Twenty-First Century Fox 2006 Annual Report Download - page 41

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Management’s Discussion andAnalysisofFinancial Condition and
Results of Operations (CONTINUED)
programming promotion, in order to sell advertising at profitable rates. FOX competes for audience, advertising revenues
and programming with other broadcast networks, such as CBS, ABC, NBC, UPN and The WB, independent television sta-
tions, cable program services, as well as other media, including DBS television services, DVDs, video games, print and the
Internet. In addition, FOX competes with the otherbroadcast networks to secure affiliations with independently owned
television stationsinmarkets acrossthecountry. (See Other Recent Business Developments below for discussion of the
announced UPN and The WB network combination and the launch of MyNetworkTV.)
The television stationsowned by the Company compete for programming, audiences and advertising revenues with
other television stations and cable networks in their respective coverage areas and, in some cases, with respect toprogram-
ming, with other station groups, and in the case of advertising revenues, with other local and national media. The com-
petitive position of the television stationsowned by the Company is largely influenced by the strength of FOX, and, in
particular, the primetime viewership of FOX, as well as the quality of the syndicatedprograms and local news programs in
time periods not programmed by FOX.
Generally, the Company’s cable networks which target various demographics,derive a majority of their revenues from
monthly affiliate fees received from cable television systems and DBS operators based on the numberof its subscribers, net
of the amortization of cable distribution investments (capitalized fees paid to acable operator or DBS operator to facilitate
the launch of acable network). The Company defers the cable distribution investments and amortizes the amounts on a
straight-line basis over the contract period. Cable television andDBSarecurrently the predominant means of distribution
of the Company’s program services in the United States. Internationally, distribution technology varies region by region.
The Company’s cable networks, including the Fox News Channel (“Fox News”), the FX Network (“FX”), and the
Regional Sports Networks (“RSNs”), compete for carriage on cable television systems, DBS systems and other distribution
systems with other program services, as well as other uses of bandwidth, such as retransmission of free over-the-air broad-
cast networks, telephony and data transmission. A primary focus of competition is for distribution of the Company’s cable
network channels that are not already distributed within a particular cable television or DBS system. For such program serv-
ices, distributors make decisions on the use of bandwidth based on various considerations, including amounts paid by
programmers for launches, subscription fees payable by distributors and appeal to the distributors’ subscribers.
In Asia, STAR’s programming is primarily distributed via satellite to local cableoperators or other pay television plat-
form operators for distribution to their subscribers. STAR derives its revenue from the sale of advertising time and affiliate
fees from these pay television platform operators.
The most significant operating expenses of the Television segmentandtheCable Network Programming segment are
the acquisition and production expenses related to programming and the production andtechnical expenses related to
operating the technical facilities of the broadcasterorcable network. Other expenses include promotional expenses related
to improving the market visibilityandawareness of the broadcaster or cable network and sales commissions paid to the
in-house advertising sales force, as well as salaries, employee benefits, rent and other routine overhead expenses.
The Company has several multi-year sports rights agreements, including contracts with the National Football League
(“NFL”) through fiscal 2012, contracts with the National Association of Stock Car Auto Racing (“NASCAR”) for certain races
and exclusive rights for certain ancillary content through calendar year 2014 and acontract with Major League Baseball
(“MLB”) through calendar year 2013. These contracts provide the Company with thebroadcast rightsto certain national
sporting events during their respective terms. 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 is based on the Company’s best estimates at June 30, 2006 of directly attributable rev-
enues and costs; such estimates may change in the future, and such changes may be significant. Should revenues decline
from estimates applied at June 30, 2006, aloss may be recorded. Should revenues improve as compared to estimated rev-
enues, the Company will have an improved operating profit related to the contract, which will be recognized over the
estimated remaining contract term.
While the Company seeks to ensure compliance with federal indecency laws and related Federal Communications
Commission (“FCC”) regulations, the definition of “indecency” is subject tointerpretation andthere 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 keyelements 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.
ANNUAL REPORT 41