TFM: The Financial Manager November/December 2020

INFORMATION AND INSIGHT FOR MEDIA FINANCE PROFESSIONALS NOVEMBER/DECEMBER 2020 THE FINANCIAL MANAGER

ALSO INSIDE

Mixed TV Station Blessings Inside the Esports Craze Understanding Tax Issues Revised Bankruptcy Rules

THE EXPANDING

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INSIDE THIS ISSUE

The Financial Manager

FEATURES

The Official Publication of the Media Financial Management Association is published six times annually under the supervision of:

10 Rebounding Like a Bullet BY SETH RESLER

MARY M. COLLINS, President & CEO Mary.Collins@MediaFinance.org

Defying the laws of economic gravity, podcasts are on a growth spurt. There are ways to build a meaningful business in the space.

JANET STILSON, Editor TFMeditor@MediaFinance.org BILL KNIGHT, Art Director wknight5@nyc.rr.com

Limited commercial messages of interest to our membership and readers will be accepted. Rates and specifications on request to:

SPECIAL REPORT:

MEDIA VALUATIONS

16 Optical Illusions

MEDIA FINANCIAL MANAGEMENT ASSOCIATION 550 W. Frontage Road, Ste. 3600 Northfield, IL 60093 telephone (847) 716-7000 facsimile (847) 716-7004 and at www.mediafinance.org. Subscription $69.00 per year.

BY MATTHEW LOCHTE & JAKE LOURIM

TV station values are impacted by a series of sobering conditions this year. Yet there’s reason for optimism.

20 Easing the Chapter 11 Load BY WANDA BORGES

The new bankruptcy act makes it less likely for foundering small businesses to sink. There are special implications for creditors.

Copyright, 2020. All rights reserved.

What is MFM?

The Media Financial Management Association is a not-for-profit corporation organized in 1961. The MFM membership includes more than 1,200 of media’s top financial, IT and human resource personnel, station general managers and other media management personnel as well as associate members in the allied fields of auditing, tax, software, sales and the law. MFM sponsors telephone seminars and conferences, publishes special studies and surveys, files position papers with federal agencies on behalf of its members and its industry, cooperates with other media industry groups and helps its members grow and learn both personally and professionally. MFM also is involved in media industry credit matters through its wholly-owned subsidiary, BCCA, which provides members with a Credit Inquiry Service, an annual Conference, directory of Credit Personnel, credit reports accessed via bccacredit.com online credit search, Commercial Credit Reports and a credit and collections handbook. The information and recommendations contained in this publication have been compiled from sources believed reliable. However, no warranty, guarantee or representation is made by the Association as to the absolute correctness or sufficiency of any representation contained in this publication, and statements contained in advertising and articles submitted to the Association are the responsibility of the authors, not the Association or its officers, directors, staff or members. Moreover, this publication is provided with the understanding that the Association is not engaged in rendering professional services through its distribution. The views and opinions expressed are those of the author, and not necessarily the Association.

24 Shifting Sands

BY NICHOLAS SANCHEZ

A briefing for non-tax professionals on how recent changes in tax regulations impact the financial health of companies.

SPECIAL REPORT:

CONFERENCE ROUNDUP 26 Punching Up Business BY JANET STILSON

The second part of TFM’s recap of the annual Media Finance Focus conference looks at gaming, alternative revenue and new consumer habits.

DEPARTMENTS 4 From the President Trends Worth Watching 6 Dear Expert Online Compliance 7 Human Factor Buzzword Overload

8 Association News Upcoming Events 30 Last Word Bridge of Friendship ON THE COVER: The Helix Nebula Image captured by the California Institute of Technology

The Financial Manager • November/December 2020 3

FROM THE PRESIDENT

‘Hat Tricks’ to Watch

The ingredients for media’s future, some tasty, some not, are sprinkled throughout this issue.

