT&T’s disastrous acquisition of Time Warner.
Today’s Corporate Consolidation Landscape
The landmark deals that have caused the most consternation in the industry over the last decade — first Disney’s acquisition of most of Fox, and now the pending merger of Paramount and Warner Bros. Discovery — are essentially horizontal in nature. But, unlike in prior eras, the market’s most recent reorientation from vertical toward horizontal combinations doesn’t reflect a shift in legal/regulatory priorities.5 Instead, the market seems to have finally figured out what almost any employee of any of these companies could have told them at any time in the last 20 years:
We suck at this.6
At multiple companies, I worked hard to find creative ways to marshal resources and capabilities across complementary businesses. I did it both because I’m a professional overachiever, and because it seemed cool, and potentially fun, and certainly like the thing I should be doing. I have zero wins to show for any of it.
Even within a relatively coherent large business (like NBCU), different divisions may have vastly and unexpectedly different cultures. (I spent years of my career learning the hard way about the dramatic differences in culture, language, and values between the video game and film/TV industries.) Such differences are often especially pronounced (and impactful) between businesses that come together via M&A activity, rather than developing in parallel organically within an existing organization.
Beyond organizational dynamics, there is also good old fashioned individual insecurity.7 Generally well-intentioned people are often so rattled by the inherent insecurity of working through a major corporate M&A process (often more than once) that they naturally begin to view more distant colleagues less as teammates and more as competitors for finite resources (if not survival).
In the end, I believe there is one rule when it comes to executing on the promise of corporate integration: “Bonus pool is destiny.” Overstressed and undersourced executives will not commit scarce resources (in time, money, or effort) for the benefit of affiliated businesses unless that benefit is somehow eventually reflected in their own compensation (and that of their teams). Undifferentiated bonus pools are controversial, and structuring compensation schemes and effective incentives for collaboration is hard.8
I’ve never seen a company “get it right.” Have you?9
So yeah, maybe there is something to this repudiation of the tempting but unproven theoretical logic of vertical integration.
I don’t believe, as LightShed’s Rich Greenfield argued, that Comcast’s decision was “an admission that there is literally no synergy between Comcast and NBCUniversal.” I just think it’s an admission that they haven’t been any better at “unlocking the synergy” or whatever than anyone else.
And I don’t take it as a sign, as Deadline suggested, that the market has fallen out of love with “bigger is better.” It just means that the market is directing its affection away from vertical scale (which requires harnessing complex cross-divisional strategic and operational efficiencies), and toward horizontal scale (i.e., good old-fashioned market domination). And the best evidence of that might be what happens to NBCU next.
NBCU Spinoff Overreaction #2: This Is Never Going to Happen
What I consider to be the “Baby Bear” interpretation of this news — not too hot, not too cold, just right — was best represented in the press by Puck’s Matt Belloni10: there’s a good chance this spinoff never actually happens.
Recall that, while essentially everyone understood that Warner Bros. Discovery CEO/Hollywood’s favorite Temu Bond villain David Zaslav had all but placed a “for sale” sign on the iconic WB water-tower from the day he arrived, it was WBD’s announcement that it planned to split the company into two parts — a slimmed down Warner Bros. comprising most of the company’s film/TV production and film distribution assets, and a new publicly traded spinoff called “Discovery Global” housing declining linear TV assets such as TNT and CNN. In practice, however, what was presented as the announcement of a corporate split was more like the announcement that the bidding for Warners was, at last, officially open. So began the bidding war from which David Ellison and Redbird Capital eventually emerged triumphant by paying nearly three times the value assigned to the company by the investment markets before the bidding began.11
Comcast was surely well aware of that recent history when it made its announcement, and I have every expectation that, in the weeks and months ahead, they’ll be at least entertaining serious inquiries from buyers eager to take some or all of the NBCU/Sky assets off their hands.
The overreaction, however, has come from those who say that’s all this is — a stealth announcement of a public sale process — and that Comcast has no intention or even desire to actually go through with the spinoff as it has currently been announced. I’ve actually heard some friends and colleagues misinterpret Belloni as making this overreaching version of the argument.
I can certainly understand why people might feel inclined to interpret current events in our industry in the most cynical possible terms. But I view Comcast’s move here as more similar to how I interpret Netflix’s participation in the WB sweepstakes — with confidence that pretty much any outcome leaves them in a better place than where they started. That’s because, whether or not a spinoff is the “best” move for NBCU, there’s reason to think that — even in the absence of a direct sale of its NBCU assets — it’s the best move for Comcast.
At the time that Comcast first announced its intention to acquire NBCUniversal from General Electric in December 2009, and continuing through the completion of Comcast’s multi-stage acquisition in March 2013, institutional investors — no doubt aware of the historically permissive attitude of regulators toward vertical combinations at the time, as described above — were celebrating and rewarding the basic business logic of the deal. Rather than being a lonely piece of an inefficiently diversified conglomerate, as it was at GE, NBCU would now be a key part of an efficient, mutually complementary vertically integrated company. Today, the prevailing sentiment among investors seems to be the one in the quote from LightShed’s Rich Greenfield above: that there is “literally no synergy there.”
