4 Revenue
Ultimately, business is about money, but recognizing how money is made and spent involves a basic understanding of financial concepts and jargon unique to broadcasting and cable. Together, these three authors unravel the complexities of revenue in this chapter, and expenses in the next chapter. Trila is the Executive Vice President and Chief Financial Officer of New Northwest Broadcasters LLC; Joyce is the Business/Program Manager of WFLA-TV in Tampa, Florida; and Fidel is Vice President of Finance and Controller of the Game Show Network.
Introduction
From the sale of products and services to customers, businesses generate revenue. This chapter discusses the revenue streams typically associated with the broadcast and cable industries, and explains how these industries account for those revenues. As the industries evolve with growing pressure from new competitive sources, new revenue sources continue to emerge, so the items in this chapter should not be considered a comprehensive list.
Revenue for broadcasters is generated primarily through the sale of local, regional, and national advertising on the local stations and their networks. The primary revenue generator for cable systems is subscriber fees (as of this writing, cable systems typically generate only 5 to 10 percent of their revenue from advertising). From a cable network programming perspective, the proportion of revenue acquired from cable advertising versus cable subscription varies, depending on the type of program content. For example, most premium services, such as HBO, have almost no advertising. The primary revenue generator in this case is a subscriber fee shared between the cable operator and the program content provider. On the other hand, highly successful program "basic" networks, such as ESPN, can command both significant per-subscriber fees from systems and impressive commercial rates from national advertisers. At the other end of the basic spectrum are less popular program networks that receive little or no subscriber compensation from cable systems, and struggle for advertising dollars.
The Broadcasting Model
Each station’s local sales staff solicits advertising either directly from a local advertising client or indirectly through an advertising agency. Stations incur an agency commission based on gross revenue associated with the advertising dollars placed on the station that are secured through an advertising agency or specialized firm. Stations report revenue as gross revenue less agency commission to achieve net revenue. National advertising dollars are acquired by a station through the help of a rep firm, which serves essentially as a broker between the station and major advertising agencies representing national advertisers. The rep firm is compensated through a commission formula based on net revenue generated by that firm. Depending on the structure of the representation agreement between the station and the national rep firm, the commission paid to the rep may be reported as a sales expense or may be netted out against revenues in a manner similar to that used for agency commissions. (See Chapter 5 for more on selling expenses.)
Revenue is recognized when it is realized, or realizable and earned. Four basic criteria must be met to satisfy the realized (or realizable and earned) threshold in order to recognize revenue:
• There is persuasive evidence that an arrangement exists (i.e., client-approved order or an insertion order from an advertising agency).
• Delivery has occurred or services have been rendered (i.e., the commercials have aired, the concert has happened, etc.).
• The seller’s price to the buyer is fixed or determinable (i.e., spot rate is determined, sponsorship amount is stated, etc.).
• Collectibility is reasonably assured (i.e., account is in good standing, credit application is approved, etc.).
For operational purposes, stations separate revenue into several categories to help managers evaluate performance, build budgets and projections, and explain variances. The most common classifications of advertising revenue for radio and TV stations and cable companies are listed and discussed in more detail below. They fall into four distinct categories: on-air advertising, nonspot revenue, emerging revenue, and cable-specific revenues.
On-Air Advertising (or Spot Revenue)
Unique to electronic media, the most valuable inventory is commercial inventory, or airtime. Unlike tangible goods, commercial inventory is very limited, in that audiences will tolerate only so many interruptions within program content. This inventory is also perishable, in that once the inventory time lapses, it can no longer be sold, similar to seats on an airline flight. Advertising clients purchase the commercial inventory to use as spot, or on-air, advertising. Spot advertising typically is sold according to varying lengths, such as :60s (60-second spots), :30s, :15s, and :10s. The commercial value of the spot is based on viewership, time of day, and, in the case of spots sold on cable systems, channel location (not all channels are available to all subscribers).
Spot rates are typically determined by sales management or general management based on complex calculations reflecting client demand, market competition, supply (available inventory), and seasonality.