C

anadian hockey legend Wayne Gretzky is often reported as saying, “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.” Honestly, I wouldn’t have thought about that quote if “Human Factor” columnist Josef Martens hadn’t mentioned it as an example of something not to say. More about that later. This issue of TFM, our last one for 2020, is about where the media business is going, like Gretzky’s hockey puck. Better yet, signs point to a hat trick, which in hockey is when a player scores three goals in one game. The wrap-up of the second half of virtual Media Finance Focus 2020 comes from TFM editor Janet Stilson. She focuses on three aspects – video games, new revenue opportunities and today’s consumer viewing habits. The COVID-19 pandemic is creating changes. Focus on where the business is going. Bond & Pecaro’s Matthew Lochte and Jake Lourim provide the second installment in our media valuations special report. Their focus is TV station groups. While TV stocks have Some advertisers and not kept pace with 2020’s market exuberother businesses are paying for ance, they see at least three positive indicapodcast production, a potential tors for improved valuations. Also check out their sidebar on “the disconnect between source for new revenue. Wall Street and Main Street.” Wanda Borges, of Borges & Associates, writes about changes in bankruptcy rules for small businesses. Good news here includes faster deadlines; more definition around the Plan of Reorganization; and the mandate for those concerned to do their homework before beginning a preference payment lawsuit. Tax, normally the purview of a subset of our membership, should be on everyone’s mind now. So says Miller Kaplan’s Nicholas Sanchez. As he points out, ongoing changes at the federal level can affect all parts of the business. Expenses paid with Paycheck Protection Program funds may need to be segregated; there is the option for payroll tax deferral; and be on guard for new rules for filing 1099 forms. Our cover story, a look at podcasting, comes from Jacobs Media’s Seth Resler. He says that podcasting is doing well partially because of the pandemic. Additionally, he sees opportunities for all media companies to participate in the content creation and the technical side of the business. In fact, some advertisers and other businesses are paying for podcast production, a potential source for new revenue. This issue’s “Dear Expert” response is from Chubb’s Patricia Kocsondy. She considers the question of regulations covering online content, particularly when it is intended to generate incremental revenue. Potential issues include those around copyright; varying Americans With Disabilities Act requirements; and state regulations covering subscription renewals. Iva Ng, whom we honored as a “Person to Watch for 2020,” writes our “Last Word” column. He explores the subject that initially brought him to our attention – building the relationship between technology and finance teams. Ng undersells himself when he says that his suggestions can be summarized in a single sentence; he has much more to offer. Finally, “Human Factor’s” Joseph Martens and the quote I used to begin this piece. Marten’s point, a good one, is that it’s easy to fall into sloppy thought patterns bolstered by over-used clichés and buzzwords. He challenges us to “(Re-)start” our “innovation efforts” and to communicate thoughtfully as we embrace media’s future. While we guard against overused expressions about the future, we will always abide by our own three-word hat Mary Collins is president and CEO of MFM and BCCA; Mary.Collins@MediaFinance.org. trick: put members first.

4 The Financial Manager • November/December 2020

EDITORIAL ADVISORY BOARD SALLY BUCKMAN Member Lerman Senter PLLC MICHAEL DENSON Director, Credit Services NMCP INC. GREG LECHOWSKI Market Controller, Phoenix Bonneville International CAL MOSTELLA Vice President, Treasurer WarnerMedia JOHN SANDERS Principal Bond & Pecaro MEREDITH SENTER Member Lerman Senter PLLC C. ROBIN SZABO President Szabo Associates JAMIE GRANDE MFM/BCCA Staff Liaison

CONTRIBUTORS WANDA BORGES Borges & Associates, LLC PATRICIA KOCSONDY Chubb MATTHEW LOCHTE Bond & Pecaro JAKE LOURIM Bond & Pecaro JOSEF MARTENS IVAN W. NG Hearst SETH RESLER Jacobs Media NICHOLAS SANCHEZ Miller Kaplan

Sharing our experience Deloitte’s Audit & Assurance Technology, Media & Telecommunications (TMT) industry practice is focused on quality and innovation, delivered by Audit & Assurance professionals who can provide deep industry knowledge and insightful audits. We’re service providers to many of the world’s most recognizable TMT brands in the market today. deloitte.com/us/tmtauditservices Copyright © 2020 Deloitte Development LLC. All rights reserved.

DEAR EXPERT

Compliance Complications

Media liability expert PATRICIA KOCSONDY highlights the intricate legal issues inherent in online revenue-generating enterprises. Dear Expert, We are in the process of expanding our online presence to help make up for the losses our magazines have experienced due to COVID-19. Are there any compliance issues we need to troubleshoot? — Concerned in Cleveland

Dear Cleveland, The short answer to your question is, “Absolutely!” Several complex and evolving regulations confront media organizations and other businesses looking to increase ecommerce and online advertising revenues. Copyright Traps ­— Become familiar with laws involving the usage of images, video and music. The use of copyrighted material requires a license, but technology has made it so easy to copy and paste images and other content online that companies may feel they aren’t obligated to follow those rules. In most cases, they are. Moreover, the probability of getting caught is increasing. Copyright holders use algorithms to scour social media and company websites for possible evidence of copyright infringement. For example, a company might use a recording of a live performance to make a video or a photo montage on a website more entertaining. While the company may have previously purchased “performance rights” to the song, the replay of a live performance on social media or a website may require additional “synchronization rights.” Although social media and company websites may offer functions that make it easy to create a montage, the terms of use may not extend to commercial advertising. In today’s era of video-sharing social networking services, it’s possible that companies could fall into such copyright traps. ADA Stipulations — An evolving website compliance issue involves the Americans Do you have a professional puzzle that MFM and BCCA experts might be able to answer? We’ll mine the contact base and find the right person to answer your question. Just contact TFM editor Janet Stilson at TFMeditor@mediafinance.org.

