Twenty-First Century Fox 2008 Annual Report Download - page 55

NEWSCORP
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
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, telephony 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, 2008 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, 2008, a loss may be recorded. Should revenues improve as compared to estimated 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 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
The DBS segment’s operations consist of SKY Italia, which provides basic and premium programming services via satellite and broadband directly
to subscribers in Italy. 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 media technologies. The Company is currently prohibited from providing a pay DTT service
under regulations of the European Commission.
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 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 marketing products and
services, 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, promotional, printing, retail commissions, distribution and
production costs. Selling, general and administrative expenses include salaries, employee benefits, rent and other routine overhead.
Newspapers and Information Services
The Newspapers and Information Services segment derives revenues primarily from the sale of advertising space, the sale of published
newspapers, and subscriptions. 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 promotional activities.
Operating expenses for the Newspapers and Information Services 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 and Information Services segment’s advertising volume, circulation 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, circulation 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, Internet and other media alternatives in
their respective locales. Competition for newspaper circulation is based on the news and editorial content of the newspaper, service, cover price
54 NEWSCORP 2008 Annual Report