Broadband Cable Association of Pennsylvania

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June 28, 2012

The U.S. Supreme Court brought an end to objections by satellite-TV companies that a 2003 Ohio sales tax was unfair because it was imposed on them and not cable-TV operators. The justices, without any comment, on Monday upheld a 2010 decision by the Ohio Supreme Court that the sales tax did not violate the Commerce Clause of the U.S. Constitution. By doing so, the justices rejected an appeal by DirecTV Inc. and Echostar Satellite Corp., which have long contended that the sales tax discriminated against the companies and their customers. They argued that the sales tax was unconstitutional because satellite companies tend to operate between states. By contrast, cable companies usually operate inside one state. But cable companies pointed out that they pay a franchise fee to local governments while satellite companies do not. Jonathon McGee, executive director of the Ohio Cable Telecommunications Association, said in a statement that his organization was "pleased" that the high court "upheld the decision of the Ohio Supreme Court, and numerous other state courts in this matter." The tax generates about $54 million a year for Ohio government. Columbus (OH) Dispatch


News Corp.'s board unanimously approved a plan to split the media conglomerate in two pieces, separating its lucrative entertainment operations from its publishing business, said a person familiar with the situation.

The board made the decision after a meeting in New York Wednesday evening that lasted roughly an hour and a half, the person said. News Corp. Chairman and Chief Executive Rupert Murdoch spoke at the meeting and financial advisers made presentations to the board. The person said many details such as who will run the publishing business have yet to be resolved. The split is expected to be formally announced early Thursday morning. The entire process is expected to take about a year, and the board must give final approval to the detailed plan.

One company will house entertainment businesses like 20th Century Fox, Fox broadcast network and Fox News Channel while another houses the publishing assets, which include The Wall Street Journal and the Times of London along with HarperCollins book publishing and News Corp.'s education business. News Corp. shares have jumped 11% since Tuesday when the media company confirmed it was contemplating splitting in two, as investors applauded the idea of the company's less profitable newspaper assets being carved off.

Publishing generates much lower profit margins than the company's TV and film operations, and faces stiff competition from online news outlets. Industrywide newspaper advertising has fallen about 50% in the past five years, estimates the Newspaper Association of America. While the Journal has added subscribers, and has protected its content behind a paywall, the new standalone publishing company will confront deep challenges. "Without deeper cost-cutting, given print advertising's continuing spiral downward, the new company's thin 7% profit margin would disappear quickly," wrote Ken Doctor, an analyst of the news industry at Outsell.

For the entertainment company, its overall profit margin will be higher without publishing. Its stock market valuation is expected to rise above that of News Corp.'s current valuation, analysts say, as the publishing assets are seen as a drag on the stock. Moreover, without the taint of the phone-hacking scandal at News Corp.'s British newspapers, the entertainment company may have an easier time doing certain acquisitions, say people familiar with the situation. That is important because the entertainment company could eventually have to confront the disruption posed by the Internet that has already affected newspapers. Film and television is already threatened by competition from online outlets, such as Netflix Inc. and Google Inc.'s YouTube.

In recent years profit growth at News Corp.'s entertainment businesses have been driven entirely by its cable channels, such as Fox News and FX. While entertainment profits grew 13% over the period from 2008 to 2011, all of that has come from the cable segment, whose operating income more than doubled between 2008 and 2011 to $2.76 billion. The broadcast TV, satellite TV and film businesses each saw operating profit fall over the same period. With broadcast TV, operating profit fell almost in half in that period, from $1.1 billion in '08 to $681 million in 2011 (partly due to sales of some TV stations in 2008). The publishing businesses expected to be spun off saw operating profit fall 26% in that period, estimates Nomura Securities analyst Michael Nathanson.

Film, broadcast TV and satellite TV saw improvements in the first nine months of the current fiscal year, while publishing continued to decline. Mr. Nathanson expects the three divisions to finish this fiscal year with lower earnings than in 2008. "I am perplexed about why so much value is created overnight in the entertainment company," says Todd Juenger of Sanford C. Bernstein. "A lot of investors are thinking they're spinning off the wonderful high growth assets into the entertainment company but...it will also include businesses that aren't high growth." News Corp. declined to comment on valuation.