For radio, audience ratings by day part influence the value of a spot. The more listeners (i.e., the higher the audience share) a station has, the more valuable a spot. This is often referred to as CPM (cost per thousand) or CPP (cost per [rating] point). Because audience numbers and time spent listening vary considerably, commercial rates for these day parts are not always the same. For example, commuters tend to spend more time listening to the radio in the morning and afternoon drive times, so those rates typically are the highest on a station.
For TV and cable, audience ratings differ by day part and by show, with prime time attracting the largest audiences, and consequently commanding the highest commercial rates on a station. As with radio, commercial rates often are calculated using CPP or CPM metrics. The actual audience size is merely an estimate or projection based on prior ratings performance for the day part or program. Once the purchased commercials have aired, the estimated CPP and estimated units delivered are used to create an invoice. Then, when the station or network receives the actual audience ratings, they are used to true up the actual delivered units and the final revenue. This may result in an adjustment to revenue if the delivered units were more or less than the units agreed upon. If the delivered units were less than agreed, revenue needs to be reduced, and a liability needs to be created. The liability is normally called ADU (Audience Deficiency Unit) liability. This liability will be reduced when "make-good" spots are aired to resolve the deficiency in audience delivered. A refund of the deficiency to the advertiser, otherwise called cash back, can also reduce the liability. By and large, finance professionals rarely (if ever) are notified about overdelivery of units. In the unlikely event that a media company expects an additional payment for schedule due to an overdelivery, the "conservatism principle" (see Chapter 3) prevents the company from recognizing the revenue before it is received.
Below are the various revenue types for spot revenue:
• Local Direct Revenue—This category of revenue is the traditional spot time sold to a local advertiser by in-house media sales representatives. These representatives are employees of the station.
• Local Agency Revenue—A local agency acts as a representative for a local advertiser, and usually places that advertiser’s entire advertising budget with all media (radio, TV, newspaper, outdoor, and the like) in the marketplace. The agency earns money by withholding a percentage of the advertiser’s gross purchase (typically 10 to 15 percent) as a fee, and the station receives the net proceeds after the agency discount. This discount is referred to as an agency commission.
• Per-Inquiry or Direct-Response Revenue—This revenue traditionally is included in the category of local direct revenue or agency revenue, but instead of an agreement based on CPM or CPP for the commercials to be aired, consideration and payment for the airtime is determined by the advertiser based on the results of the advertising—either by the number of inquiries (e.g., phone calls, emails, web site clicks, etc.), or predicated by the actual dollar sales that an air schedule generates.
• Regional Revenue—Revenue placed by agencies outside the local station’s market for advertisers in the surrounding region is reported in this class.
• National Revenue—This advertising is purchased by large national advertisers and is placed by the station’s national rep firm or directly with the network (either broadcast or cable).
• What is a national rep firm? This kind of firm functions much like a local agency, but instead of representing the advertiser, they represent the station or cable system to larger national advertisers. These firms charge the stations (or systems) a fee similar to that for local agencies for their services. These fees are either paid as a sales expense or deducted from the net revenue form the advertisers’ media purchases.
• Network Revenue—Stations may agree with network on-air content providers to air their programs in exchange for a fee or placement of the network’s commercials during the program run. The revenue generated from this activity is considered network revenue or network compensation. This category may also include ads placed in unsold inventory by a third-party company representing its own group of clients. This can occur when a station or system signs a contract to accept spots in unsold inventory with such a third-party company.
• Trade Revenue—Stations may agree with advertisers to accept goods or services instead of cash for advertising. In these cases, the revenue generated from the spot is classified as trade revenue, or barter revenue, for income statement purposes. As the station uses these goods or services, an expense is recognized to account for the usage.
Generally speaking, recognition of revenue for spot advertising described here occurs when a contract is approved by the client and the commercials air on the station, as outlined in the contract. As indicated above, invoices for commercial schedules are issued after the spots have run, so this is when the receivable is created.
Nonspot Revenue/Nontraditional Revenue (or NTR)
Until the 1990s, almost all broadcast station revenue was generated from spot advertising. As competition increased, however, stations had to develop new revenue streams, leveraging their vast audience in new ways. The following are some alternative sources of revenue.
• Events and Concerts—This category includes exhibitor revenues from job fairs and other station- or system-managed community events, ticket sales, and concessions sales.
