[opendtv] Re: DTT in the US
- From: Craig Birkmaier <craig@xxxxxxxxx>
- To: opendtv@xxxxxxxxxxxxx
- Date: Fri, 13 Jan 2006 10:15:35 -0500
At 12:21 PM -0500 1/12/06, Manfredi, Albert E wrote:
>It's odd that you single out the broadcast industry.
>I simply disgree with this recurring thread of yours.
>The congloms, the top MSOs, PC companies, auto
>companies, cleaning supply companies, soft drink
>companies, they all fit this description. There is
>hardly a large industry in the industrialized world
>that doesn't fit this description.
You mentioned the oil industry. According to this story
[http://www.allianceibm.org/platskybu092505.shtml], the oil industry
operating profit margins for their second quarter in 2005 were:
>Exxon Mobil's operating margins are 15 percent; BP, 9 percent;
>Chevron, 11 percent; Valero, 5.9 percent; and Amerada Hess, 8.1
>percent.
In the PC industry, most companies are operating on razor thin
margins. IBM has already dumped their PC division and industry
analysts say that 2-3 of the top ten vendors will leave this space by
2007. The profits in the PC industry flow primarily to Microsoft and
Intel. Microsoft is a monopoly, while Intel controls 80% of unit
sales and 90% of the revenues in the global PC business.
Microsoft had an operating margin of 41.8% in the fiscal year ended
in June of 2005. To be fair, several other large software foundries
also had very high operating margins: Oracle's were 38.1; Adobe,
36.2; and SAP, 26.9. Perhaps there are some parallels in the software
business, if we consider TV content to be software...
Intel has operating margins in the range of 30%, while their chief
competitor, AMD lost money in three of the past four years.
John Wilkie will try to tell you that the cable MSOs have never made
any money. This is not true. According to this story
http://www.broadband-pbimedia.com/cfaxdb/archives/databriefs080403.htm
Between 1990 and 2002 operating revenues for the ~10,000 U.S. cable
systems increased from $17.3 billion in 1990 to $48.2 billion in
2002. But operating margins declined from 43% in 1990 to 36.9% in
2002.
I believe these margins are increasing again as the cable industry
begins to cash in on the more than $60 billion spent in system
upgrades during the period covered by the report above.
The soft drink industry? In 2002 Coke had a net profit margin of 15%,
Pepsi was 13%.
Bottom line, when an industry has one or two very powerful players,
even with robust marketplace competition, profit margins may be
higher that the average for all businesses. Whe there are only a few
players and there is little or no marketplace competition, the
margins can soar.
You might look at the profit margins for the networks or the media
conglomerates as well. You would find the numbers are typically well
below 10%. But these companies have many ways to hide income, and
they also have businesses with higher risk levels that can bring down
the whole. So the networks may show operating profits in the range of
5-7% while the network O&O's are operating with net profit margins in
the range of 40-50%. At Disney, ESPN contributes 30-35% of the
operating profit for the entire company. They can do this because of
subscriber fees, which account for approximately more than $1.5
billion annually (ad revenues are on top of this).
Yes, businesses are suppose to make profits. My point is that the
profit levels in the media business are significantly higher that the
average for all businesses, and the reason is the lack of competition
because of political gerrymandering. And the profit levels for
broadcasters, are significantly higher than the average for all
businesses - in the top 50 markets they are in the 25-35% range with
some groups operating duopolies with profit margins above 50%.
Now explain why these broadcasters need subscriber fees from the
cable and DBS operators...
>
>> Channel 4 makes money the same way that advertiser
>> supported broadcasts have made money for nearly a
>> century. They charge advertisers for the numbers
>> of people who are watching. They may also make
>> money from the syndication of any programming that
> > they create for Channel 4. For this discussion
>> however, the answer is simple: Channel 4 will gain
>> enough new viewers via carriage by Freeview to
>> offset the carriage costs.
>>
>> Now explain to me why U.S. broadcasters need to be
>> compensated for carriage of their signals when in
>> reality that carriage is allowing the broadcasters
>> to charge more for their ads?
>
>Who gets the ad revenue? That's what all of this
>revolves around.
Which ad revenues? There are two huge pots: The ads inserted by the
networks into the shows they distribute via cable and or broadcast
affiliates (>$15 billion in revenues); and the ads inserted by the
actual broadcast stations, including the network O&O's and all other
stations, whether affiliated with a network of independent (>$15
billion in revenues).
The networks spend a higher proportion of their ad revenues for
content; as Mark points out, theymay even lose money on the first run
of shows on the network, assuming that they will make their profits
from syndication of these shows. Syndication revenues are not
included in the more than $35 billion in revenues generated by the
networks and broadcasters each year.