to subscribe. Attaching provisions that renew the subscription automatically or convert it from a free subscription to a paid one, however, is closely regulated in at least 26 states. In general, these laws may require With Disabilities Act. The law requires providers to obtain the consumer’s affirmabusinesses that provide public accomtive consent to the terms before charging modations to make them accessible to for service or converting from a free trial to persons with disabilities so they can have a paid subscription. “full and equal enjoyment” of the goods Furthermore, the automatic renewal text and services offered. Recent court rulings must be displayed in a “clear and conspicuhave expanded the meaning of the term ous manner,” which may require a specified “public accommodations” to include virtual font size and proximity to the offer. Lastly, locations like a website. the provider must send a confirmation of Federal regulatory standards for website purchase to the consumer and make it easy accessibility have been under consideration for the subscriber to cancel the service. Free trials of an online service are a minefield of potential litigation. The replay of a live performance on A $250 million class action lawsuit social media or a website may require against Ancestry.com, for instance, alleges the provider of genealogy additional “synchronization rights.” services automatically renewed for a number of years but have not yet been customers without their clear permission. adopted. According to the lawsuit, the plaintiff Absent clear direction from the federal alleged she accepted a 14-day free trial government, media companies must carefully without knowledge of an automatic enrollreview and consider state trial-court and ment in a monthly $39.99 subscription federal circuit-court rulings, which are incon- plan. Had she known, she wouldn’t have sistent in interpreting the intent of ADA. submitted her credit card information. In some jurisdictions, the law has been Many other subscribers had a similar applied only to brick-and-mortar businesses, complaint, hence the class action. like restaurants and retail stores, because It is always best to pause and consider they fit one of the categories identified by the potential legal and reputational ramifithe ADA as a “public accommodation.” In cations of evolving federal, state and local other jurisdictions, ADA-compliance restric- regulations before tions have been applied to online businesses. undertaking an online Websites may need to include technolocommercial venture, gies making them accessible to people who despite the need for have disabilities, including hearing and additional revenue vision impairments. Companies should sources in the current consult legal counsel to determine their environment. obligations and opportunities in this area. Automatic Renewal ­— A subscription-based Patricia Kocsondy is senior vice president model is a great way for companies to lock and the media professional liability product in customers and ensure steady revenues, manager for Chubb. She can be reached at Patricia.Kocsondy@Chubb.com. offering a free trial or a gift to entice them

6 The Financial Manager • November/December 2020

HUMAN FACTOR

Buzzword Overload

Challenge yourself to replace worn-out corporate clichés with language that reflects a sense of sincere, authentic thinking. BY JOSEF MARTENS

M

y immune system has been triggered by COVID-19. No, I haven’t contracted the virus. It’s actually my “linguistic immune system” that’s being triggered on a daily basis. Even in pre-pandemic times, we frequently encountered buzzwords in the business world: phrases we use in the hope that we sound business-savvy. Yet no one would use them with the family at the dinner table because it would come across as just a little pompous. Speaking with our children, we might talk about middle school, but in corporate speak, it becomes an educational solution. When you put a phrase like rock climbing through the business translator, it stiffens into a family entertainment experience. The pandemic expanded our vocabulary with other vague and vacuous words. Yet we feel obliged to parrot them back like a Tibetan chant. It’s unprecedented how often we hear the word unprecedented. And if someone says “pivoting” one more time, I’ll scream. It is my all-time un-favorite. We’re heading for a new normal as we go through an unprecedented buzzword pivot. Those with a tech background may know that pivoting is an engineering term that describes a rotation around a pin. A sailboat pivots around a vertical axis that goes through the mast; a crankshaft pivots around a bearing; a ballerina or ice skater pivot. It involves a rotation; it has no forward direction. You can see where I’m going with this: just turning direction without moving forward is not enough. It never has been. We need to find new solutions that deliver value to the customer. This was important before the pandemic, and it’s even more important now. Just pivoting won’t get you successfully into the new world. It’s too small of a change, and you’re likely going to be left behind your competition – if you make it at all. Begin to challenge and question the core premises that you made about your

