Twenty-First Century Fox 2005 Annual Report Download - page 45

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NEWS CORPORATION
certain races through calendar year 2008. The Company still maintains certain exclusive NASCAR ancillary content rights through calendar year
2012. The costs of these sports contracts are charged to expense based on the ratio of each period’s operating profits to estimated total
remaining operating profit of the contract.
The profitability of these long-term national sports contracts, as discussed above, is based on the Company’s best estimates at June 30,
2005 of directly attributable revenues and costs; such estimates may change in the future, and such changes may be significant. Should
revenues decline from estimates applied at June 30, 2005, a loss will be recorded. Should revenues improve as compared to estimated
revenues, the Company will have a positive operating profit related to the contract, which will be recognized over the estimated remaining
contract term.
In general, the television broadcasting and multichannel video programming and distribution industries in the United States are highly
regulated by federal laws and regulations issued and administered by various federal agencies, including the Federal Communications
Commission (“FCC”). The FCC generally regulates, among other things, the ownership of media (including ownership by non-U.S. citizens),
broadcast and multichannel video programming and technical operations of broadcast and satellite licensees. Further, the United States
Congress and the FCC currently have under consideration, and may in the future adopt, new laws, regulations and policies regarding a wide
variety of matters that could, directly or indirectly, affect the operations and ownership of the Company’s U.S. media properties. Similarly,
changes in regulations imposed by governments in other jurisdictions in which the Company, or entities in which it has an interest, operate could
adversely affect the Company’s business and results of operations.
While the Company seeks to ensure compliance with federal indecency laws and related FCC regulations, the definition of “indecency” is
subject to interpretation and there can be no assurance that the Company will not broadcast programming that is ultimately determined by the
FCC to violate the prohibition against indecency. Such programming could subject the Company to regulatory review or investigation, fines,
adverse publicity or other sanctions, including the loss of station licenses.
Direct Broadcast Satellite Television
SKY Italia derives revenues principally from subscriber fees. The Company believes that the quality and variety of video, audio and interactive
programming, quality of picture, access to service, customer service and price are the key elements for gaining and maintaining market share.
SKY Italia’s competition includes companies that offer video, audio, interactive programming, telephony, data and other information and
entertainment services, including broadband Internet providers, digital terrestrial transmission (“DTT”) services, wireless companies and
companies that are developing new technologies.
During the fiscal year, competitive DTT services in Italy expanded to include pay-per-view offering of soccer games previously available
exclusively on the SKY Italia platform. The Company is currently prohibited from providing a DTT service under regulations of the European
Commission. In addition, the Italian government offers a subsidy on DTT decoders. As a result, DTT operators could entice potential SKY Italia
subscribers to their system.
SKY Italia’s most significant operating expenses are those related to acquiring entertainment, movie and sports programming and
subscribers and the production and technical expenses related to operating the technical facilities.
Magazines and Inserts
The Magazine and Inserts segment derives revenues from the sale of advertising space in free standing inserts, in-store promotional advertising,
subscriptions and production fees. Adverse changes in general market conditions for advertising may affect revenues. Operating expenses for
the Magazine and Inserts segment include paper costs, promotional, printing, retail commissions, distribution expenses and production costs.
Selling, general and administrative expenses include salaries, employee benefits, rent and other routine overhead.
Newspapers
The Newspapers segment derives revenues from the sale of advertising space and the sale of published newspapers. Adverse changes in
general market conditions for advertising may affect revenues. Circulation revenues can be greatly affected by changes in competitors’ cover
prices and by promotion activities. Operating expenses for the Newspapers segment include costs related to newsprint, ink, printing costs and
editorial content. Selling, general and administrative expenses include salaries, employee benefits, rent and other routine overhead.
The Newspapers segment’s advertising volume and the price of newsprint are the key uncertainties whose fluctuations can have a material
effect on the Company’s operating results and cash flow. The Company has to anticipate the level of advertising volume and newsprint prices in
managing its businesses to maximize operating profit during expanding and contracting economic cycles. Newsprint is a basic commodity and its
price is sensitive to the balance of supply and demand. The Company’s costs and expenses are affected by the cyclical increases and decreases
in the price of newsprint. The newspapers published by the Company compete for readership and advertising with local and national newspapers
and also compete with television, radio and other communications media in their respective locales. Competition for newspaper circulation is
based on the news and editorial content of the newspaper, cover price and, from time to time, various promotions. The success of the
newspapers published by the Company in competing with other newspapers and media for advertising depends upon advertisers’ judgments as
to the most effective use of their advertising budgets. Competition for advertising among newspapers is based upon circulation levels, reader
demographics, advertising rates and advertiser results. Such judgments are based on factors, such as cost, availability of alternative media,
circulation and quality of readership demographics.
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