Twenty-First Century Fox 2006 Annual Report Download - page 42

Management’s Discussion andAnalysisofFinancial Condition and
Results of Operations (CONTINUED)
During fiscal 2005, competitive DTT services in Italy expanded to include pay-per-view offering of soccer games pre-
viously available exclusively on the SKY Italia platform. The Company is currently prohibited from providing aDTTservice
under regulations of the European Commission.Inaddition, the Italian government previously offered a subsidy on the
purchase of DTT decoders.
SKY Italia’s most significant operating expenses are those related to acquiring entertainment, movie and sports
programming and subscribers and the production andtechnical expenses related to operating the technical facilities. Oper-
ating expenses related to sports programming are generally recognized over the course of the related sport season, which
may cause fluctuations in the operating results of this segment.
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 sal-
aries, 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. Competi-
tion for circulation is based upon the content of the newspaper, service and price. Adverse changes in general market con-
ditions 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, circulation andtheprice of newsprint are the keyuncertainties whose
fluctuations can have amaterial effect on the Company’s operating results and cash flow. The Company has to anticipate
the level of advertising volume, circulation andnewsprint 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 media alternatives in their respective locales. Competition
for newspaper circulation is based on the news and editorial content of the newspaper, cover price and, from timeto time,
various promotions.Thesuccess of the newspapers published by the Company in competingwith other newspapersand
media for advertising depends upon advertisers’ judgments as to the most effective use of their advertising budgets. Com-
petition for advertising among newspapers is based upon circulation levels, readership levels, reader demographics,
advertising rates and advertiser results. Such judgments are based on factors, such as cost, availability of alternative media,
circulation andquality of readership demographics.
Book Publishing
The Book Publishing segment derives revenues from the sale of general and children’s books in the United States and inter-
nationally. The revenues and operating results of the Book Publishing segment are significantly affected by the timing of
the Company’s releases and the number of its books in the marketplace. The book publishing marketplace is subject to
increased periodsof demand in the summer months and during the end-of-year holiday season. Each book is aseparate and
distinct product, and its financial success depends upon many factors, including public acceptance.
Major new title releases represent a significant portion of the Company’s sales throughout the year. Consumer books
are generally sold on afully returnable basis, resulting in the return of unsold books. In the domestic and international
markets, the Company is subject toglobal trends and local economic conditions.
Operating expenses for the Book Publishing segment include costs related to paper, printing, authors’ royalties, edito-
rial, art and design expenses. Selling, general and administrative expenses include promotional expenses, salaries, employee
benefits, rent and other routine overhead.
The book publishing business operates in ahighly competitive market and has been affected by consolidation trends.
This market continues to change in response to technological innovations and other factors. Recent years have brought a
number of significant mergers among the leading book publishers. The book superstore remains a significant factor in the
industry contributing to the general trend toward consolidation in the retail channel.There have also been anumber of
mergers completed in the distribution channel. The Company must compete with other publisherssuch as Random House,
Penguin Group, Simon &Schuster and Hachette Livre, for the rights to works by well-known authors and public person-
alities. Although the Company currently has strong positions in each of its markets, further consolidation in the book pub-
lishing industry could place the Company at a competitive disadvantage with respect toscale and resources.
42 NEWS CORPORATION