It’s unprecedented how often we hear the word unprecedented. And if someone says “pivoting” one more time, I’ll scream. business. Come up with new answers to all of the assumptions you have been making. Expand the way you think about your business and your leadership role – not by making a small change, but by blowing away (in your thinking) the strategic ideas at the foundation of your business. Think from scratch. (Re-)start your innovation efforts and stop pivoting. There’s another ubiquitous term that gets me: social distancing. This phrase is really misleading. The virus requires us to be physically or spatially distant, but in many ways, it is bringing us socially closer. (Yes, there are also events taking place that take us apart as a society, but they are not driven by the virus). I’ve seen neighborly gestures of support, encouragement and love that weren’t there before. People offer to shop for others in need. Families find ways to pool their kids for childcare and even schooling at home. A crisis gives us the opportunity to reflect on what is important and what matters most. We express this in language. The words we use matter. It is crucial to connect well with our work colleagues, our friends and our loved ones. Using the right words makes all the difference between growing further apart and being more connected. Coming up with new platitudes and vapid corporate language is not helping us personally or professionally. More than

ever, it is important to use language that is real and authentic. Tell your stories of what’s happening and not someone else’s. Use normal language. Let it reflect your emotions. Don’t tell people how they should feel. Tell them how you feel. Use language at its most powerful. If we take anything out of this crisis, it is this: focus on what is important and express it well. My challenge to you is this: for the next week, flatten your own buzzword curve. Pay attention to words such as pivot, unprecedented, new normal, social distancing, emerge and uncertain times. Catch yourself as you’re tempted to use any of them. Instead, use more descriptive language and keep it real. Oh, and by the way, there’s a quote that keeps popping up lately. It’s by the Canadian ice hockey player Wayne Gretzky: “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.” If you’re tempted to use it, you’re not there yet. Josef Martens helps organizations dramatically improve their performance. You can reach him at JM@JosefMartens.com or (240) 938 1274.

The Financial Manager • November/December 2020 7

ASSOCIATION NEWS

UPCOMING EVENTS: EXPAND YOUR KNOWLEDGE Media Tax Summit

March 2-3, 2021 11 AM to 1 PM ET (Both Days) PRESENTED VIRTUALLY

For the first time ever, MFM is organizing a Tax Summit, which seeks to provide attendees with information that they can’t get elsewhere. It will focus on issues that are important to media tax professionals.

Three co-chairs are leading the charge: Sean Hetzler, senior director of tax, Tegna; Dan McGuire, tax partner, KPMG; and Paul Nesterovsky, vice president, tax, Sinclair Broadcast Group. The summit will include a discussion featuring media CFOs about what they expect from their tax department and how the department can make a CFO’s job easier. Other planned topics include:

Pending tax legislation and its potential to affect media businesses; ■ Future trends related to state tax legislation and their potential to affect media company tax liability; ■ Remote work considerations. The cost is $100 per attendee, with a $200 cap per company. There’s no charge for corporate members. ■

CFO Summit

March 11-12, 2021 Three hours of content both days PRESENTED VIRTUALLY

BOND & PECARO The Basis for Your Decisions

ApprAisAls FeAsibility studies expert testimony And relAted FinAnciAl services For the communicAtions industry

1990 M STREET, NW SUITE 400 WASHINGTON, DC 20036 (202) 775-8870 E-mail: BP@BondPecaro.com www.BondPecaro.com

8 The Financial Manager • November/December 2020

This signature MFM event is limited to senior financial professionals working for media companies. They’ll convene on March 11 in the afternoon and the following morning, on March 12th. At press time the session lineup included: ■ Economic overview, Drew Marcus, senior advisor, Guggenheim Securities; ■ Automotive industry trends, Tyson Jominy, vice president, data and analytics with J.D. Power; ■ Live events, Juliette Feld Grossman, chief operating officer and Steve Yaros, senior vice president, media and global communications, Feld Entertainment; ■ New revenue opportunities, Paul Jacobs, vice president and general manager, Jacobs Media Strategies; ■ CFO Roundtable, moderated two-hour discussion about current strategic priorities for the media industry. There are three co-chairs of the summit: Van Allen, executive vice president and CFO, Radio Advertising Bureau; Kimberly Parker, vice president and CFO, Graham Media; Paul Yates, vice president and corporate controller, Hubbard Broadcasting Inc. For members, the cost of the summit is $450 each. Non-members pay an additional $250, which includes a one-year trial MFM membership. The organization reserves the right to refuse registration to those who do not meet qualifications. Both seminars will offer CPE credit. As more information about these events becomes available, it will be posted on mediafinance.org.

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Rebounding Like a Bullet BY SETH RESLER

Behind the scenes at John Deere's podcast, "On Life and Land"

10 The Financial Manager • November/December 2020

AUDIO ADVANCES

Defying the laws of economic gravity, podcasts are on a growth spurt. There are ways to build a meaningful business in the space.