• Sponsorships—Whereas advertisers can sponsor a special program for on-air content and potentially flow through local direct revenue, in many cases the most material types of sponsorships are related to special events such as concerts or special-event shows, which would place them in this NTR category. Also included in this category would be the sponsorship of a station van or other promotional item.
• Merchandising—Sales of station goods (T-shirts, bumper stickers, key chains, etc.) are categorized as merchandising.
• Talent Fees—This is a pass-through revenue account in which the employer recognizes (as expense) amounts paid to on-air talent for appearances, and then is paid for those appearances by the advertiser. Because employers must contribute the employer taxes on these amounts, the expense related to this talent fee is recognized in production and programming expense, as discussed in the next chapter.
• Auctions—Although on-air auctions have gained in popularity over the past few years, many stations are moving their auctions to the web. In any case, the revenue generated from the sale of auctioned goods would be classified here. Stations and systems often procure those goods to sell at auction via trade.
• Publication Revenue—Some stations, systems, or channels may publish magazines or guides that include advertisements. This is especially common for sports stations and companies that have a strong niche audience (e.g., football season guides, magazines produced by channels targeted at children, magazines for do-it-yourselfers, etc.).
• Rental Income—Stations that own their broadcast tower or studio facilities and have other tenants (cellular telephone companies, utilities, or other broadcasters) that lease space would recognize that income as rental income.
• Retransmission Consent—FCC rules allow television broadcasters to negotiate with local cable systems for compensation in return for permission to transmit the television broadcast signal on the cable system. Although this is a source of revenue for the television broadcaster, it is an expense for the cable operator (see Chapter 5).
• Syndication Fees—Companies that have developed strong programming content and on-air personalities that are popular and compelling have been able to distribute (syndicate) these programs to other broadcast markets and charge the stations a syndication fee.
Typically, recognition of revenue for nonspot revenue described above occurs only when the event is completed. However, the timing of revenue recognition might be more complex if an event sponsorship fee is coupled with a commercial spot schedule. In this case, the sponsorship fee would be recognized once the event occurs, but the spot revenue would be recognized as the spots air. Sales managers will argue that sponsorship fees may be recognized prior to the event because of on-air mentions or ‘ticket-stop’ appearances that are scheduled prior to the actual event. The question should be asked, ‘If the event is canceled for any reason, would the advertiser expect a refund of their sponsorship commitment?’ If the answer is yes, then the revenue should not be recognized until the event actually takes place.
Revenue Adjustments
Adjustments to revenue are considered a contra revenue account, and result in an offset or reduction in advertising revenue. Revenue adjustments are typically caused because (a) a sales order was improperly entered into the system, (b) a spot aired out of schedule, or (c) incorrect copy aired for a spot. Some companies choose to anticipate sales adjustments based on historical records, and automatically subtract a percentage from expected revenue. Other companies simply book the adjustment at the time that the station is notified of the incorrect advertising.
Emerging Revenue Streams
At this writing, Internet revenue is the most rapidly growing source of advertising expenditures, coinciding with the exponential growth of Internet usage. In addition, stations and systems are capitalizing on their large audience base by moving their content to digital platforms. The potential revenue streams continue to expand. In addition to programs, media companies can also provide interactive video and data services. Emerging revenue streams may include:
• Internet Revenue—This is revenue associated with audio streaming, portals, banner advertising, embedded links, and new web sites.
• Digital Broadcasts—Broadcasters can now provide two or more high definition (HD) programs or even more channels (multicasts) simultaneously using standard definition (SD) technology. The number of programs a station can broadcast at the same time depends on the level of picture resolution in the programming stream (i.e., the more channels used, the lower the resolution).
• Video on Demand (VOD) and Podcasts—These are a significant area of new revenue for traditional media outlets such as TV and radio because consumers have demonstrated that they are willing to pay for the convenience of controlling when and where they access media content.
Recognition of revenue generated from these new revenue streams will depend on the service promised. For instance, if a station sells a Flash banner advertisement for six months at a set fee, that fee would be recognized over the six-month period. In another instance, if a minimum number of web site ‘visits,’ or ‘hits’ to a specified site, are promised, then the revenue should not be recognized until that target is achieved. Because revenue generated from these areas is rapidly changing, personnel in charge of emerging revenue streams should consult the accounting manager or controller to discuss revenue recognition of specific transactions.
