This is a great move for NBC for various reasons. The Oxygen Network -- which targets 18- to 24-year-old women -- already comes with about 74 million subscribers (households where the cable channel is available). To give some context to that number, let's look at the subscriber counts for some of Disney's cable assets. According to Disney's latest 10-K, the Disney Channel had 89 million subscribers, ESPN (80% owned by Disney) had 92 million subscribers, and ABC Family had 91 million subscribers. (You can read more about ESPN's $3 subscriber costs.) Oxygen, therefore, has room for subscriber growth.
Now, let's consider valuation. According to The Wall Street Journal, the valuation of Oxygen in 2000 was about $1 billion. Since then, the channel has grown subscribers and added several reality shows that have brought in higher ratings. NBC is picking up Oxygen for a price that's less than its $1 billion valuation seven years ago. And excluding financial assets, the net cost will be about $875 million.
In order to avoid mostly paying out of pocket, NBC will sell off a few of its non-core assets, such as two Telemundo TV stations, to make room for the Oxygen channel.
Cable channels are a great model -- you sell advertising while also collecting a steady stream of subscriber fees. For NBC Universal, its cable networks contribute about 50% to its profits. Adding Oxygen will drive greater shareholder value.
Perhaps one of the most compelling aspects of the purchase is the online component. Online advertising and e-commerce is perceived as a must-have strategy these days; content concerns such as CBS
NBC paid a very reasonable price to attract the valuable young female demographic. Going forward, I'd imagine that the company will look to leverage its network and online presence to further grow the subscriber base and to keep ratings on the rise (according to Advertising Age, Oxygen's third quarter saw its highest ratings to date). If NBC can successfully promote the synergy potential here, it should have a winner.
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Fool contributor Steven Mallas owns shares of Disney and General Electric. As of this writing, he was ranked 11,841 out of more than 60,000 investors in the CAPS system. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.