W

HILE THE COVID-19 PAN-

demic is taking a significant toll on many sectors within the media industry, the podcasting space is proving to be surprisingly resilient. In April, the number of titles available in Apple Podcasts surpassed 1 million. Other companies have taken note. While Apple Podcasts is still the largest podcast directory, streaming services like Spotify, Pandora and TuneIn have embraced podcasts in recent years. In September, Amazon Music became the latest player to feature podcasts on its platform. What’s more, the IAB (Interactive Advertising Bureau) released a report this past summer stating that in 2019, the medium saw an estimated 48% year-over-year revenue growth, for a total market estimate of $708.1 million. And despite the COVID-19 pandemic, the IAB expects the podcasting industry to cross the $1 billion mark next year. According to a recent report from Westwood One and Magellan AI, after a slight dip in the number of unique podcast advertisers in April, the industry rebounded and has seen a 10% increase year-to-date. In other words, podcast production is up; podcast listening is up; and podcast revenue is up even as the rest of the world is upside down. How can media companies get in on the action? Or if they’re already involved in podcasting, how can they do more? There are two revenue-opportunity “doors” to choose from. Companies can make a play on the content side or the tech side – or choose to do both. Going the content route involves the creation of podcasts themselves. Media companies like National Public Radio (NPR), Nerdist and Wondery are examples of content players. The tech side, on the other hand, involves building the technology that supports either podcasters or podcast listeners. Art-19, Blubrry and PocketCasts are among the tech companies in that arena. Some players have a foot on both sides of

the podcast business. This often involves the creation of exclusive content and an app for delivering it, similar to what Netflix, Disney+ and CBS All Access are doing in the television space. As Spotify has grown its presence in podcasting, it has acquired both Gimlet, a content company, and Anchor, a tech company. Other players are following suit. The road traveled by Slate gives an idea of how a podcast strategy can evolve. Its foray into podcasting was initially a content play, spearheaded by Andy Bowers, a former NPR journalist. This grew into Panoply Media, which acquired ad-insertion and podcast-hosting technology, which it then offered to other podcasters. Eventually, Panoply split its technology company off from Slate and rebranded itself as Megaphone. CONTENT MODELS For podcast producers, there are a number of different revenue models in a burgeoning medium that is still finding its footing. First and foremost, there’s the traditional ad-supported approach, akin to radio or television. However, most podcast ads are host-read, rather than 30- or 60-second produced spots. According to the IAB, about half of podcast ads are “baked in” – recorded and uploaded at the same time the show is produced. The other half are dynamically inserted into the show when the listener downloads the file to a listening device. In this way, someone who listens to a podcast episode today will hear different ads than someone who listens six months from now. Similarly, a listener in Chicago might hear a different ad than a podcast consumer in Miami. Podcast ads are typically sold on the basis of CPM (cost-per-thousand) impressions. They can cost between $18 and $50 per CPM, depending on the popularity of the podcast, the length of the ad and its position (pre-roll, mid-roll, post-roll) within an episode. According to the IAB’s Podcast Ad Revenue Study released in July 2020, over half of all podcast advertising revenue comes from direct

The Financial Manager • November/December 2020 11

AUDIO ADVANCES response ads, in which podcasters often encourage their listeners to go to a unique URL or use an exclusive code when purchasing as a means of attributing the sale to a particular podcast. As with radio, attribution can present a challenge for advertisers who focus on ROI (return on investment) metrics. Although startup companies (like Chartable), which use IP addresses to match purchases to podcast listeners, are tackling the issue. Podcasts are measured by the number of downloads an episode receives in its first 30 days after being published. Rob Walch, vice president of podcaster relations at Libsyn, the industry’s largest podcast hosting company, points out that as a rule of thumb, advertisers become interested when shows earn at least 5,000 downloads per episode. That’s a high bar for most podcasts. In May of this year, only 6.3% of new podcast episodes hosted on Libsyn’s platform had crossed it. Over the last several years, as more advertisers have turned their attention to podcasts, the medium’s metrics have attracted increased scrutiny. Unlike the broadcast radio and

LITTLE ENGINES THAT COULD?

P

ODCASTS HAVE EXPENDED their revenue opportunities beyond recorded shows. Prior to the pandemic, more and more podcasts took to the road for live performances, in much the same way that musical artists rely on concerts and merchandizing to support their brands. In podcasting, this model has yielded impressive successes. Fans around the country have lined up to see a live recording of the popular podcast “My Favorite Murder” or director Kevin Smith’s “SModcast.” The podcast touring model, however, is more embryonic – not yet as established as the tried-and-true circuit for musical artists or stand-up comedians. The concept for podcasts was still in its infancy when live events ground to a near halt with the pandemic. The sale of merchandise, such as clothing or stickers, presents yet another albeit smaller source of revenue for podcasters attempting to build their foundation of fans.

