NETWORK MEETS NETHow big an audience is there for Microsoft and NBC's cable-Web news venture?
Why would Microsoft Corp., happily cranking out profits in its core business, be willing to put up more than $500 million to join NBC's plunge into the soon-to-be crowded cable news business? How could the software giant hope to see a payback, when ABC News scrapped a cable network rather than risk $800 million getting caught in the coming brawl between the incumbent giant, CNN, and its challengers?
It's simple, says Patricia Q. Stonesifer, senior vice-president of Microsoft's Interactive Media Div.: ``Microsoft has always tried to drive the number of dollars per PC.'' By investing heavily in multimedia CD-ROMs, for example, the company built up in a few years a new $400 million-a-year business. Likewise, MSNBC, which will debut with much fanfare on July 15, has the potential to generate new revenue from PC owners by bringing together the promotional clout of a major network, a new cable channel, and a companion Web site. Online services, including interactive news, look like another winner, says Stonesifer.
Even so, Microsoft and NBC, a unit of General Electric Co., both concede that MSNBC is not likely to have an immediate payoff. Their goals are long-term. Microsoft hopes to build a bigger presence in the converging worlds of media and computers and expects that constant promotion on NBC and the MSNBC cable channel will drive consumers to the MSNBC Interactive Web site. If significant numbers of viewers are Net cruisers, too, the joint venture may prove the viability of an advertising-driven Internet site.
OVERSHADOW. For NBC, the MSNBC venture is a key step in expanding beyond its core U.S. broadcasting business. ``For the future of NBC, this is the most important video service we're involved in,'' says NBC President Robert C. Wright. In 1986, when GE bought NBC, it had no non-broadcast assets and no international distribution. Since 1989, NBC has launched CNBC in the U.S., Europe, and Asia, an NBC channel in Asia, and NBC Super Channel in Europe. These properties now make up about 25% of NBC's asset base.
Ten years from now, NBC expects the value of its cable, international, and interactive assets to overshadow that of the U.S. broadcasting business. ``MSNBC is not an appendage,'' says NBC Executive Vice-President Thomas Rogers, who, as the head of business development, negotiated the MSNBC partnership. ``We're redefining what our core business is. This is the core business 10 years from now.''
For both companies, the partnership is economically attractive. Last summer, Microsoft came close to investing $1 billion in Turner Broadcasting System Inc. to create a similar venture with CNN. To get into the business with NBC, whose audience for its nightly news program is 10 times as large as a typical CNN audience, Microsoft had only to invest $220 million to buy a half-interest in NBC's America's Talking channel, which is being shut down and replaced by MSNBC. On top of that, Microsoft is paying NBC more than $20 million a year in licensing fees for NBC news content that is used on MSNBC. It will also pay $50 million annually for the next five years to fund its share of MSNBC day-to-day operations.
That adds up to about half what Microsoft might have spent with Turner. Still, says Pete Higgins, vice-president of Microsoft's Applications and Content Group. ``It's our biggest outside investment.'' And he adds: ``It's the cornerstone of our investment in interactive media.''
NBC is getting an even better deal. Its $50 million-a-year contribution to MSNBC through 2000 isn't much more than the $30 million it had been spending to run America's Talking. Much of the content will be supplied by NBC, which spends about $350 million a year on news operations to generate about $100 million in profits. All told, with an annual budget of about $100 million, MSNBC will be much cheaper to produce than CNN, which spends more than $500 million annually on its newsgathering operation.
The MSNBC team has a key edge over other news startups in distribution. By taking over the America's Talking slot on cable systems, MSNBC will debut in 22 million homes and will pass a crucial threshold of 40 million in the next three years, Wright says. Rupert Murdoch's News Corp. expects to spend $300 million, or $10 per subscriber, to line up distribution to 30 million homes for its cable news channel, which debuts this fall.
What will MSNBC and MSNBC Interactive look like? The cable channel will offer all the slick promotional glitz and star power NBC News can muster. Tom Brokaw, Katie Couric, Jane Pauley, Bryant Gumbel, and Bill Moyers will anchor prime-time MSNBC fare, which will be a mix of interview, magazine, and news programs. Even with those big names, however, Wright is setting modest viewership goals. He says a ``very successful'' average rating in the next 18 months would be just 0.5--only 479,500 homes. Larry King Live, CNN's most popular show, averages a 1.2 rating.
BELLS AND WHISTLES. The Web site will offer lots of interactive ways to go beyond the video programming. Peter Neupert, the Microsoft executive overseeing MSNBC Interactive, vows it will be ``more than just a headline service.'' For one thing, MSNBC Interactive will offer a custom news service that will create a unique daily Web page for each consumer--with the news, weather, and even opinion that fit his or her preferences. It will also offer features to help interpret the news, such as a calculator to let PC owners figure out how a flat tax would affect them.
Executives on both sides quietly warn that on July 15 MSNBC, especially its Web site, may not have all the bells and whistles the hype might lead viewers to expect. The venture is being rushed out just seven months after being announced to catch big news events: the Olympics, the political conventions, and the Presidential election. Those events, coupled with a huge promotional campaign, will likely entice a large number of viewers to sample MSNBC both on cable and online.
The risk, warns Cowen & Co. media analyst Harold L. Vogel, is that viewers may be underwhelmed by what they see at first and not give MSNBC a second look. That's particularly true for the Web site, he says: ``It's important for the interactive to be slick. People's attention has to be grabbed, and it has to stand out compared to other Web sites.''
MSNBC's creators say they're not worried about any short-term glitches. Microsoft regards MSNBC as a strategic investment in Internet content. NBC is intent on adding ever more assets to set itself apart from its lagging network rivals. If MSNBC is a hit, it will put both companies, already leaders in their fields, even farther ahead of the pack.
By Elizabeth Lesly in New York and Kathy Rebello in Redmond, Wash.
Updated June 14, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.