Twenty-First Century Fox 2007 Annual Report Download - page 42

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
The television stations owned by the Company compete for programming, audiences and advertising revenues with other tele-
vision stations and cable networks in their respective coverage areas and, in some cases, with respect to programming, with other
station groups, and in the case of advertising revenues, with other local and national media. The competitive position of the tele-
vision stations owned by the Company is largely influenced by the strength of FOX and MyNetworkTV, and, in particular, the prime-
time viewership of the respective network, as well as the quality of the syndicated programs and local news programs in time
periods not programmed by FOX and MyNetworkTV.
In Asia, STAR’s channels are primarily distributed to local cable operators or other pay-television platform operators for dis-
tribution to their subscribers. STAR derives its revenue from the sale of advertising time and affiliate fees from these pay-television
platform operators.
The Company’s U.S. cable network operations primarily consist of the Fox News Channel (“Fox News”), the FX Network (“FX”)
and the Regional Sports Networks (“RSNs”). The Company’s international cable networks consist of the Fox International Channels
(“FIC”) with operations primarily in Latin America and Europe.
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 number of its subscribers. Affiliate fee revenues
are net of the amortization of cable distribution investments (capitalized fees paid to a cable operator or DBS operator to facilitate
the launch of a cable network). The Company defers the cable distribution investments and amortizes the amounts on a straight-line
basis over the contract period. Cable television and DBS are currently 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 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 broadcast networks, tel-
ephony and data transmission. A primary focus of competition is for distribution of the Company’s cable network channels that are
not already distributed by particular cable television or DBS systems. For such program services, 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.
The most significant operating expenses of the Television segment and the Cable Network Programming segment are the
acquisition and production expenses related to programming and the production and technical expenses related to operating the
technical facilities of the broadcaster or cable network. Other expenses include promotional expenses related to improving the
market visibility and awareness of the broadcaster or cable network and its programming. Additional expenses include 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, a contract with Major League Baseball (“MLB”) through calendar
year 2013 and a contract for the Bowl Championship Series (“BCS”) through fiscal year 2010. These contracts provide the Company
with the broadcast rights to 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 profit to estimated total operating profit for the remaining term of
the contract.
The profitability of these long-term national sports contracts is based on the Company’s best estimates at June 30, 2007 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, 2007, a loss may be recorded. Should revenues improve as compared to esti-
mated revenues, the Company may have an improved operating profit related to the contract, which may 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 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 program-
ming 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
The DBS segment’s operations consist of SKY Italia, which provides basic and premium programming services via satellite and broad-
band directly to subscribers in Italy. SKY Italia derives revenues principally from subscriber fees. The Company believes that the qual-
ity 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, inter-
active 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 media technologies.
In fiscal 2005, 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 pay DTT service under regulations of
the European Commission. In addition, the Italian government previously offered a subsidy on the purchase of DTT decoders.
SKY Italia’s most significant operating expenses are those related to the acquisition of entertainment, movie and sports
programming and subscribers and the production and technical expenses related to operating the technical facilities. Operating
NEWS CORPORATION 2007 Annual Report 41