William, Will Ferrell and Barack Obama), you must sign up for a subscription. Slate takes a different approach to premium content with their Slate Plus program. Subscribers to the program get ad-free versions of their podcasts, which also include exclusive bonus segments. As you might expect, companies that offer premium content are hoping to become the “Netflix of podcasts,” an attractive but lofty ambition. The startup company LumiEarlier this year Spotify purchased nary raised $100 million licensing rights to the highly popular in initial venture capital “The Joe Rogan Experience” for more with this goal in mind. Luminary built a “podthan $100 million. catcher” (an app created for listening to podcasts) television industries, in which a dominant that includes thousands of free podcasts in third-party company like Nielsen publishes its directory. The company then enticed audience metrics, podcast statistics are provid- high-profile podcasters such as Trevor Noah ed to each podcaster by their hosting compa- and public radio’s Guy Raz to create exclusive ny. (A handful of companies produce charts, content, and it uses this app to upsell listeners but most require the podcast producers to opt by encouraging them to subscribe to these in, and none dominate the measurement space shows. in the same way that Nielsen does.) However, Luminary has struggled to turn This raises an important question: how a profit. In May, Bloomberg reported that do we know what constitutes a download? despite these efforts, the company has only Is a podcast download on a show hosted by signed up 80,000 subscribers, generating less Blubrrry the same as one hosted on Art 19? than $500,000 in monthly revenue – despite The IAB has assembled key players in the spending more than $4 million each month. industry to build consensus around these metMeanwhile, Spotify is increasing its investrics, and it’s published technical guidelines. ment in exclusive podcasts. For example, earliAdditionally, a download does not neces- er this year it purchased licensing rights to the sarily mean a consumer has actually listened highly popular “The Joe Rogan Experience” to an episode – all or part. This is another for more than $100 million. (There reportedly area where for media mavens, podcast metrics has been pushback from Spotify employees fall short. who expressed concern over Rogan’s transphobic content, and the platform removed PREMIUM CONTENT some of Rogan’s shows with right-wing figWhile advertising is the largest revenue ures.) The strategy of owning popular content stream in the space, it is not the only one. can have a big payback, if it not only entices Many podcasters are placing premium con- more consumers to download the Spotify app tent behind a paywall to generate income. but also converts them to paying subscribers. For example, comedian Marc Maron hosts Moreover, if Spotify can shift a significant his popular “WTF” podcast, in which he amount of its users’ listening to content that interviews comedians, musicians and other it owns, rather than music owned by record celebrities. The most recent episodes are labels and their artists, it could dramatically available for free. But in order to listen to decrease the amount of money it pays for royinterviews older than six months (including alties, thus changing their business model to Continued on page 14 great conversations with the likes Robin

12 The Financial Manager • November/December 2020

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AUDIO ADVANCES PODCASTS—Continued from page 12

a more attractive format, making its investors happy. Increasingly, podcasts have become an incubator for Hollywood. Hit podcasts like “Dirty John,” “Lore” and “2 Dope Queens” have been developed into television shows. The adaption of popular on-demand audio shows into a reliable podcast-to-screen pipeline could prove to be an area of revenue growth for the movie and television businesses of all types. Of course, sometimes the pipeline flows in reverse: Spotify recently inked a deal with Warner Brothers to produce podcasts based on DC Comics characters. ADVERTISERS JUMP IN Podcasts can be such a powerful marketing tool that many independent producers generate revenue not just through ads, but by using their shows as a vehicle to promote a product or service. For example, a real estate agency or a local law partnership might launch a podcast to help spread the word about their services and attract potential clients. Increasingly, larger companies are also

producing branded podcasts as a way of engaging with their customers and loyal fans. John Deere, Trader Joe’s, Basecamp and Blue Apron are among the growing list of companies producing branded podcasts as part of their total marketing efforts. These brands often hire outside firms to

John Deere, Trader Joe’s, Basecamp and Blue Apron are among the growing list of companies producing branded podcasts. produce the podcasts, opening up a new revenue stream in the podcasting space. Podcast producers are paid a per-project fee that does not depend on downloads the way that an ad-driven show does. The production of branded podcasts can be executed by many different types of firms. Some, like Canada’s Pacific Content, specialize in podcast production. Traditional radio or television companies, including

iHeartMedia, are increasingly offering podcast production services as well. They can also be offered as an additional service by video production houses, digital marketing companies or even public relations firms skilled in the creation of on-demand audio. The branded shows can serve purposes beyond just marketing. For example, large corporations are increasingly using podcasts for internal communications: to train new hires; roll out new products internally; or give management a platform to communicate their vision to the staff and prospective employees. Podcasts can also be used as ongoing customer support tools, or for educational purposes. As your company looks to enter into or expand its offerings in the world of podcasting, consider the full range of revenue streams. They can round out a portfolio, offering unique content that is reflective of a media company’s brand and what it stands for. Seth Resler is the digital strategist for Jacobs Media, a consulting firm that represents radio, TV and digital media. He can be reached at (248) 353-9030 or seth@jacobsmedia.com.

