NBCUniversal CEO: We Have The Best Studios And Film Products Of Any Streamer

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Following is the unofficial transcript of a CNBC exclusive interview with NBCUniversal CEO Jeff Shell on CNBC’s “Squawk on the Street” (M-F, 9AM-11AM ET) today, Tuesday, October 4th. Following is a link to video on CNBC.com.

We Have The Best Studios And Film Products Of Any Streamer, Says NBCUniversal’s Shell

DAVID FABER: Welcome back. With declines in linear cable, questions about streaming strategies and the Hollywood distribution system, while there are no shortages of challenges for the media industry that includes our parent company, Comcast, which owns NBCUniversal, which owns CNBC.

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Joining me now is Jeff Shell. He is the CEO of NBCUniversal, always a pleasure to interview your boss' boss' boss' boss. Nice to have you here.

JEFF SHELL: Thanks for having me here. The set looks great.

FABER: Thank you. Yeah, this is the first time I'm using it and obviously “Mad Money” has made a great use of the space as well. You know, Jeff, no shortage as I said of things to discuss. I want to talk films want to talk parks, but investors really want to talk a lot about Peacock and direct-to-consumer as they try to understand the new landscape.

There's a downgrade of our parent company, Comcast today and I'll just start with that and get your response. They start the downgrade by saying the linear business model that is underpin media is set to decline rapidly. pivots to direct-to-consumer are dilutive to margins, and earnings. Just give me a response to sort of that thesis.

SHELL: Well, so I think the there's no question that's not new. There's no question the whole television landscape is changing. You just look at how consumers behave. And how they watch TV. And what you got to do is gotta get deeper into it.

There's definitely a shift from linear to nonlinear people thought streaming it's really nonlinear with watching stuff when you want to watch it. And really, it all goes back down to content. If you have the right content, and you offer a broad distribution platform, your consumers are going to find you and that's what we're doing with Peacock.

FABER: And when it comes to Peacock, though, there continues to be sort of questions about how robust the service needs to be, I think 13 million paying subscribers right now, I think Brian Roberts recently at a conference I attended as well.

16 million total. But obviously a lot of them are Comcast subscribers, and a EBITDA loss of two and a half billion dollars by 2022. So what do you tell those who say, okay, direct-to-consumer is really important, the nonlinear business, but how are you going to make it profitable?

SHELL: So let's take a step back and break it down a little bit. So we entered streaming as you know, about two years ago two years and change ago and when we looked at the market, we looked at, you know, we looked at the upper end of the market, Netflix, you know, Disney plus no ads premium SVOD, and even back then it looked pretty frothy.

It looked pretty competitive. And so we decided to enter in a different way we entered as kind of a broad dual revenue stream model which we thought A) was the more attractive business opportunity, but it happened to fit really well with our company. That's what we do in our regular business. That's where our content is.

That's where our advertising strength is. So we launched with all that and we are doing really, really well in that model. So as of this quarter, we have 30 million active accounts that are watching us monthly. Of those 30 million, we're actually up over 15 million now paid. Give you some news this morning.

FABER: All right good that’s 2 million more than not.

SHELL: Over 2 million more since the end of last quarter. And if you look at since the beginning of the year, it's 70% more than we started the year with so we've gotten paid some 70%. If you look at you know, if you look at kind of what's driving that in the quarter, why are we growing when some of the parts of the market are flat?

It's really driven by the content. And for us, there's four different pillars that content sports has been really successful for us. We have the best sports offering of any streaming service. All of our major sports deals on linear we also have nonlinear rights and we have long term deals and stability NFL English Premier League, WWE.

You've reported we have big 10 rights coming next year with a lot of rights on peacock and then biggest sporting event in the world is the World Cup coming in a month which will be streamed on Peacock. Second part of it is going to be our studio.

I think we're probably talking about our film business, hopefully later our film business is ranking. All those films we spent, you know the investment that you reference, most of the investment we're making in Peacock is on our own content.

And a lot of that is film so films are coming directly to Peacock after their transactional windows and the fact that the film business is doing so well Minions Jurassic Park, you know The Black Phone all this quarter drove growth drove growth and all those movies stay on the platform.

And every quarter we add new movies like Nope and Halloween right so film we think we're gonna have we have the best studios therefore we're gonna have the best film product of any streamer.

Third category is our linear businesses, even though as you mentioned, they're declining. They're still very strong and number one across the board. So all of our content that's on NBC, Bravo our other channels for the first time in the next couple of weeks is coming to Peacock where it used to go to Hulu.

Part of our deal was we terminated our Hulu programming agreement. So if you want to watch Saturday Night Live if you want to watch Real Housewives if you want to watch The Voice all of our Chicago shows Dick Wolfe shows those are now coming to Peacock and that just started and then lastly, we're doing originals which we think we have a very, you know, kind of prudent strategy

FABER: So why Jeff the continued chorus that there's just not enough scale on Peacock and let me you know, again, I'm quoting here from a Bank of America note that came out last week. Given small amount of net ads and lack of buzz around hit shows we worry this is the BofA analysts that Peacock may struggle to hit engagement figures of 10 hours a month, that is per consumer. And they say NBC said the greatest potential risk of the companies that they follow in that space. How do you respond to that continued question as to whether there's simply not enough scale?

