[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 

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


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 

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.


>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 

>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

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 

>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).

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