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«2nd Edition BROADCAST CABLE FINANCIAL MANAGEMENT ASSOCIATION Understanding Broadcast and Cable Finance This page intentionally left blank ...»

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Broadcast &

Cable Finance

A Primer for Nonfinancial Managers

2nd Edition


Understanding Broadcast and Cable Finance

This page intentionally left blank


Broadcast and

Cable Finance

A Primer for the Nonfinancial Manager

Broadcast Cable Financial Management Association (BCFM)

Edited by Walter McDowell, Ph.D., and Alan Batten

First published 2008

This edition published 2013 by Focal Press 70 Blanchard Road, Suite 402, Burlington, MA 01803 Simultaneously published in the UK by Focal Press 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Focal Press is an imprint of the Taylor & Francis Group, an informa business Copyright © 2008 by Taylor & Francis.

All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers.

Notices Practitioners and researchers must always rely on their own experience and knowledge in evaluating and using any information, methods, compounds, or experiments described herein. In using such information or methods they should be mindful of their own safety and the safety of others, including parties for whom they have a professional responsibility.

To the fullest extent of the law, neither the Publisher nor the authors, contributors, or editors, assume any liability for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions, or ideas contained in the material herein.

Library of Congress Cataloging-in-Publication Data Understanding broadcast and cable finance : a primer for the nonfinancial manager / Broadcast Cable Financial Management Association (BCFM) ; edited by: Walter McDowell and Alan Batten.

p. cm.

Includes bibliographical references and index.

ISBN-13: 978-0-240-80958-8 (pbk. : alk. paper) 1. Broadcasting–United States–Finance.

2. Cable television–United States–Finance. 3. Broadcasting–United States– Management. 4. Cable television–United States–Management. I. McDowell, Walter.

II. Batten, Alan. III. Broadcast Cable Financial Management Association.

HE8689.8.U53 2008 384.54’30681–dc22 2007044889 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library.

ISBN: 978-0-240-80958-8 (pbk) Contents vii Foreword xi Introduction to the Second Edition Part I Chapter 1 Introduction to Broadcasting and Cable 3 Timothy Pecaro and John S. Sanders Chapter 2 The Role of the Financial Manager and Other Personnel 15 Leslie Hartmann Chapter 3 Understanding Financial Statements 23 Glenn Larkin as Updated by William Mangum Chapter 4 Revenue 39 Trila Bumstead, Joyce Lueders, and Fidel Quiralte Chapter 5 Expenses 49 Trila Bumstead, Joyce Lueders, and Fidel Quiralte Chapter 6 Financial Systems for Broadcasting and Cable 61 Calvin Lyles, Jr., and Bruce Lazarus Chapter 7 Capital Assets 77 Ronald Rizzuto, Ph.D., and Leslie Hartmann

–  –  –

Chapter 9 Cash Flow Measures and Reports 99 Anthony Vasconcellos Part II Chapter 10 Sarbanes-Oxley and Internal Controls 107 Mary M. Collins Chapter 11 Strategic Planning and Budgeting 115 Laura James and Andrew Kober

–  –  –

Chapter 12 Credit and Collection Administration 123 Peter F. Szabo — Revised by C. Robin Szabo Chapter 13 Trade and Barter Transactions and Related Accounting 135 Laura Daigle and John Kampfe Chapter 14 Music Licensing and Syndication Fees 149 Mary M. Collins Chapter 15 Taxation in Brief 163 J. Michael Hines, Esq., and Geoffrey J. Christian Chapter 16 Financial and Accounting Considerations for Broadcast and Cable Acquisitions 173 John S. Sanders

–  –  –

On a hot August afternoon in 1922, Mr. H. M. Blackwell, representing the Queensboro Real Estate Corporation, stood before a microphone within the studios of radio station WEAF in New York City, and read a ten-minute script inviting audiences to visit his new suburban housing development in nearby New Jersey. Within moments after the announcement, the developer’s office began receiving dozens of phone calls from people who had listened to the broadcast. Most historians credit this episode as the first known broadcast commercial.

Simultaneously, young men such as William S. Paley and David Sarnoff recognized the commercial viability in this newfangled wireless source of entertainment.

Sarnoff had become famous in 1912 for staying at his Marconi wireless set for more than 24 hours to take down the names of the RMS Titanic’s survivors. And Paley convinced his cigar-manufacturing father that if radio could sell real estate, it would certainly sell cigars. From those inauspicious starts, today’s market-driven amalgam of broadcasting and cable was born.

The obvious success of these ventures and those of other daring businesspeople willing to experiment with this new medium led to the basic advertising business model that would endure for decades to come. Unlike most of the rest of the world, which advocated serious government involvement in the ownership and operation of stations, the founders of U.S. broadcasting preferred an enterprise that was not a government agency, but a private business. And, as the saying goes, the rest is history.

The business of radio and television involves not only collecting revenue from advertisers, but also investing revenue in the internal operations of the station, system, or network. Just as car manufacturers must spend money on materials, labor, and dealerships in order to produce and sell a product, so broadcasters must spend money on programming, marketing, facilities, licensing, and personnel in order to attract audiences to sell to advertisers.

The cable industry uses another business model—subscriptions. In addition to selling commercial time to advertisers, cable operators continue to depend on

–  –  –

customer subscription fees as their major source of revenue. From basic and premium program networks to video on demand and Internet access, the business of cable is similar to the business of broadcasting in that it involves the proper monitoring and control of money coming in and money going out. A more formal name for these crucial activities is financial management.