SHELL: There's a very easy way to respond. By the way, everybody's talking about subscribers. All subscribers are not created equal, right? So, what you have to do is actually look at the real numbers.

And because we're ad supported, engagement is very important for us. So once again, in this quarter, we're doing an ARPU of close to $10 on our paid subs, which is very healthy.

I think we've reported before we did over a billion dollars in the upfront for Peacock and only our second upfront, you know, since we launched two years ago, and if you look at the third quarter on a run rate basis, our third quarter we would do $2 billion in annual revenues on Peacock.

So I don't know a lot of businesses that you've covered that in two years have reached the point of 2 billion. So we're right on the trajectory that we wanted to. We're growing subs, we're growing our revenue and we have the scale to do things we want and –

FABER: And are we investing enough? I mean, does it require more? You look obviously, as a company, we invest over 20 billion in content, but specifically to Peacock, I mean, Disney+, Chapek said 16 billion. We know Netflix is at 17 billion. Is it enough at Peacock?

SHELL: I think once again, going back to the beginning, we are a different strategy than Netflix or Disney+. We look at our TV business as a whole. So we don't say here's how much we're spending on Peacock, here's how much we're spending on NBC.

What we're looking to do is build a platform where our content creators can have a platform that offers them the best chance of a hit as they move across different devices for consumers to watch and more importantly, allows advertisers to have that full platform.

We think our platform is the best. We clearly need a streaming element on that platform. We think Peacock is perfect. And with it, we're growing just where we need to do to get it –

FABER: There are those who would say well, you know what, you need to figure out a deal, whether it's with Paramount or whether it's one day Brian making the move on Warner Brothers Discovery. Obviously some time perhaps from now. Because direct to consumer is the key and it's simply not big enough. You say?

SHELL: First of all, just the scale question I find completely baffling. I've been at Comcast for about 20 years now. I've been an NBCUniversal for over a decade. There has not been one single time when I've ever had an investment that we wanted to make that we think would drive a return that we couldn't make because we didn't have enough capital.

Our competitors that you cover can't say that, right? So what’s scale? I mean at scale, we have all the scale to do what we need to do. We're making huge investments in our theme parks, we're making twice as many movies as our nearest competitor. And we're buying all that content and moving it to Peacock to establish the streaming service.

So I think we have plenty of scale. You know, sure, if you can make acquisitions for the right strategy and the right price – we've been a company that has always made acquisitions as part of our business. Look back at DreamWorks when we bought six years ago.

People questioned the price of that. It's been an unquestionable success adding another, you know, animation studio at a price that now looks pretty favorable. And I'm not going to talk about the big transformative deals, but for the people who say we need to do something, we don't need to do anything.

FABER: Linear cable business. You talked about it. I want to share a quote with you from MoffettNathanson. They say, “the linear model can no longer be saved. So there's less and less energy being devoted to saving it.” Do you agree with that?

SHELL: I think whenever there's a shift in businesses, people tend to get to the end of the movie without following the movie through. So there's no question that linear is starting to decline as people shift. You see it in your own behavior, right?

But linear is still an incredibly important business. An incredibly important business to consumers, incredibly important business to advertisers. Just look at the NFL, you know, which we just renewed last year. Look at the numbers of the NFL or the Olympics. So linear is a part of the overall ecosystem. It's not going to be –

FABER: It produces a lot of cash.

SHELL: A lot of cash flow and a lot of viewers. People still watch. People don't just go home and say I want to watch linear or streaming tonight. They say I want to watch a show. Sometimes it's a live NFL game.

Sometimes it's binging a drama on the streaming service. Sometimes it's watching a Chicago episode live because you saw it on Peacock last week. So it's a lot more complicated than that picture. It's not over.

FABER: What about 10 o'clock at night? Are they still going to be able to watch NBC programming or is this idea of potentially giving that time back to the affiliates going to happen?

SHELL: We're evaluating a lot of things. I mean, when you look at the investment in Peacock, as I mentioned most of the investment is for our own programming putting it on Peacock, but if we're being prudent operators, which we try to be right.

If you're allocating a bunch of resources to one part of the business, you have to look at the allocation of resources to another’s. I don't think we're ready to make any decision on 10 o'clock or anything else.

FABER: When will you do that—

SHELL: We are looking to reallocate resources.

FABER: You are but do you know when you will come to a decision? Yes, no, given it’s been in the press?

SHELL: Whenever the numbers, whenever the numbers look, right now, we have a lot of great shows at 10 o'clock. We make a lot of money at 10 o'clock. We still have a lot of viewers at 10 o'clock. There's no question throughout the day as linear declines, you're going to have to make some tradeoffs and we'll be looking at that as our investors would want us to look at.

