Building A Financial Model For A Television Network

Building A Financial Model For A Television Network

The television network industry is in flux, as networks struggle to retain the attention of viewers who spend an increasing amount of their time and media consumption on other mediums such as the internet.

Fragmentation of this viewer audience is forcing traditional television players, the networks and studios, to reach out where the audience lives. Many television networks are in the process of reinventing their business, by ensuring that their television brands, shows / content and characters are platform agnostic, in order to reach out and maximize their engagement time with the viewer regardless of where he / she is consuming content from.

In spite of this, most networks still derive the bulk of their income from the traditional television medium today, but that is slowly but surely changing.

A financial modeler should be aware of the dynamics that are driving the television industry and in doing so build robust financial models that are able to strategically analyze the needs, requirements and challenges of the industry, and help quantify key growth opportunities and challenges.

Sources of Revenue To Consider When Building A Network Television Financial Model

A television network primarily derives its income from 2 sources: advertising sales, network distribution sales and merchandise and licensing sales.

Advertising sales

A television network may sell airtime on its channel to advertisers wishing to reach out to the network’s viewers with relevant products and services:

  • Such airtime is normally sold in blocks of 30 seconds, hence the term “30 second spot” or 30 second television commercial.
  • Given the need to air original, entertaining and informative programming for viewers, there is normally a limited amount of airtime available for sale in each hour of the programming.
  • Due to viewing habits, there are also more viewers who watch television at certain times of the day compared to others.
  • As a result, rates for advertising airtime differ significantly according to the time of day, and also to the viewership / ratings of the network in which a larger viewer audience and / or a highly desirable target demographic (e.g. affluent urban dwellers, etc) would command higher rates.
  • Gross advertising revenues can therefore be calculated by multiplying the advertising rate with the amount of advertising inventory (in seconds / minutes) available and sold at any given time.
  • The calculation would need to be repeated to account for different advertising rates and available/ sold advertising inventory at different times of the day.
  • Networks may also sell customized product placement or sponsorship slots within their television programming, that are negotiated separately from the advertising rate card and may command a premium to the normal airtime slots.

Licensing and Merchandising sales

If a television network owns the rights to market popular television series brands, characters or actors outside of the television box, they may also derive income from the licensing and merchandising opportunities of these assets:

  • Normally billed by way of a revenue share or flat fee with a 3rd party that will in turn produce additional products or services that are branded with or uses the content / assets of the television network.
  • Licensing and merchandising deals are normally negotiated on a case by case basis although some television networks may have established internal sales targets and the levels for the minimum revenue share or fixed fee requirement for certain assets.
  • In the case of certain network assets, the television network may also decide to aggressively pursue development of a licensing & merchandising business that may be very lucrative, such as in the case of using popular cartoon characters to brand books, DVDs, toys, multimedia devices, etc.
  • In such cases, television networks may be directly involved in the commissioning of such products and services by engaging contract manufacturing services and directly forming sales / distribution relationships with retailers, instead of going down a traditional licensing arrangement route.
  • In some cases, a television network may even loan its brands, characters and show formats (for a fee) to other television production companies to produce new formats.

Network distribution sales

If not freely available over the air, television networks in many countries also derive income from selling the right to view their channel to cable, IPTV and satellite television network operators, sometimes also called affiliates:

  • Such rights are normally calculated on a per subscriber household basis, in which a certain spot rate per month charged to each subscriber household is multiplied by the number of households who sign up to watch the channel.
  • The cable / IPTV / satellite network operator then benefits from the price arbitrage between the buying price for the channel and the retail price charged to household subscribers.
  • The television network’s channel may also be bundled together with a suite of other channels in a package designed by the cable / IPTV / satellite television network operators.
  • In such cases, the operator may negotiate a bulk deal in which guarantees the television network a minimum sum paid in return for lower per subscriber rates.
  • Some television networks are also able to obtain carriage for their channels in non household environments, such as hotel rooms.
  • In such cases, the revenue model will be similar in terms of charging a per room per month subscription rate multiplied by the number of rooms in the hotel. Hotel rates are normally higher than the household subscription rates as there are lower economies of scale.

