The media company raised eyebrows last year when it bid $4.4 billion to broadcast the Olympic Games. Turns out the cable guys have a plan - and they're just getting started.
By Douglas Alden Warshaw, contributor
FORTUNE -- The Dassault Falcon 900 was speeding across the Atlantic last June on its way to New York from Lausanne, Switzerland, chasing the waning sun. Aboard the corporate jet were just two passengers: Steve Burke, CEO of Comcast's NBCUniversal unit, and sportscaster Bob Costas. Only a few hours earlier Burke, Costas, and a dozen colleagues had presented a $4.4 billion pitch to the International Olympic Committee to be the exclusive U.S. rights holder of the Olympics -- bidding against Disney's ESPN and News Corp.'s Fox Sports. It was Comcast's biggest and boldest programming move since acquiring control of the struggling entertainment company in January 2011, and as Burke and Costas cruised home, everything was, well, up in the air.
Throughout the flight Burke had been in contact with his team, but all of a sudden nobody on the ground was answering his calls. Finally he reached Brian Roberts, the CEO of Comcast, who had led the presentation and was still in Lausanne. As he listened, Burke balled his right hand into a fist, thrust it into the air, and yelled, "Yes!" He and Costas high-fived. Roberts was even more emotional. He would later describe falling back on his hotel room bed in a mix of euphoria, exhaustion, and relief upon hearing that NBC would host the Games through 2020. "I was," he confessed to me, "moved to tears."
Roberts's reaction underscores just how high the stakes are for Comcast (CMCSA) as it seeks to make a success of NBCU, and in the process validate his decision to merge the two companies into a content and distribution colossus. Such conglomerates are now seen as unmanageable at best -- and at worst, disastrous like the AOL/Time Warner merger of 2001 (Fortune is a unit of Time Warner (TWX)).
Wall Street investors prefer pure-play content or distribution companies, believing the Internet has radically changed the economics of the media business. And just what does Philadelphia-based Comcast, lampooned as "Kabletown" on NBC sitcom 30 Rock, know about running an entertainment company, anyway?
Quite a bit, it turns out. Under Comcast's control (it owns 51%, GE (GE) retains 49%) over the past 11 months, NBCU's revenue edged up 4% to $21.1 billion. Comcast's overall revenue climbed to nearly $56 billion. Yes, there have been culture clashes, including a high-profile showdown with sports titan Dick Ebersol, who resigned as chairman of NBC Sports last May. There's also been an infusion of operational discipline -- gold-plated private bathrooms are out; Comcast cable bills stuffed with promotions for NBC's The Voice are in -- that is winning over many NBCU executives, and a few creative types too.
But Comcast's ambitions extend far beyond simply turning NBCU into a well-managed business: Roberts and Burke believe they can transform the entertainment unit into a multimedia juggernaut that takes advantage of its parent's deep pockets, scale, and digital know-how. At the heart of the strategy? Sports. Bigtime, ratings-grabbing sports such as the Super Bowl and, yes, the Olympics. "NBC Sports is 5% of the portfolio, but sports is our 'tell,' " Burke says. "Sports is how we're going to move forward with the rest of the company."
At a time when consumers are ditching their cable boxes, including Comcast's, to watch on-demand programming on Netflix (NFLX), Xbox, iTunes, and YouTube, live sports are almost 100% DVR-proof. Nobody wants to watch the Super Bowl on Monday -- and watching live means you can't skip the ads.
Sports generates more than high ratings and ad revenues for broadcasters. ESPN, the worldwide leader in cable fees, gets $4.69 on average per household -- more than four times what any other national channel charges -- and the combined ESPN networks rake in more than $6.5 billion in subscriber fees a year. TNT, which carries a full slate of NBA regular season and playoff games between Law & Order reruns, fetches an average monthly subscription fee of $1.16, while Fox's FX channel, with critically acclaimed original programming but no major sports, gets only 44¢ per subscriber, according to SNL Kagan. Assuming both TNT and FX reach 100 million paying households, that's a difference of a whopping $865 million a year.
So Comcast is doubling down on sports. It has relaunched its Versus channel as the NBC Sports Network. ("Versus" not ringing a bell? Originally named the Outdoor Life Network, it was best known as the channel where Lance Armstrong used to race, deer were shot, and the NHL disappeared into the witness-protection program.) And Comcast has folded the new network and its other sports assets -- Golf Channel and its regional sports networks -- into the NBC Sports Group, a powerhouse with existing long-term contracts with the NFL, the NHL, and PGA golf events. Starting this summer in London, the company plans to blanket Olympics coverage across all its digital platforms and existing channels. Most of the sports group will soon be based at a new, $100 million sports production facility in Stamford, Conn., some 50 miles closer to New York City than ESPN's headquarters in Bristol, Conn., which should attract current ESPN talent.
