I spent part of last week in the big apple, doing two days of training with A & E Network. Those are the folks that do the History Channel, A & E Channel, and Bravo to name a few. The cable business is an interesting business. Very profitable right now but times are changing quickly with the online content coming on from Netflix, Hulu and others. This big advantage for these businesses is the duel revenue source that they enjoy. Cable networks get the advertising revenue like any TV network but they also get subscription revenue from cable and satellite providers. It’s creates a very high margin business model. Many of these networks enjoy a 30% to 40% operating margin. In a competitive world margins that high are rarely sustained for long periods of time. It will be interesting to see what happens as competitors come into this space.
The class was interesting. I had six Vice President level leaders in the meeting. This made it possible to really answer and discuss detailed questions. I always enjoy these more intimate sessions. They become more discussion than lecture which is a much better format for me. One interesting issue we looked at in this business is the amortization of programming. In the TV industry is a common practice to amortize programming over their perceived useful life. Different types of programming are amortized over different periods. Many of these program producers are rated on the margin against advertising revenue their products bring to the business. These margins are calculated by taking total ad revenue for a program minus the amortized programming costs divided by the total programming revenue. A simple equation provides a return on the program’s advertising revenue.
The issue with these programming leaders is the timing of the amortization. For some reality series we amortize for 18 to 36 months and on some original series the amortization may be just 12 months. The amortization period can greatly affect the initial return on a series. In cases where they have a hit that is fully amortized in the first year and still running the next year, the return on advertising is 100% since there is no amortization left. This creates some interesting behavior and programming strategies based on the accounting. The class really appreciated understanding this issue and how it relates to their production strategies.
In the evening on this trip I had a chance to have dinner with Norm and Elaine Brodsky old dear friends. Norm is an entrepreneur extraordinaire. He has a column in INC magazine that has run for over 10 years. Norm is always great for stories and to bounce ideas off of. Elaine and Norm are a great couple and really nice people. We went to a Greek place called Kellari on 44th near 5th Avenue. I recommend it.