At the station level, broadcasters get the ad revenue. At one time
they also got compensation from the networks for carriage, but this
is largely history today. In fact, in some cases the stations are
paying the networks for key programming like NFL football. They also
pay for the syndicated programming that they run when not airing
network programming, and for operations including news.
Ultimately, the most obscene margins are collected by those who suck
from the small end of the mass media funnel. This is the reason that
athletes can earn more than $200,000 on a Sunday afternoon, or an
actor/actress can earn 10 million or more for a movie, or $1 million
per episode of a TV series.
When there is this much money (profits) on the table, everyone wants,
and gets a piece of the action, and things keep spiraling upward.
>If a US cable company is paid by ABC to carry ABC
>content, then I would fully expect ABC to get *all*
>the ad revenue.
ABC gets all ad revenues for the commercials they insert into
broadcast and cable network programming. They do not get the revenues
from the ads inserted by broadcast affiliates into the ABC network
(unless there is a specific reverse compensation agreement as is the
case today for some sports programming). In many cases this reverse
compensation is handled by reducing the number of ads that the
stations get to insert into the network programming, giving this
inventory back to the networks.
The cable companies PAY ABC or their affiliates to carry the
broadcast network and the cable networks owned by Disney including
ABC Family, The Disney Channel, The Soap Opera network, etc. In
recent years this has been in the form of in-kind compensation;
typically carriage of additional networks with associated subscriber
fees, or in the form of ads that the cable companies run on other
channels to promote ABC/Disney shows. As these re-transmission
consent agreements are re-negotiated, increasingly the networks and
stations are opting for cash from the cable and DBS systems, which
the cable systems pass along as subscriber fees.
> If ABC also transmits that content
>through its O&Os, of course ABC would also get all
>the ad revenue.
Correct.
>If ABC transmits that content OTA
>via affiliated stations, then those affiliated
>stations could be compensated much like the cable
>company -- they could be compensated by ABC, and
>then all the ad revenue goes to ABC, for that ABC
>content. I think this might be the cleanest model.
At one time the stations receive cash payments from the networks for
carriage. The networks have NEVER paid cable or DBS for carriage.
Stations get a limited number of ads that they can insert into
network programming during "station breaks." This is the primary form
of compensation for the station, however in some cases the stations
are now giving up some of these ad avails, or paying the networks for
important content like NFL football.
>If ABC distributes Warner Brothers content, then I
>would expect ABC to have made an arrangement with WB.
>ABC would be compensated as always, but they would
>then turn over a portion of the profits to WB.
This is quite simple. Both stations and networks pay for the content
they run. They pay a lot.
The rights fees for major league sports run into the billions per
year. The rights fees for college sports are also very large.
For first run network programming (dramas and episodic TV) the rights
fees are also very large. During the last season of Friends, NBC was
paying more than $3 million per episode.
For many years, the networks were limited in the percentage of the
content they offer that was owned by that network. These (FYN/SYN)
FCC regulations were aimed at curbing the power of the networks and
to help independent producers get their content onto the networks.
The FYN/SYN rules were dropped in the early 90's, and now the
congloms are highly vertically integrated. The network now either
produce the content themselves, or require a percentage of the back
end syndications profits when they buy content from other companies.
Most of the profits from popular TV dramas and sitcoms come from
syndication. The networks can afford to lose a little on the first
run, which popularizes the program, because they will make it back
when the program is syndicated. This was more prevalent in the days
when one show could anchor the entire evening, keeping viewers around
for adjacent shows. But this does not work very well in todays 500
channel universe, so more an more, shows are forced to stand on their
own. This also accounts for the relatively low profit margins for the
networks - the congloms just take the profits out of the division
that sells the content to the network division.
>I see nothing preventing this model from being used
>in the US? And this seems to be the way Channel 4
>works with respect to Freeview. This is how a conglom
>would see the most direct benefit of using the OTA
>distribution medium, either its own O&Os, affiliates,
>or even independents.
Well first, you need to use the correct model. I have described the
realities of how the U.S. system really works.
Then you need to look at the difference between the U.S. and the U.K.
Here we have a distorted situation due to the lack of real markets.
Moeny is moved around in creative ways that obscure the reality of
who is paying for what. In the U.K it is more obvious, as most of the
revenues come from the ads, and subscriber fees for content that is
FOTA or on Freview are uncommon (I do not know if Channel 4 gets
compensation from NTL for carriage on the U.K. cable system).
>
>On the other hand, if the MSO gets some or all of the
>ad revenue, then obviously money has to be transferred
>differently. If ABC allows the MSO to collect ad
>revenue while airing ABC content, some of that ad
>revenue MUST go to ABC.