If Comcast's big bet on sports pays off -- if it can woo viewers and advertisers, boost the fees its rivals pay to carry NBC sports, and come up with a slew of interactive services that keep consumers from cutting the cord -- the rest of NBC can expect to follow suit.
When Comcast agreed to take control of NBCUniversal in a complex deal that valued the whole division at $30 billion, the most attractive parts of the NBC portfolio were its cable channels like Bravo and the USA Network, the highest-rated basic cable channel for the past three years. The NBC television network, on the other hand, was a mess. The once-proud Peacock has been in fourth place in the primetime Nielsen ratings for the last five years, and grateful there weren't five networks. As Burke confided to associates after the deal was made, "When we bought NBC, we valued the network at zero. I hope we didn't overpay."
The network had one consistent crown jewel: live sporting events such as NFL games and the Olympics. And the king was Dick Ebersol. A television legend who co-created Saturday Night Live with Lorne Michaels, he built NBC sports in the 1990s into the home of the Olympic Games. (During the Olympics, Ebersol would literally live in the International Broadcast Center.) In 2006 he put together NBC's Sunday Football Night in America, which was the No. 1 primetime television show in the fall of 2011.
Burke valued Ebersol's creative talent, and he engineered a sort of reverse takeover, giving the management of NBC Sports control of the Comcast sports TV assets. But over time Burke began to feel that the sports group needed an executive to work alongside Ebersol. He wanted someone who had a passion for all media, not just network TV, someone who cared about the economics of cable programming and distribution and understood the growing power of digital media and its importance to sports fans. Digital technology has long been a Comcast focus, but it was an area in which Ebersol always showed an alarming lack of interest.
At their third lunch together, Burke began the discussion with, "You're Dick Ebersol! I think you're a genius!" He went on to suggest that Ebersol, 64, take on a partner to help manage the brave new world of sports, someone who could help package programming on network, cable, and digital platforms. Ebersol hired Mark Lazarus, a former Turner executive. Burke recalls planning with Ebersol that "after a couple of years, Mark will become more like the CEO, and you'll be the chairman, and four years into it, you'll retire."
With the right managerial staff and succession plan in place, everything seemed set. But things began to founder in the spring of last year. "Dick wanted to be paid and treated differently than the rest of the company," says a senior NBCU executive who knows both men. "He says it was a dispute about money. It was really much deeper than that." (NBC did not make Ebersol available to comment for this story.) As much as Burke admired Ebersol's abilities, he was creating a different culture at Comcast's NBCU. "Dick in many ways tried," Burke says, "and I tried in many ways. But part of my mantra is that no one's bigger than the company." Ebersol at one point said he wasn't sure he wanted to remain at NBC. "Let's not do anything rash," Burke says he told Ebersol. "Let's go home and sleep on it, and let's talk tomorrow." And then Burke went home and couldn't sleep.
That night Burke weighed his options, almost none of them good. Losing Ebersol would hurt morale throughout NBC; it would also hurt the company's impending Olympics bid. If NBC failed to secure the Olympics and Ebersol left afterward, it would look as if he'd fled a sinking ship. But if NBC won the bid and then Ebersol was let go, the Olympic committee might consider it a bait and switch.
The next morning at 8:30, Burke met with Ebersol and simply said, "Dick, it's not going to work."
Ebersol went down to his office, called seven of his top executives, all of whom had been with him for 20 years or more, and calmly told them he had resigned. One head of programming broke into tears. Others wept quietly. Ebersol was incredibly gracious, telling his team it was "their time." And then Dick Ebersol left the building.
Mark Lazarus had no idea that he was the new head of NBC Sports until Burke called him up and said, "In about an hour we're going to announce that Dick's leaving and that you're being named chairman."
The change was palpable almost immediately. Recently, while walking the halls with Lazarus, a former NBC producer had two longtime staffers give him the thumbs-up signal when Lazarus wasn't looking. "It's amazing," the producer said to Lazarus, "People like you behind your back." Lazarus took one look at Ebersol's palatial office, decided it would make for a couple of good-size conference rooms, and moved into far more modest surroundings. And while Ebersol eschewed hard-core management, Lazarus embraces it: "I don't pretend to be a producer or an executive producer," he says, alluding to the practice of corporate execs putting their names on credits to raise their profile or stock their office with awards. "My job is to marry the art and the commerce."
Despite Lazarus's obvious competence, many at NBC worried that the loss of Ebersol would hurt the company's chances of keeping the Olympics past the 2012 London Games. Ebersol traditionally led the bidding process with a presentation to the International Olympic Committee that was roughly the equivalent of George Lucas and Steven Spielberg on PowerPoint: emotional, heart-tugging videos combined with promises to promote the Games to the American public in a way that would make every man, woman, and child feel they were part of the Olympic team.
