Cable & Multichannel Business Operations

Getting Started Franchising

Cable systems must be franchised through local authority

Access to right of ways Early monopoly status (now defunct) Terms and conditions for operating

Early free-for-alls 1984 Cable Act constraints

Max fee: 5% of gross Renewals

1996 Act opens for competition

From CATV to Cable From mid 1970s, cable began

offering significant new channels Transformed business, refocussed

operations Multichannel Service Provider Compete with off-air, then DBS New revenue sources with ads

Growth & rise of Multi System Operators (MSOs)

Old Business Model

M a in te na n ce In s ta lla tion

E n g in e ering

C o m m . R e l.

B u s ine ss O p e ra tio ns

G e n e ra l M gr

Cable adds … Programming

What channels to add, tiering Local origination / Local access

Marketing / Promotion Combat churn on pay channels Sell new packages Coordinate with channel promotions Customer service

Cable Adds … Advertising

New channels offer local ad inserts Decisions on offering? Sales staff

As price & penetration grows, need greater reliability / repair Outsource installations?

Cable Org Chart

T yp ica l L o ca l C a b le S ys tem

C S R s A cc tg & B illing

A d m in

P ro du c tion

L o ca l

P ro g ram m ing

P ro m o tio ns

S a le s R e ps A d E xe cs

S a le s & M k tg

In s ta lle rs

L in e / S erv ice

H ea de nd

E n g in e ering

G e n e ra l M gr

Cable & MSOs Rise of MSOs

Growth in scale and scope, as move to suburbs, cities

Growth in profitability as value-added service

Inherent scale and scope efficiencies Cross-ownership with channels Advertising efficiencies for adjacent

systems

Cable MSO Org Chart

L eg a l F in an ce

R e g l M g rs.

D ire c to rs

S a le s & M k tg

R e g l M g rs

O p e ra tio ns

R & D /P la n n ing

C o rp . E ng in ee ring H u m an R e so u rces P u b lic A ffa irs

C O O

C h a irm a n/C E O

Cable MSO Concentration

1990 1995 2000(w/DBS)

2000(w/o DBS)

Top Share

24.0% 25.9% 19.1% 22.5%

Top 2 36.7% 42.1% 34.0% 40.1%

Top 4 45.6% 54.6% 52.7% 58.7%

Top 10 61.6% 73.2% 83.9% ~90%

Concentration Issues Diversity Issue

What’s important? Conduit or channels? Is bigger necessarily bad?

Most locales are monopoly anyway Control over prices

Power with programmers Power with advertisers Power with financing Internet implications

Special Issues - Debt & Predatory Practices Regulation – Ownership caps?

Cable Org Chart

T yp ica l L o ca l C a b le S ys tem

C S R s A cc tg & B illing

A d m in

P ro du c tion

L o ca l

P ro g ram m ing

P ro m o tio ns

S a le s R e ps A d E xe cs

S a le s & M k tg

In s ta lle rs

L in e / S erv ice

H ea de nd

E n g in e ering

G e n e ra l M gr

Cable Positions General Administration

General Manager Office Manager Personnel Customer Service Representatives

(CSRs) Dispatcher Staff

Programming Local Production

Cable Positions Sales & Marketing

Marketing Director Promotions Sales Manager (sale of system services)

Sales Reps Advertising Manager

Acct. Execs (Ad Sales) Traffic Manager

Cable Positions Engineering

Chief Tech Line Maintenance Service Bench

Installers Construction/Upgrade

Trends in Cable Growth in coverage and penetration

levels Growth in audience for cable

channels, along with growth in number of cable networks

Investment in fiber, conversion to digital

Rise of competition from DBS (others?)

Trends in Audience

Trends in Audience

From Cable to Broadband Digital

The current transition is from Multichannel video (TV plus) to broadband digital, offering Basic TV Additional Channels Interactive Services

Data/ISPs Telephony Interactive TV

Cable Revenue Sources(revenues in $million)

1996 1998 2000(est)

Avg. Basic Subs

62.8 (mil) 65.4 67.7

Basic Tiers 18395 21830 24445

Pay Tiers 4955 5084 5177

Local Ads 1662 1850 3128

PPV 647 627 1522

Home Shop 145 187 202

Adv. Serv 91 452 4238

Eqpt/Install 2055 2631 3029

Total 27950 32661 41741

Rev per sub 445 499 617

Cable Subscription Revs

0

5000

10000

15000

20000

25000

30000

1980 1985 1990 1995 2000

BasicPayTotal

Cable Advertising Revenues(revenues in $million)

0

2000

4000

6000

8000

10000

12000

1980 1985 1990 1995 2000

Local SpotCable NetRegl Sports

Cable Revenue Sources Subscription Revenues

Basic, Tiers Pay PPV Digital Audio Services

Advertising Local spot ads

Regional / National buys Local sources

Cable Revenue Sources Additional Sources

Equipment Sales and Service Installation/Service Fees Home Shopping Advanced Services

Telemetry (utilities, security, etc.) Paging/CAP (backhaul cells) Leased Access Fees Cable Modems / ISPs Telephony Commercial Production Etc.

Cable Expenses Operating Expenses -day to day

operations, “variable costs” Capital Expenses - long term

investment in infrastructure, “fixed costs”

Profits (if any)

Cable Operating Expenses Programming - 30-35%

Fees to networks (+64% since 1996) Copyright fees (~4% gross) local programming

Personnel - 20-25% Capital (depreciation) 15-20% Administrative15-20% Marketing 5-10%

Cable Operating Expenses Franchise Fees - 5% Pole Attachment - 3% Non-income Taxes & Fees - 2%

Capital Expenses Equipment Purchases

Infrastructure Customer premises equipment

Infrastructure Investment Reception equipment Transmission system Added service capacity

Debt Service

Capital Expenses Basic construction $30-35,000 per

mile Rebuilds somewhat less

Profits Different measures, based on

what’s included Cash Flow (doesn’t include debt

service) Operating Profit (does)

Average Profit Margins

Cash Flow OperatingProfits

1980s 35-40% 12-15%

1990s 40-45% 5-10%

2001 35-45% Losses- 10%

Cable Operating Expenses Franchise Fees (3-5% of gross revenues) Plant operating expenses (electricity,

maintenance, etc.) Programming Expenses Marketing & Promotion costs Customer Service costs Advertising costs General & Administrative Costs / Taxes