How NBC Finally Made Its Net Move
May 21, 1999
The Peacock network has been on a roller-coaster ride – a near miss with Lycos, and then a swift deal with Xoom. Here's how it all went down.
By Jim Evans
Executives at NBC thought they had a deal. For three months they negotiated with Lycos (LCOS) to gain a stake in the portal for a merger involving Snap.com and other NBC properties, according to sources close to those talks. Although there were signs that Lycos was waffling, the execs still felt like the two companies had a deal in the first week of February. The details, they thought, could be worked out.
But when the time came, Lycos CEO Bob Davis balked. Davis called an NBC executive's office and told him he would have to postpone their meeting that day for personal reasons.
At first the exec believed Davis, but as he glanced down at the caller-ID screen in his midtown Manhattan office, something struck him as strange. He picked up the receiver, dialed the number on the screen and waited for an answer. He didn't expect to get the response he got, from a very official-sounding voice.
"Barry Diller's office, may I help you?"
With that, the deal between NBC and Lycos was over. The next week, Lycos signed a complicated deal with Diller's USA Networks (USAI) and Ticketmaster-CitySearch, and NBC searched for a new partner. The search concluded two weeks ago with the equally complex pairing of NBC assets and community site Xoom.com, on the day before the Lycos-USA deal was killed over lack of shareholder support. It's funny how these things turn out.
The deal with Xoom signals that NBC is finally ready for online primetime. Over the past two years, NBC has invested in a myriad of hot Web companies but has lacked a cohesive central site branded under the Peacock logo.
However, NBC's portal play isn't a simple one. NBC is creating an entirely new company called NBCi that will consist of main site Snap.com, community site Xoom.com, NBC.com, NBC's Interactive Neighborhood, Videoseeker.com and a 10 percent stake in CNBC.com, which will relaunch some time in June. Xoom chairman Chris Kitze will be the CEO, and Bob Wright, the president and CEO of NBC, will be chairman.
The NBCi network of sites will have a reach of about 30 percent, according to Media Metrix. That puts it in seventh place as of March. Xoom and Snap had only 10 percent unduplicated reach.
NBC will own 49.9 percent of NBCi, with an option to increase it to 53 percent, while Xoom and CNET (CNET) will own 34 percent and 13 percent, respectively. Sources say it's unlikely NBC will exercise its option to take majority control anytime soon. If it did, NBCi's losses would show up on the income statements of General Electric, NBC's parent firm.
The advent of NBCi marks the second time a major media player has delved into a market pioneered by pure-play Web companies like Yahoo (YHOO) and Excite (XCIT). While CBS (CBS) and Fox remain on the sidelines, Disney, which owns ABC, ESPN and other properties, aligned with Infoseek (SEEK) last year to create the Go Network.
Historically, GE has been slow to see the value in creating a Net portal because it's so focused on the bottom line, NBC sources say. In the past, that has hamstrung what the company could do in developing properties like Videoseeker and the Interactive Neighborhood.
But in the last year, NBC has invested in such Web companies as LiveWorld Productions (the parent of community site Talk City), Launch Media, Snap and CNET, Intertainer and iVillage (IVIL). It was the success of some of these investments, along with the significant increase of traffic that Snap was getting because of NBC's on-air crosspromotion, that convinced the company to put more weight behind the portal concept.
The investments led directly to NBC's talks with Lycos, beginning in November 1998. Sources close to those discussions say that the deal would have been similar to the one worked out with Xoom, except that NBC would have had less equity in Lycos, and Lycos' site would have been the main page for NBCi. The same sources say that Lycos CEO Davis "felt burdened by the complexity" of the deal and intimated that Davis put just enough roadblocks in the way to maintain publicly that an NBC deal was never close. Lycos officials declined to comment.
When the talks between Lycos and NBC died, NBC moved quickly to Xoom.com. It started with a phone call from CNET CEO Halsey Minor, who was temporarily running Snap, to Xoom's Kitze. Minor suggested to Kitze (the two are old friends) that he talk with NBC executives Tom Rodgers, president of NBC cable and executive VP of NBC, and Marty Yudkovitz, president of NBC Interactive.
But before talking with NBC, Kitze had talked with just about every big company, including Lycos, Microsoft (MSFT), Amazon.com (AMZN) and CBS, looking for a portal or community partner. Nothing was serious until the discussions with NBC.
NBC was smarting from not sealing the Lycos deal. But while losing Lycos didn't necessarily make NBC look good in GE's eyes, there was also relief. One source close to the talks says they questioned Davis' judgement over the USA deal: "There was a feeling at GE that maybe we dodged a bullet."
But they did want Kitze and Xoom. Kitze, in fact, met with Bob Wright, Rodgers, Yudkovitz and even GE CEO Jack Welsh and came away feeling that NBC was serious about doing the Web, and that it would throw the entire weight of its brand behind the effort.
Talks were going smoothly until Xoom decided to do a secondary offering at the beginning of April. To NBC, this was a sign that Xoom wasn't entirely committed to the merger. NBC executives told Kitze so, but Kitze reassured NBC's top brass that Xoom still wanted to do a deal.
Yet the offering wasn't the entire problem. In every merger, there's someone known as the "deal cop" whose job it is to police both sides in order to get the deal done and to look through any public statements that the companies make for potential legal problems.
In this case, the deal cop was from Bear, Stearns, who recommended that Xoom reveal its talks with a larger company in its SEC forms about the offering. In effect, Xoom would have to tell the world that it was soon about to be bought. Once the news hit the Street, Xoom's shares jumped from $76.88 a share to just over $94 a share in a single day. After a brief quiet period in which Xoom and NBC couldn't talk, Kitze boarded a plane for New York to resume the merger discussions. NBC executives were upset with the offering, but negotiations resumed and were completed without a hitch.
There were a few other issues. NBC didn't want to include any of CNBC.com in the deal, but if equity in the site wasn't involved it was a deal breaker for Kitze. It's been widely rumored that a revamped CNBC.com is going to be a blockbuster news and stock-information site. While regulations don't allow such a site to facilitate trading, a business partner can. Knowing this, Kitze asked for 20 percent of CNBC.com. He got 10 percent.
The issue of why NBC's other properties aren't included in this deal is also complicated. Many observers have wondered why NBC didn't also throw in its stake in valuable holdings such as MSNBC.com and CNBC.com and its investments in companies like iVillage and Talk City. The most glaring omission, of course, is MSNBC.com, its 50-50 joint venture with Microsoft.
Sources close to the deal say that NBC was wary about including Microsoft in any discussions about NBCi, even though Kitze wanted MSNBC.com in the deal. The problem: Microsoft's notorious negotiating style. Says a source: "It just wasn't productive to get involved with Microsoft. I mean, the original deal that NBC signed with them weighs seven pounds."
Still, NBCi will have access to the content from NBC's various partners. Not only will iVillage, CNBC.com, MSNBC.com and others be represented on the new site in some form, but it's likely that other deals, such as the one NBC signed with television home-shopping network ValueVision, will be mined, as well. That's the benefit of having a relationship with a major television network.
Of course, the devil is in the details. NBC, Xoom and Snap will have to work overtime to integrate all the various properties that will be housed under the NBCi roof. Even NBC officials realize that Yahoo, America Online (AOL) and other portal behemoths have a significant head start. Says one official: "We're at the starting line here. We still have to execute. You can have the biggest arsenal in the world, but if you don't execute, it's nothing." |
