Twenty-First Century Fox 2008 Annual Report Download - page 54

NEWSCORP
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Filmed Entertainment
The Filmed Entertainment segment derives revenue from the production and distribution of feature motion pictures and television series. In
general, motion pictures produced or acquired for distribution by the Company are exhibited in U.S. and foreign theaters, followed by home
entertainment, video-on-demand and pay-per-view television, premium subscription television, network television and basic cable and syndicated
television exploitation. Television series initially produced for the networks and first-run syndication are generally licensed to domestic and
international markets concurrently and subsequently released in seasonal DVD box sets. More successful series are later syndicated in domestic
markets. The length of the revenue cycle for television series will vary depending on the number of seasons a series remains in active production
and, therefore, may cause fluctuations in operating results. License fees received for television exhibition (including international and U.S.
premium television and basic cable television) are recorded as revenue in the period that licensed films or programs are available for such
exhibition, which may cause substantial fluctuations in operating results.
The revenues and operating results of the Filmed Entertainment segment are significantly affected by the timing of the Company’s theatrical
and home entertainment releases, the number of its original and returning television series that are aired by television networks and the number
of its television series in off-network syndication. Theatrical and home entertainment release dates are determined by several factors, including
timing of vacation and holiday periods and competition in the marketplace. The distribution windows for the release of motion pictures
theatrically and in various home entertainment formats have been compressing and may continue to change in the future. A further reduction in
timing between theatrical and home entertainment releases could adversely affect the revenues and operating results of this segment.
The Company enters into arrangements with third parties to co-produce many of its theatrical productions. These arrangements, which are
referred to as co-financing arrangements, take various forms. The parties to these arrangements include studio and non-studio entities, both
domestic and foreign. In several of these agreements, other parties control certain distribution rights. The Filmed Entertainment segment records
the amounts received for the sale of an economic interest as a reduction of the cost of the film, as the investor assumes full risk for that portion of
the film asset acquired in these transactions. The substance of these arrangements is that the third-party investors own an interest in the film
and, therefore, receive a participation based on the respective third-party investor’s interest in the profits or losses incurred on the film. Consistent
with the requirements of Statement of Position 00-2, “Accounting by Producers or Distributors of Films,” the estimate of a third-party investor’s
interest in profits or losses incurred on the film is determined by reference to the ratio of actual revenue earned to date in relation to total
estimated ultimate revenues.
Operating costs incurred by the Filmed Entertainment segment include: exploitation costs, primarily theatrical prints and advertising and
home entertainment marketing and manufacturing costs; amortization of capitalized production, overhead and interest costs; and participations
and talent residuals. Selling, general and administrative expenses include salaries, employee benefits, rent and other routine overhead.
The Company competes with other major studios, such as Disney, Paramount, Sony, Universal, Warner Bros., and independent film producers
in the production and distribution of motion pictures and DVDs. As a producer and distributor of television programming, the Company competes
with studios, television production groups and independent producers and syndicators, such as Disney, Sony, NBC Universal, Warner Bros. and
Paramount Television, to sell programming both domestically and internationally. The Company also competes to obtain creative talent and story
properties which are essential to the success of the Company’s filmed entertainment businesses.
Television and Cable Network Programming
The Company’s U.S. television operations primarily consist of the FOX Broadcasting Company (“FOX”), MyNetworkTV, Inc. (“MyNetworkTV”) and,
as of June 30, 2008, the 35 television stations owned by the Company. The Company’s international television operations consist primarily of
STAR Group Limited (“STAR”).
The U.S. television broadcast environment is highly competitive and the primary methods of competition are the development and
acquisition of popular programming. Program success is measured by ratings, which are an indication of market acceptance, with the top rated
programs commanding the highest advertising prices. FOX and MyNetworkTV compete for audience, advertising revenues and programming with
other broadcast networks, such as CBS, ABC, NBC and The CW, independent television stations, cable program services, as well as other media,
including DVDs, video games, print and the Internet. In addition, FOX and MyNetworkTV compete with the other broadcast networks to secure
affiliations with independently owned television stations in markets across the country.
The television stations owned 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 to programming, with other station groups, and in the case
of advertising revenues, with other local and national media. The competitive position of the television 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 distribution 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.
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