[opendtv] Re: DTT in the US

  • From: John Willkie <johnwillkie@xxxxxxxxxxxxx>
  • To: opendtv@xxxxxxxxxxxxx
  • Date: Fri, 13 Jan 2006 19:13:35 +0000 (GMT+00:00)

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 

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


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 

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 

Now explain why these broadcasters need subscriber fees from the cable and DBS 

>>  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 

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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