John "Willkie" (note spelling, and I would think that someone with as difficult to spell a last name as yours would be sensitive to correctly spelling names) maintains that "no cable company in the United States has ever made a profit from operations ever." And, this John Willkie doesn't ever confuse operating revenues from actual profits. Exxon this year made more profit in a quarter than any company in history has ever made. To even put that in a posting where you try to equate profit with "operating revenues" (which, by the way, are not even the same terms vis a vis cable and oil companies) is ... breath-taking. I note that the reference to me was buried deep in the item. Somehow, I still found it. This is a good time to point to another obvious syntactical error of yours. In you Broadcast Engineering column of two months ago, you say that the code in firmware and the code in software is "all software." It's a breathtakingly ignorant assertion. Software means that it can be changed after deployment, and firmware cannot be changed, although the circuits housing the firmware can be replaced. If the ic vendor is still in busines and if they still have a business relationship with the equipment vendor. "It's all code." It shows you didn't understand the difference from 20 years ago, and the changes keep on coming, since the current state of the art is that "software" can be changed by the application at run-time (well after the code has been written) based on experience. Try that trick with firmware sometimes. And, just in case some nit-picker is emboldened: some software requires a run-time component, and some of those run-time components are implemented in firmware. I could go on, talking about the inherent differences between the Java Virtual Machine (model T) and the .Net framework 2.0 (Cadillac Seville) and how MS uses the framework to extend their reach into new areas, but I'll save that for later. With all due regards; John Willkie ----- 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 ---------------------------------------------------------------------- You can UNSUBSCRIBE from the OpenDTV list in two ways: - Using the UNSUBSCRIBE command in your user configuration settings at FreeLists.org - By sending a message to: opendtv-request@xxxxxxxxxxxxx with the word unsubscribe in the subject line.