They do not. Cable is not allowed to insert ads into broadcast
content. They do have the ability to insert ads into most cable
networks.
>
>So as I said, one can make a perfectly valid case for
>the MSO paying the conglomerate, or the conglom paying
>the MSO. I favor the first approach, where the conglom
>gets the revenues and in turn compensates the
>different distribution chains.
I hope that the discussion above helps you to understand the way
things work in the U.S.
The bottom line is what is important. Everyone that touches mass
media TV content is making a ton of money, regardless of how the
compensation flows between parties. And that ton of money is coming
from the consumers who pay directly in the form of subscriber fees,
and indirectly in the cost of the ads that are embedded in the
products we buy.
>
>BUT I also understand that "distribution chains" like
>cable and DBS see themselves as media companies. They
>want to appeal directly to potential subscribers. And
>in order to achieve this mass appeal, THEY have to seek
>out the best content, rather than passively sitting by
>waiting for the congloms to come looking for them. So
>these MSOs likely prefer to control matters, by paying
>the congloms rather than vv. And there you have it. Of
>course, now the congloms have leverage to demand a
>piece of the MSO action, and things get complicated.
Get a clue Bert. The congloms have all of the leverage. The cable and
DBS systems have the direct relationship with the viewers, and the
billing systems that collect the subscriber fees for the congloms.
The cable and DBS systems are happy to play this game because there
is no real competition between the various distribution channels.
Everytime subscribe fees go up, the cable and DBS companies tack on a
little to increase their margins as well.
This will continue as long as consumers put up with it.
>
>This is what I see you missing. If there's anything
>less than competitive, it is the existence of very
>few competing local distribution companies, and the
>fact that 80 to 85 percent of households gladly let
>themselves get sucked in. But let the prices keep
>rising, and the appeal of a freeview in the US will
>increase.
IF it were possible to put together a Freeview like system in the
U.S., it would likely do better than Freview in the U.K. Who would
not spend about $100, one time, to get out from under a $40/mo. bill?
But it cannot happen here because there is no spectrum to deliver
such a service. The companies that currently occupy the available
spectrum have no desire to kill the goose that keeps laying these
golden eggs. They are more than content to allow the cable and DBS
systems to collect subscriber fees for them.
You are correct, the appeal of a Freeview system will keep growing.
But the only way it will happen is if consumers make a huge stink
about it and get the government out of the business of propping up
these monopolies and oligopolies.
>
>> What would happen if the broadcasters - not the
>> media conglomerates with which they are affiliated -
>> decided to compete with cable and work together to
>> create a service similar to Freeview, with 30 or more
>> of the most popular channels that are available via
>> both FOTA and subscriptions services?
>
>You mean, if broadcasters formed an alliance and
>created top-notch content that could compete with the
>major conglomerates? That would be great, but it would
>simply result in a new conglomerate. I have no problem
>at all with the five congloms competing against each
>other. I doubt that broadcasters could individually
>develop content to compete with the sheer volume of
>material from the five congloms, 24 hours a day. It's
>all about scale. This is a mass medium.
No. I mean if they would actually use the spectrum to compete. They
would have to pay for the content out of the ad revenues they could
generate from the system, just like Freeview. And they would have to
buy the content that people are already watching, just like Freeview.
It is highly unlikely that local broadcasters can compete in the
content business, although several large station groups have moved
successfully into the content business. Scripps Howard has done quite
well with the Food Network, HGTV, Fine Living, etc.
As you say, this is a mass medium, so you need to deliver the stuff
that the masses want to see.
The problem is that there is no competition among the various
distribution systems in the U.S. OTA broadcasters are almost totally
reliant on cable and DBS to reach their customers; and are happy to
let them collect subscriber fees, which they cannot collect from the
holdouts who still rely on an antenna. If you want multi-channel TV
in the U.S. you are going to pay $30-40 month. At $20/mo with about
20 channels, USDTV is not competitive.
In the U.S. competition is going to come from the Internet, with
companies like Google, Yahoo, and Apple leading the charge. Buying
content on an ala carte basis is not going to be cheaper in the short
run - the deck is stacked against them. But in the long run this new
channel of distribution will allow independent producers to bypass
the congloms, and that is what will eventually undermine the current
system.
>
>I think a good way to make OTA work is to work toward
>a model where the content creator gets the revenues, and
>then if it uses distribution media other than its own
>OTA network, it compensates these other media with part
>of those revenues.
You're close Bert. The ultimate distribution system is where the
content owner deals directly with the consumer, paying a fee to the
distributor for their services (i.e carriage, collection of fees, and
customer service).
Regards
Craig
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