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

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

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

Cable MSO Concentration (w/DBS) 2000 (w/o DBS) Top Share24.0%25.9%19.1%22.5% Top 236.7%42.1%34.0%40.1% Top 445.6%54.6%52.7%58.7% Top %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

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

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) (est) Avg. Basic Subs62.8 (mil) Basic Tiers Pay Tiers Local Ads PPV Home Shop Adv. Serv Eqpt/Install Total Rev per sub

Cable Subscription Revs

Cable Advertising Revenues (revenues in $million)

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

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