Cable-Specific Revenues
Cable Network-Specific Revenue Streams
• Affiliate Fees—Cable networks and their distributors—cable systems, MSOs (multiple-system operators), direct satellite providers, and so on—normally have contracts that specify the terms and length of the agreement. The contract also specifies the fees the distributor pays the networks for carriage of the signal. These fees are based on the average number of monthly subscribers. Morecomplex license fee agreements will include terms that are based upon specific carriage requirements, volume discounts, channel placement (channel number and/or channels next to the channel being discussed), penetration (percentage of potential customers who subscribe to the distributor’s service), and packaging incentives.
• Launch Support Fees—A launch support fee is a payment by the cable program network to the distributor to help launch a new cable channel. It is also called a subscriber-acquisition fee. Launch Support is a contra revenue account. These fees are normally capitalized and amortized over the contractual term of the applicable distribution agreements as a reduction in subscriber fees revenue. If the amortization expense exceeds the revenue recognized on a per-distribution basis, the excess amortization is included as a component of cost of service. This situation occurs when a network is attempting to increase the subscriber base, and justifies the higher cost of launch support by increasing revenues from advertising to pay for the growth.
Cable System-Specific Revenue Streams
Cable systems have evolved from simple one-way distribution companies to diversified broadband companies offering video, voice, and data services to both residential and commercial customers. On the residential front, services are offered on a subscription basis as well as on demand or pay per view (PPV). Cable system-specific revenues may include:
• Video Revenue—Cable systems or MSOs normally have contracts with programmers that permit carriage of video services. Operators offer these services in bundles based on FCC rules for carriage. Several packages (called ‘tiers’) of nonpremium channels are generally offered, with the tiers offering the most channels being the most expensive to purchase. Additional monthly fees are generated by premium channels such as HBO and Showtime. Cable also offers a wide variety of digital and high definition TV options as enhanced video service offerings. Monthly services typically are billed in advance. Subscribers to cable systems pay a fixed monthly rate based upon the level of service to which they subscribe (i.e., which package).
• Pay per View (PPV)—Some individual programs, movies, and events are sold to subscribers on a per-viewing basis. Charges are determined by the type of event and anticipated demand, with movies being the most popular purchases. Events such as concerts and sporting contests (e.g., wrestling or boxing) are sold based on contracts with promoters. Sports programming can also be sold as a ‘season ticket’ for an extended series of professional events ranging from football to baseball to basketball to hockey over the course of a season. Note that this is also an opportunity for the cable operator to work with the local television broadcaster. See Nonspot Revenue/Nontraditional Revenue (or NTR) above.
• High Speed Internet Service—It is sold in varying packages based on the delivery speed and features offered.
• Launch Support Fees—From a cable operator perspective, the accounting is the mirror image of what is done for networks (see above). Cash is paid by the programmer, either up front or as the launch is achieved, and is recognized as deferred revenue (subject to normal current-versus-noncurrent considerations). Such credits are amortized (usually straight-line amortization) over the term of the contract as a ‘contra,’ or reduction of programming expense. To the extent that the support received exceeds the programming expense incurred, it is recognized as miscellaneous revenue.
• Telephony Services—Cable operators are offering both traditional land-based products and wireless telephony. The charges for local service, features (e.g., call waiting, voice mail, conferencing, etc.), and long distance are similar to those for traditional telephone companies.
• Business Services—Many cable operators also offer services for commercial accounts. Available products may include video services for public commercial establishments (e.g., bars or restaurants), Internet, and/or phone services targeted for business customers.
The primary differentiator for cable operator–provided services when compared to individual service providers is the bundled approach for all three products (i.e., video, data, and telephony) at a discounted price with integrated features and billing not typically available elsewhere.
In Conclusion
This chapter has focused on many of the revenue sources available in the broadcast and cable industries. As discussed above, the sources of revenues are changing dramatically. Regardless of the source of revenue, it is important to follow GAAP guidelines and to recognize revenues only when they have realizable value.
Notes
1. The authors gratefully acknowledge Richard ‘Dick’ Petty, SVP/Controller, Time Warner Cable, for his assistance with the portions of this chapter dealing with revenue from cable operations.