As complex as the conventional broadcasting and cable business models are today, the future promises even more challenges. With the transition from analog to digital technology, the partitions separating one medium from another are disappearing. For example, most television and radio stations now operate Internet web sites that serve as additional profit centers. In addition, both broadcast and cable networks are exploring video on demand via the Internet as a new revenue stream. Will these new media business ventures use an advertising-based or subscription-based business model, or a combination of both? This blurring of media boundaries, often referred to as media convergence, and experimentation with new business models make the need for sound financial management in coming years even more vital.

No one would deny that business and accounting professionals need to keep abreast of the complexities of media financial management, but this book is not intended for them. Instead, it is intended for the people who have other job descriptions, but who nonetheless have a stake in the successful running of a media business. The book also is intended for students of media management who need exposure to the essential principles and jargon of financial management. Business managers and accountants do not operate in a vacuum. They must rely on the competency and goodwill of other people within the organization. Essentially, every department within a station, network, or cable operation contributes to the overall financial health of the business. The purpose of this book is to introduce nonfinancial people to the fundamentals of financial management so they can communicate better with their financial colleagues and appreciate some of the inner workings of the business of media.

Your editors were asked by the Broadcast Cable Financial Management Association (BCFM) to oversee the creation of this book mainly because we are not financial pros, although we do have a solid background in broadcasting. Although each chapter would be written by a highly qualified expert, there was a concern that the authors might take too much for granted, and that editors possessing a similar financial background might not be sensitive to the learning needs of a nonexpert.

Consequently, we were solicited to evaluate and modify the chapters not because of what we knew, but rather, because of what we did not know. During this process, we assumed that if we couldn’t understand what an author was talking about, neither could an ordinary reader, and so we asked questions and made changes for the sake ix FOREWORD of clarity. We are both teachers and are familiar with the learning needs of students in an unknown arena.

We were flattered to be asked to perform this task, and we hope the reader will learn as much as we did.

–  –  –

Although it may sound like hyperbole, the world of broadcast and cable finance has changed dramatically since BCFM Press published the first edition of this book in

1994. Then the Internet was a curiosity, and very few people had email—if they did, it was via a slow dial-up connection (2400 baud was considered fast!). Fax machines were considered cutting-edge technology; cell phones were very expensive, and their weight was measured in pounds, not ounces. A cable system with 100 analog channels was state of the art. Radio, TV, and cable ownership was disbursed among many, many smaller companies. Satellite television was just being launched, as were digital cable tiers. There was no such thing as high-definition broadcast television in the United States; nor was there satellite radio, HD radio, or podcasts. And, on the financial side, scandals such as those at Enron, WorldCom, and others, and the subsequent laws intended to restore investor confidence—primarily the SarbanesOxley Act of 2002—had not been contemplated.

The original book was also noticeably short of cable content because the majority of the contributors came from the broadcasting side of the media business. What cable issues it did address focused primarily on cable programming (applicable to channels such as ESPN or CNN), and overlooked the unique financial considerations of cable operating companies—the companies that provide the packages of programming (and now data and telephony services) to consumers.

Despite these shortcomings, the Broadcast Cable Financial Management Association (BCFM) continues to get requests for the original book because there is no other source that explains the basics of broadcast and cable financial management for both the industries’ nonfinancial managers and to financial personnel new to the industries. Despite its obviously dated contents, the original is required reading in several broadcast companies (followed, of course by, “Here’s what’s changed since that book was written...”). It has been used as a secondary college text as recently as 2004.

Working with Focal Press has allowed BCFM to produce a second edition that is a significant upgrade from its predecessor. Not only does this edition include

–  –  –

information that is more complete and more current, with Focal’s help, we have improved both the editing and the graphics. In addition, we have added an index and a glossary—very valuable additions because language in the media industry is riddled with acronyms, jargon, and familiar words that have unique meanings when used in the context of media and/or media finance.

This edition is organized in two parts. Part I covers the fundamentals: an introduction to the industry; the role of the financial manager; an overview of financial statements; key sources of revenue, followed by important information about industry expenses; an overview of the financial systems used in broadcasting and cable (including several that are unique to the industry or industries); a discussion of capital assets; a look at key performance metrics for the industries; and an overview of the extremely important issue of cash flow. Part II gives an overview of specialized areas that are nevertheless important to nonfinancial managers and those interested in understanding the electronic media business. These include Sarbanes-Oxley and internal controls; planning and budgeting; administration of credit and collection— an interesting topic because the industry sells a perishable product (advertising time and/or media transmissions to consumers), and generally tries to collect for that product after it has been consumed; trade and barter transactions; music license and syndication fees; taxation; and the financial and accounting considerations when media ownership changes hands.

The rewrite of this book is one of the tangible results of the work done by the BCFM Strategic Planning Committee to position the Association to meet members’ needs both now and in the future. A not-for-profit educational association, BCFM’s

mission is:

To be the premier source of education, networking, information, and signature products to meet the diverse needs of financial and business professionals in the broadcast, cable, and electronic media industries.

This book would not be possible without the leadership of the project’s Co-chairs—Leslie Hartmann and Timothy Pecaro. As 2006 BCFM Chair, Leslie Hartmann had the vision and the drive to make this rewrite a priority, and she committed to heading up the project when her Board term ended. Working with Timothy Pecaro, she developed the outline for the new book, drafted volunteers to write each chapter, and reviewed each submission to ensure that it covered the subject thoroughly and at a level easily understood by our target audience: nonfinancial media professionals; financial professionals new to electronic media; and academics—both professors and students concentrating in media management.

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