South-Western College Publishing - Economics  
New NBC Universal Poised for Big Gains in Entertainment Profits
Subject Increased Market Concentration Allows for Bigger Profits
Topic Oligopoly; Profit Maximization and the Firm
Key Words

Demand, Health Care, Profit, Hospitals

News Story

NBC is finalizing its purchase of Universal Studios, and the new company, NBC Universal, will be one of the five largest entertainment companies in the world. The new company will be 80% owned by NBC's parent company, General Electric Company, with the other 20% owned by France's Vivendi Universal SA, although Vivendi will have the right to sell its share to GE in several years.
To help the merger work more efficiently, NBC Universal intends to reduce its overall staff by about 500 workers--most of the reductions coming from Universal Studios' staff. Many Universal senior-level executives' roles are now redundant. For example, the new firm no longer needs two Chairmen and CEO's.

NBC Universal also can potentially reap significant benefits from the merger. When NBC broadcasts the 2004 Summer Olympics on its network stations, it can show some of the sports on Universal's USA Network. Doing this can help USA remain among the cable lineup of rival companies. Further, NBC Universal can use its network and cable channels to heavily advertise (at reduced prices, of course) the movies and DVD's coming from Universal Studios. It also now has access to Universal Studios' library of old TV shows, such as "Magnum, P.I.," which it can advertise as well. Finally, NBC Universal will own television shows such as "Law and Order," which it currently airs. This will help NBC significantly when the time comes to renegotiate timing of shows and determining advertising costs, as its bargaining power will increase.

Overall, the move is expected to help NBC Universal become much more competitive in the entertainment industry.

(Updated July, 2004)

Questions
1.

Do the cost-cutting maneuvers by NBC Universal cited in the summary constitute changes to long-run costs or short-run costs? Why?

2. Would NBC Universal now have an incentive to work far more closely with the other entertainment giants, like Time Warner, Viacom, and Disney, or would you expect increased competition? Do such large firms face a strong incentive to work together? Why might this be a concern?
3. How does the purchase of Universal Studios offer NBC increased economies of scale?
Source Joe Flint and Brooks Barnes. "The Peacock's New Strut." The Wall Street Journal. 11 May 2004.

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