The film division is the second-largest entertainment business by revenue and profits, and it has enjoyed blockbuster hits including "Avatar" in recent years. But it also has been slammed by a plunge in DVD sales, a key source of profits in the film industry over the past decade. Consumers have increasingly turned to services such as Netflix and Redbox vending machines to rent DVDs rather than buy them. PricewaterhouseCoopers estimates global DVD and VHS revenues fell 19% between 2007 and 2011. It is expected to keep falling, only partly offset by rising streaming and other electronic rental revenue. Broadcast television, including News Corp.'s Fox network and TV stations, was hit hard during the 2008-09 recession because it is heavily dependent on advertising. SNL Kagan says gross advertising revenue at U.S. broadcast networks fell to $17.2 billion in 2011 from a peak of $19.4 billion in 2006 and little growth is expected in coming years. Broadcasters have begun extracting payments from cable companies to transmit their channels but those fees remain relatively small, particularly relative at advertising revenue.

Fox's cable networks have been the standout, driven both by rising ad revenues and increases in subscription fees. Mr. Nathanson of Nomura Securities expects the cable networks to have annual revenue growth of 11.1% from 2011 to 2014 and even faster rises in operating income. News Corp.'s revenues from cable and satellite operators could grow more slowly however if consumers start cutting the TV subscription cord in significant numbers, or if they choose cheaper TV packages without sports channels, says RBC Capital Markets analyst David Bank. He says that along with Walt Disney Co., majority owner of ESPN, News Corp. has the largest exposure of any media conglomerate to sports networks. He estimates News Corp. could lose $240 million of operating income annually if 5% of pay-TV customers switched to the cheapest-available package. Wall Street Journal


DirecTV says it has reduced the programming hours of its 24-hour 3-D channel, n3D, due to a shortage of 3-D content.

The satellite TV provider launched the channel to much fanfare in July 2010, boasting the backing of Panasonic Corp. The company said it was the first 3-D channel to operate around the clock. A dearth of 3-D programs on n3D led to the same shows being run in a constant loop. Now, when there is nothing available, the channel will show the n3D logo. If there's an upcoming special event, details will appear on the program guide two or three weeks in advance. The reduced hours began June 1. It's the latest setback for 3-D TV, which has had trouble attracting mainstream audiences.

DirecTV's channel isn't the first 3-D offering to stumble. Last August, AT&T Inc. said its U-verse lineup of video channels would no longer include ESPN 3D. The company said the cost wasn't justified, "especially considering the low demand we've seen from customers." Meanwhile, sales of 3-D TVs are growing. Tracking firm NPD Group said last month that 3-D TVs accounted for 11 percent of all flat-panel TV sales in the first three months of the year. That's nearly double the rate of a year ago. DirecTV spokesman Robert Mercer said n3D will continue to air 3-D shows like "Guitar Center Sessions" and plans to air Olympics coverage in 3-D this summer. Reuters


Sky Angel LLC, a distribution company that delivers content via broadband or "over the top," claims that programmers are resisting doing business with it for fear of upsetting cable and satellite pay-TV distributors. In written testimony submitted in advance of Wednesday's Future of Video hearing being held by the House Subcommittee on Communications and Technology, Sky Angel Chief Executive Robert Johnson said, "The video distribution marketplace remains willing to engage in anti-competitive tactics in order to harm emerging competitors."

Sky Angel is currently in a fight with programming giant Discovery Communications. Sky Angel suggested that Discovery stopped doing business with it because of concern that traditional pay-TV companies didn't approve of the relationship. Sky Angel filed a complaint against Discovery at the Federal Communications Commission that is currently under review. Besides Discovery, Sky Angel's Johnson said several programmers "have refused to deal with Sky Angel, saying (or implying) that they want to avoid conflicts within the industry." The only network Johnson names is C-SPAN (a nonprofit network that is owned by major cable companies), which he said entered into a distribution agreement with Sky Angel only to withdraw three days after its programming started to appear on the service. "Perhaps telling is that C-SPAN is controlled by the cable television industry, which claims that it does not need to be regulated in this area because it can be trusted to do the right thing. No doubt, the fox was quoted as saying much the same on the way to the chicken coop," Johnson said. Los Angeles Times

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