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The Financial Manager • November/December 2020 15

OPTICAL ILLUSIONS BY MATTHEW LOCHTE & JAKE LOURIM

16 The Financial Manager • November/December 2020

MEDIA VALUATIONS

TV station values are impacted by a series of sobering conditions this year. Yet there’s reason for optimism. This is the second in a series of stories on the performance of various media sectors. AT SOME POINT IN THEIR LIVES, MOST KIDS BECOME FAMILIAR WITH

the enthralling spectacle of a magic show. You’ve probably watched a magician go through the usual repertoire of tricks – the rabbit out of the hat, the never-ending handkerchief, the assistant sawed in half. But one always stands out. The assistant lies down on a table, is covered with a black sheet and then is somehow miraculously levitated. The magician runs large rings over her floating body to show that there is nothing supporting her. To the untrained eye, it may seem as if the magicians can defy the laws of gravity and make someone float. Of course, this is all done with sleight of hand and smoke and mirrors. In a similar way, it is easy to become mesmerized by the stock market’s performance. As of the end of August, stock prices seemed to defy basic financial and valuation theories and continue to levitate upwards in the face of a pandemic; global economic recession; high unemployment; downward revisions to earnings; political standoffs; and social upheaval. Publicly traded companies in the local TV broadcast business haven’t enjoyed the same magical rise. There’s a sharp difference between investor sentiment in the broader markets and the stock prices of local television broadcasters. Is the broader market over-valued? Have the broadcasters been undervalued? Let’s dig into some numbers and market conditions to get at those answers. To be sure, the impacts of the recession induced by COVID-19 vary by industry. Some companies – such as Netflix, Amazon and Zoom – have certainly profited from the stay-at-home era. Other industry sectors – such as restaurants and travel – have been hit particularly hard. Local television broadcasters fall somewhere between the two ends of that spectrum. TV stations have been buoyed by increased viewing of entertainment and news, along with a tsunami of political ad spending. But there was a contraction of revenue from core advertisers – the ones who buy spot TV availabilities year-in and year-out. To put things in perspective: the tech-heavy NASDAQ has rallied significantly this year, increasing 47.9% year over year for the first eight months of this year. It’s also up an incredible 52.9% in the five months since the March stay-at-home orders. The S&P 500 posted a similar but less dramatic rebound. It was up 19.6% and 35.4% for those two periods, respectively, compared with the same time last year.

However, the average stock price for “pure-play” television stocks – Gray Television, Sinclair Broadcasting, Nexstar, TEGNA and E.W. Scripps – shows a less buoyant return. An index of these companies’ stock prices as of Aug. 31, 2020 was $31.20. That’s up from the March 31 index of $20.59, but down 15.9% when compared with results for the first eight months of 2019. Granted, Sinclair’s stock price has fared significantly worse than its peers due to COVID’s impact on its $9.6 billion regional sports network acquisition. But even when Sinclair is removed from the mix of companies, the average share price is still down 4.0% year-over-year. While TV stocks have continued to rise since stay-at-home orders began in March, that growth has slowed, and the average of four broadcast price-earnings ratios (Gray, Nexstar, TEGNA and Sinclair) was 9.5 as of Aug. 31, lower than its level of 10.5 one year prior. Sinclair’s price-earnings ratio fell from 12.8 to 5.2. TEGNA’s jumped from 7.5 to 11.4. However, the same two companies’ ratios of enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization) have remained fairly similar, settling at 8.8 on Aug. 31 compared to 8.4 on the same date in 2019. The ratio was 8.6 in 2018, and 9.1 in 2017. M&A ACTIVITY RISES Broadcast mergers and acquisitions resumed in the summer after a significantly quiet four-month period, and the deals that have occurred reflect the current economic hardships in their prices. As of July 31, 2020, the average multiples for this year’s broadcast deals were down to: ■ 7.0x in the top 25 markets (lowest since 2015); ■ 7.1x in the 26th through 75th markets (lowest since at least 2009); ■ 7.7x in the rest (lowest since at least 2009). That’s according to S&P Market Intelligence. The rise to $96 million in total TV transactions in July, more than the previous four months combined, was a welcome sight for the industry. Why haven’t investors pushed broadcast television stocks to the highs seen in the broader market? Broadcasters are facing some unique challenges. Industries hit particularly hard by the pandemic this year are some of TV’s most significant advertisers – sectors like restaurants/dining, automobile sales, and travel and leisure. There were large declines in core advertising, according to the April-June 2020 10-Q financial reports from Gray, Sinclair, Nexstar, TEGNA, and E.W. Scripps. Each company has a slightly different portfolio of reporting units and way of classifying revenues. But most experienced 30% to 40% declines in revenue over 2019 results. The downward spirals came after relatively flat first-quarter The Financial Manager • November/December 2020 17