Lazarus had heard about Ebersol's presentations, but he had never seen one. In fact, he hadn't seen the one that was due to be presented to the IOC just three weeks after Ebersol's resignation -- not an image or a word of it. So Lazarus quickly set up a meeting with the team working on it, all of them Ebersol acolytes and all of them, in Lazarus's words, "hurt and wounded, as well they should be." Then Lazarus called Burke, and they agreed that he should attend the meeting too. Burke brought along Brian Roberts, and they spoke to the team and tried to reassure them that Comcast was serious about pursuing the Games, and that they weren't the bean counters who famously passed up the chance in 1998 to bid big money on an NFL Thursday-night package that would have put Versus on the map.
In truth, though, they were hardly sold on the Games. As Roberts would later confide, when doing due diligence on NBC, he and Burke had looked over the network's balance sheet, discovered a sea of red ink flowing out of the sports division, and concluded, "We've got to get rid of the NFL and the Olympics or make a big change."
The Olympic team gave their presentations -- and what Roberts and Burke saw and heard gave them goose bumps. "As the meeting went on," says one of the participants, "you could actually see these guys getting Olympic fever." Burke and Roberts were taken aback by the passion of the Olympic group and the brilliance of their almost two-hour presentation. They felt it was close to perfect. "One video we're missing," Burke told the group, "is a video called The Faces of NBC, where each person talks into the camera about what the Olympics means to them, because your team is hundreds and hundreds of people." The rest of the group looked at each other. They had pitched the very same idea to Ebersol, and he had shot it down. As soon as Burke made that suggestion, he and Roberts stopped being the cable guys. NBC Sports and Comcast were one team.
Everyone in the room went to Lausanne to present to the IOC's television committee. So did Bob Costas, who had never participated in a presentation before and was there in many ways to fill Ebersol's role. After the last tapes were played and Costas was through speaking, one emotional IOC member, while drying his eyes, whispered to an NBC executive, "If it's even close, it's yours." It wasn't even close. NBC followed up its presentation by dropping that $4.4 billion into the laps of the IOC for all U.S. media rights -- broadcast, cable, and digital -- to four Olympics from 2014 to 2020. NBC's bid was almost a billion more than the $3.4 billion reportedly offered by Fox, which also bid on four Games. (ESPN was believed to have bid $1.4 billion for only the 2014 and 2016 Games.)
Months later, in an office high atop 30 Rock, Roberts sits on his couch and calmly, with all the passion of an accountant, insists that he didn't overpay for the Games. "This deal makes economic sense," Roberts says. NBCU not only has television rights but also controls all U.S. digital distribution of the Olympics on its own platforms -- and Comcast has the right to make content available on other platforms such as mobile phones or even via a Facebook application or other social media initiative.
It's a significant departure from the Ebersol days. Digital was almost an afterthought for Ebersol, either because he didn't think the online audience was big enough -- or feared cannibalization. Consequently, NBC has lagged in developing interactive products; NBC Sports' site, which includes NHL.com, gets just 15 million unique monthly visitors, while the ESPN site draws some 38 million unique visitors a month.
Roberts, with Burke as his No. 2, has built Comcast into a company of incredible scale. The cable division ended the year with almost 50 million subscribers nationwide -- and now Comcast can push its new NBC Sports Network into all their homes, helping generate buzz and demand for the channel among other cable and satellite operators. If NBC can inch its 31¢-a-month sports channel closer to ESPN's $4.69, the financial upside is huge.
Comcast has the financial strength to invest in sports. Roberts's cost-consciousness of the past decade has paid off: The company's net income last year rose 14%, and it has one of the lowest debt-to-cash-flow ratios in the industry.
A new NFL eight-game, weeknight cable package with additional NFL programming could go up for bid as early as 2013, and it would make the NBC Sports Network must-see TV. Now, just as they did in 1998 when Comcast last had a chance to bid on weeknight NFL games, Burke and Roberts will have a critical choice to make. Asked directly whether he would bid hundreds of millions annually for the NFL, Burke takes a deep breath and pauses before answering. "That's a big bet to make," he says. "A very big bet." Even if Burke doesn't pull the trigger on that deal, Comcast clearly is making one of the biggest sports bets of all time.
--Douglas Alden Warshaw is a digital strategist and author. He is a former television news and sports producer who has worked for ESPN and NBC Sports. His writings on media can be found at FrstPrsn.com.
Reporter Associate: Alex Konrad
This article is from the March 19, 2012 issue of Fortune.
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