All at once, institutional investors seem to have suddenly rediscovered the concept of the conglomerate discount, in which a diversified group of businesses and assets is valued at less than the sum of its parts (usually by about 10% to 15%) due to the conglomerate’s inability to manage various and different businesses as well as a focused company would do. But wait — should we instead apply the conglomerate premium, in which the market values a diversified parent company higher than the sum of its individual business units (because of vibes, I guess)? Or is it that all of this is faux-precise made-up nonsense? I say the latter, but it doesn’t matter — in the Game of Thrones of the American economy, reality is whatever market sentiment says it is.
Thirty years from now, investors might once again embrace vertical integration as the key to smart corporate growth. Today, their opinion can be seen in Comcast’s moribund stock price, which has declined by roughly 60% from its pandemic era high in September 2021 (a period when most entertainment and media stocks were flying high in the months following the widespread rollout of Covid-19 vaccines). And it’s not just Comcast being picked on — Disney’s stock is down by about 45% over the same period.
But again, just because “vertical integration” is out of style doesn’t mean that the market has lost its lust for M&A&S activity generally. It’s reasonable for Comcast to have concluded that, based on prevailing market sentiment, there was simply no way to convince investors to reverse that decline without making a corporate event of it. Whether that event is a spinoff or a sale unfortunately matters less than the mere fact of it being an event. And the institutional investors who have shown so little affection for Comcast over the last five years seem to agree: Comcast shares rose 4.5% on the day of the announcement, on roughly 4x typical trading volume, and then added another 2% the next day (though they have shed most of those gains in the roughly week and a half since).
Comcast likely has other strategic considerations on its mind as well. Comcast’s core broadband/pay TV business has been vulnerable to secular decline, but — at least until recently — somewhat impervious to direct competitive threat. Every merger among its rivals, like the 2016 merger of Charter and Time Warner Cable, meant one fewer competitor seated at the table. At the same time, the incredibly high cost of building and deploying the necessary infrastructure to launch a new broadband or pay TV business effectively deterred new players from sitting down at the table.
More recently, however, the emergence of Starlink — as well as an expanding group of rivals like Amazon Leo that have followed Starlink into the emerging business of delivering broadband Internet access via low earth orbit (LEO) satellites — promises to substantially disrupt the industry and challenge the once-impregnable-seeming fortresses of Comcast and its terrestrial broadband/pay TV kin.
I expect that Comcast is eyeing a combination with Charter as a defensive move against these new satellite-based competitors. Charter, you may recall, ultimately walked away with Time Warner Cable in 2016, after the breakdown of TWC’s initial tentative deal with Comcast. It is currently mid-close on a $34.5B acquisition of Cox, a big move that is also likely informed by looming competitive pressure from Starlink and its ilk.
Divesting NBCU positions Comcast for an easier political and regulatory climate through which to push through a deal with Charter — one that would have been virtually unimaginable in a pre-Starlink world, effectively combining the U.S.’s four largest cable/broadband providers from before the current wave of consolidation began.12 And I’m not the only one who seems to think so — Charter’s stock price jumped by about 10% in the days immediately following Comcast’s announcement of the NBCU spinoff (though it has also since shed most of those gains).
To be clear, I still fully expect that the months ahead will see a flurry of additional potential M&A activity around NBCU. But I believe it would be a mistake to assume that, if a sufficiently compelling offer doesn’t materialize, Comcast isn’t fully prepared to see the spinoff plan through as it has been announced.
So if the bidding for (or by) NBCU is about to begin in earnest, who should we expect to see at the auction? In Part 3, I’ll conclude this series by considering all of the plausible players in the drama to come, and share my sure-to-be-unpopular pick for the potential buyer that I think isn’t getting nearly enough attention.
Well hello, attentive and eagle-eyed reader, were you expecting this to come out on Monday? That’s fair; so was I. Thanks for sticking with me as I work through those kinks.
“Mergers & Acquisitions & Spinoffs.” We’re making it a thing!
I.e., layoffs.
I.e., also layoffs, but probably fewer?
Especially since, these days, what’s regulatorily permissible appears to come down to whatever personally pleases, flatters, and/or enriches the president and his family.
Quoting myself about mega-mergers:
I’m not saying that these kinds of combinations can’t work. But I am saying that experience shows that they virtually never do, and that thinking about what it would take to get one right — especially at this scale and with these stakes — unfortunately reminds me a little too much of a different Homer Simpson quote. Dismissing his wife’s concerns about adopting a pet elephant, Homer confidently declares, “Marge, I agree with you in theory. In theory, communism works! In theory.”
Perhaps my #1 grand unifying theory of everything (and I’m a person who loves grand unifying theories): insecurity, for reasons real or imagined, is at the root of virtually all human conflict in both personal and professional settings.
I have done this professionally. It is very very hard.
If you have, I would love to hear about it. Because let me be clear: in both support and lead roles, I tried and failed.
(Who, because he is a professional journalist and I am not, was able to broadcast that point of view to the world within a couple of days rather than a couple of weeks.)
Or, if you prefer: “triumphant.”
Listed from largest to smallest, as of immediately before the merger of Time Warner Cable and Charter kicked off the new consolidated era for the industry: Comcast (#1), Time Warner Cable (#2), Cox (#3), and Charter (#4).