Time Magazine 2011 Annual Report Download - page 35

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If the costs of producing and marketing feature films continue to increase, it may be more difficult for a
film to generate a profit. The production and marketing of feature films is very expensive and has been
increasing in recent years. The trend toward producing more event films including franchise films (which often
entail higher talent costs for films later in the series) could result in even higher production costs. If production
and marketing costs continue to increase, it may make it more difficult for the segment’s films to generate a
profit. Also, if film production incentives, such as subsidies and rebates, currently offered in certain U.S. states
and international territories (particularly the United Kingdom) are reduced or discontinued, Warner Bros.’ capital
requirements for production would increase.
RISKS RELATING TO TIME WARNER’S PUBLISHING BUSINESS
The Publishing segment’s results of operations could be adversely affected as a result of additional
increases in postal rates, and its business and results of operations could be negatively affected by other
changes in postal service. Postage is a significant operating expense for the Publishing segment. Postal rates,
which have increased in recent years, are dependent on the operating efficiency of the U.S. Postal Service and on
legislative mandates imposed on the Postal Service. The Postal Service’s financial condition continues to
deteriorate, and in December 2011, the Postal Service announced plans to close approximately half of its mail
processing centers beginning in 2012, which will result in slower delivery of first class mail and periodical mail.
Legislation has been introduced in the U.S. House of Representatives and the U.S. Senate to implement various
structural reforms of the Postal Service to restore its financial solvency, which could result in additional increases
to the rates for periodicals class mail, local post office closures and decreases in or the elimination of Saturday
mail delivery. If there are significant increases in postal rates and the Publishing segment is not able to offset the
increases, they could have a negative impact on the segment’s results of operations. If significant post office and
mail processing center closures and mail delivery changes occur, they could adversely affect the segment’s
business and results of operations.
The Publishing segment could face increased costs and business disruption resulting from instability in
the U.S. wholesaler distribution channel. The Publishing segment operates a national distribution business that
relies on wholesalers to distribute its magazines to newsstands and other retail outlets. A small number of
wholesalers are responsible for a substantial percentage of the wholesale magazine distribution business in the
U.S. There is the possibility of consolidation among these major wholesalers and insolvency of or non-payment
by one or more of these wholesalers, especially in light of the economic climate and its impact on retailers.
Distribution channel disruptions can temporarily impede the Publishing segment’s ability to distribute magazines
to the retail marketplace, which could, among other things, negatively affect the ability of certain magazines to
meet the rate base established with advertisers. Continued disruption in the wholesaler channel, an increase in
wholesaler costs or the failure of wholesalers to pay amounts due could adversely affect the Publishing segment’s
operating income or cash flow.
A significant increase in the price of paper or significant disruptions in the Publishing segment’s supply
of paper would have an adverse effect on the segment’s business and results of operations.Paper represents a
significant component of the Publishing segment’s total costs to produce magazines. Paper is a commodity, and
its price has historically been volatile and may increase as a result of various factors, including:
• a reduction in the number of suppliers as a result of restructurings, bankruptcies and consolidations;
• declining paper supply as a result of paper mill closures; and
• other factors that generally adversely impact supplier profitability, including increases in operating
expenses caused by rising raw material and energy costs.
If paper prices increase significantly or the segment experiences significant paper supply channel
disruptions, the segment’s business and results of operations would be adversely affected.
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