Main Operating Costs To Consider For A Network Television Financial Model

  • Programming cost, which primarily contains the amortization cost of 3rd party program licensing / acquisition or original productions (read the amortization section for details of how to calculate television programming amortization in a financial model) and programming staff cost.
  • Program licensing / acquisitions are normally calculated by multiplying the number of hours of programming acquired by the cost per hour to arrive at a total license cash cost.
  • Original production costs typically consist mainly of staff costs, and the staff required would include talent / actors, production managers and assistants, producers, script writers, copy editors, cameramen and coordinators. Project costs such as the cost of constructing a set, cost of props and other supporting equipment, make up and wardrobe expenses, travel expenses and all other miscellaneous costs associated with producing a television program.
  • Programming staff are involved in the scheduling of programming for the television channel, as well as acquisition and negotiation process of 3rd party program purchases. Other programming costs may include mastering & duplication costs for programming tapes, tapes and accessories for storage of programming, and other miscellaneous administrative costs required for the programming operation.
  • Creative services cost, which may include creative staff costs primarily, as well as the cost of contracting / suppliers to produce on-air graphics, links, and promotional material to package television programming with entertaining and engaging visual appeal. Creative services staff will include creative directors / producers, video graphic designers and print graphic designers.
  • Playout cost, which includes the cost of preparing (e.g. advertisement insertions, sub-title insertions, audio dubbing / mixing, video optimization, etc) and timing the programming run of the television channel for onward transmission. Costs involved may include mainly programming tape stock costs and staff costs. Staff typically needed include librarians, video editors, and audio editors.
  • Transmission costs, depending on the transmission medium of the television channel from the studio to the affiliate who then distributes the channel onward to the viewer’s television set, transmission costs can vary significantly. Using satellite transmission as an example, key costs would include the rental of satellite transponder space and the broadband connectivity required to transmit the channel from the studio to the satellites earth based up-linking station. Key staff costs would include technical operators and engineers to ensure the transmission equipment are properly functioning.
  • Marketing and publicity cost, that may be required for general brand building and development of the television channel, and increase its awareness and attractiveness to viewers, affiliates and advertisers. Such costs may include affiliate marketing costs (souvenirs, brochures, and other marketing collateral, etc), advertising related spend, events and brand-related costs.
  • General and administrative cost, which primarily includes support staff costs such as lawyers and para legals, accountants, technology and administrative staff.

Key Investments, Depreciation and Amortization

Key capital investments for a television network which need to be considered in a financial modeling exercise for a television network business primarily include equipment required to operate a production studio facility, and equipment required for the playout and transmission of the television channel.

Production studio and playout & transmission equipment may include specialized machines and facilities for audio and video editing, computer hardware and software, television programming and electrical backup facilities, etc. Examples of such equipment and facilities include decoders and encoders, standards converter, cuetones, character generators, video server nodes, viewing stations, audio suites, and general cabling.

In a television network financial model, such capital investment in equipment can be depreciated according to their normal useful lives like in many other industries.

It is also typical for television network and studios to amortize their cost of acquiring or producing television programming. The amortization schedule for television programming in a television network financial model can defer significantly according the timing and repeat cycle of when the programming is aired.

As a general rule of thumb for a television network financial model, 80% of the cash cost of programming may be amortized in the first year which it is acquired, as we can assume that it would be aired and repeated most often in that time period, and the balance in the proceeding 2nd year.

Key Metrics To Consider When Building A Television Network Financial Model

Key metrics used to analyze a television network business in a financial model include:

  • Advertising rates, where a higher than market average rate normally reflects the strength of the channel’s viewership, ratings and overall brand quality.
  • The amount of advertising inventory in minutes, which is limited to the programming schedule and hence must be maximized in terms of commanding the best rates for peak times in the programming schedule (i.e. prime time) and also during shoulder periods (the time period immediately before and after prime time) and off peak periods.
  • Average revenue per user (ARPU), which is the price charged per household to a cable / IPTV / satellite operator who agrees to distribute the television channel, if the network is a paid television channel.
  • % penetration of TV households, a macro indicator of the success of television network reach in the total potential television audience market.
  • Cost per hour of programming, as programming cash costs are typically the highest cost item in a television channel’s operating expenses.

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