FABER: Yeah, well, we mentioned parks a couple of times but we haven't focused on it. Obviously it is one of the important growth components of the company. Perhaps not thought that way back when the deal was done, but it's a star. Can you continue to make the kind of investment that will generate the returns that you're looking for?

SHELL: Yeah, there's no question the parks business right now is just cranking. I mean, if you look at our domestic theme parks are way above where they were in 2019 here, approaching historic levels, we're taking share in Florida.

That's all with international visitors still way down from what they were prior. So, we still have some runway for international visitors when they come back. Internationally, this is gonna be the first quarter, the third quarter that we're actually profitable in Beijing. So even with lockdowns, even with travel restrictions, that park there is slowly steadily climbing—

FABER: I would assume it's still a slow I mean because—

SHELL: Sure, you can't travel from outside of Beijing into Beijing and everything but given all that, we're now generating enough visitors to to be profitable, so that's really promising for the future.

And what's really promising is the end of the third quarter was really strong in Japan and Osaka, which is one of our biggest parks.

And the most promising thing to me is it's being driven by the investment we made during the pandemic on a new Nintendo Land, which is fortunate because we also invested in building that in Hollywood, which is coming in the beginning of next year, coinciding with the launch of our Mario movie at Universal.

And then of course, we're building Epic in Orlando, our third park there which is going to be anchored by Nintendo. The theme park business we continue to invest during the pandemic and all that investment is paying off and really the growth in the theme park business is totally dependent on how much capital we want to allocate to the business but it's a great business.

FABER: It's a great business.

SHELL: Great business.

FABER: And the film business, how would you characterize that? Is that still a great business and how do you think about it? You mentioned earlier in terms of delivering things directly to the Peacock platform or continuing to first have them on Amazon, Netflix, and then ultimately on Peacock.

SHELL: So two things happened to the film business during the pandemic, right. The first thing that happened is windows finally collapsed, right?

The windowing scheme on films is now much different than it was going into the pandemic where you have a shorter theatrical then we do something called the PVOD window which is transactional where you could buy or rent it at home and then it goes to Peacock.

That construct you know of the of the windowing and combined with the fact that streamers really want movies, movies are driving platforms, because in my opinion, made the movie business economically better than it's been since the entire time I've been in the movie business and we have, have reacted to that by putting more capital into the movie business.

So during the pandemic, while everybody else was scaling back, by the way, we have the scale at our company to take a movie like “Minions” and not release it right away or sell it to a streamer and wait till the market recovers.

We did that while at the same time investing in our business. So we are making more movies because we believe in the business and we are also attracting the best filmmakers because of the model. We have the best distribution scheme, we have the best marketing in the business by far—

FABER: And you don’t think you need to send things directly to the Peacock platform perhaps to actually make that more robust. That that time, you know, needs to be even shrunk more?

SHELL: In the third quarter where we've just as I mentioned grown pretty robustly at Peacock, we had “Jurassic World,” we had “Minions” and we had “Black Phone,” three really good theatrical movies that all drove Peacock subscribers, all those stay on the platform in the fourth quarter.

And then we have “Nope,” the Jordan Peele movie that had a great summer and then we're doing a day in day movie with “Halloween” coming day in date with “Halloween” with theatrical and it’s tracking very well in theatrical.

So I think it really depends on the movie. For me, most movies are, feel like movies when they get a big, robust theatrical launch and then end up at Peacock a short time afterwards. That's what makes movies as opposed to just a long TV show.

But occasionally there's a movie like “Halloween” that you can be kind of kind of, you know, strategic about and put it on Peacock at the same time, but I think the movie business is great. I think our movie business in particular is very strong looking out at our slate and I think because we bought our rights that's going to contribute to the growth of Peacock going forward.

FABER: Right, you mentioned pulling some content off Hulu. Got to wrap up here, but I did want to get a sense from you.

Would we want to own all of Hulu if we could actually work that deal the other way, we own 33% now we being Comcast, or is that something that in 2024 you're going to say goodbye to?

SHELL: Well, you know, the the deal. The mechanism is there's a buy sell at the end of next year and our anticipation is going to be that Disney is going to pay us a lot of money—

FABER: It certainly sounded like that from having spoken to Chapek a few weeks ago—

SHELL: Which I watched and so it sounds like they they're going to buy it. Look as Brian said I think a couple of weeks ago, it's a great asset. If it was put on the auction block, it would fetch a high price, it would be a pretty robust auction.

We would want to participate in the auction, we like a lot of other people would want to own Hulu. That's not what we anticipate happening but it's a pretty valuable asset.

FABER: Well it could be some good money to spend on a lot of the other efforts you just discussed so—

SHELL: Thanks and thanks for taking the time here, David.

FABER: Jeff, pleasure to have you. Jeff Shell, of course CEO of NBCUniversal. Carl, over to you.