results. There was robust advertising on TV during January and February, followed by dramatic decreases in core advertising revenue in the second half of March.

stimulus package was passed in early 2009, TV stocks began to rebound, but the index did not return to its pre-crash level until September 2013. Similarly, local TV advertising revenue that was lost following the early 2000 dot.com bust and the 2008-2009 recession were slow to return and have never reached the highs seen at the turn of the millennium. Bond & Pecaro’s estimated total net local television advertising by year shows some clear trends. (See chart below.) The decrease in local television advertis-

WILL HISTORY REPEAT? The more limited stock recovery of TV broadcasters, when compared with other industries, also has to do with another factor: investors may be looking to the past as a prologue to the future. When the stock market crashed in the 2008 recession, publicly traded TV groups,

Local Broadcast Television Annual Net Advertising Revenue Estimates

19,000,000 18,000,000 Ad Revenue (000s)

17,000,000 16,000,000 15,000,000 14,000,000 13,000,000 12,000,000 11,000,000

2019

2020

2018

2017

2016

2015

2013

2014

2012

2011

2010

2009

2008

2007

2006

2005

2003

2004

2002

2001

2000

10,000,000

SOURCE: Bond &Pecaro

140

TV Station Group Stock Prices

120

Gray

100 80

Nexstar

Sinclair TEGNA

Average

60 40 20 0 1/31/07

1/31/09

5/31/13

for the most part, endured a more severe stock market hit than the overall averages, and more severe than the revenue declines would have indicated. An index of four publicly traded pure-play TV station owners (Gray, Sinclair, Nexstar, and TEGNA) closed 65.4% lower on Sept. 30, 2008 than one year earlier. That compared with a 22.6% decline in the NASDAQ and a 23.6% drop in the S&P 500. At the TV index’s low point, at the end of March 2009, it had fallen 95.7% from its apex in May 2007. After an economic

1/31/16

4/30/18

8/31/20

ing revenue from the 2000-2001 recession proved long-lasting. B&P estimates published in 2000 had net local TV advertising revenue across all markets at about $18.8 billion, and they projected that revenues would increase to approximately $23 billion by 2003. Revenue forecasts were revised lower in 2001 and 2002.By 2003, B&P projected 2003 local TV net advertising at $17.6 billion, 20.0% below the level projected just prior to the dot-com bust. By the time the 2008 recession hit, industry forecasts for television advertising had just begun to approach the

18 The Financial Manager • November/December 2020

levels originally forecast in 2000. The 2008 stock market crash and ensuing economic disruptions created ripple effects from which local TV station advertising never fully recovered. S&P Global Market Intelligence’s historical TV ad revenue data follows the same trajectory as those forecast by B&P, although they estimate gross rather than net advertising revenue. In their estimate, total local TV advertising revenue began decreasing in 2007, consistent with the non-election year cycle, down 7.5% to $22.4 billion. In 2008, despite a presidential election and the Beijing Summer Olympics, television industry advertising revenue decreased 1.7% to $22.0 billion. As the crisis continued into 2009, gross local TV advertising revenue plummeted by 21.3% to $17.3 billion. Given that history, investors have probably decided that other industries can provide more immediate returns. And there’s another factor to consider: every year, more and more local advertising dollars have flowed to digital. Those gains, made at the expense of broadcasting during the pandemic, may be difficult to reverse in the coming years. ON THE POSITIVE SIDE Despite all those troubles, broadcast TV has some big reasons for optimism. The introduction of ATSC 3.0, also known as Next Gen TV, allows broadcasters to offer local advertisers targeted advertising and measurement, enabling local TV stations to better compete with digital rivals. What’s more, political advertising has thus far been immune to COVID-19 and the recession this year. Over the first half of 2020, Nexstar, Gray, Sinclair, TEGNA, E.W. Scripps, Meredith and Entravision generated a total of $322 million in political advertising revenue. That’s up from $168 million during the same period in the midterm election year of 2018 and $141 million during the same period in 2016. Even while local advertising dried up at times in 2020, TV groups maintained or raised their political forecasts, with TEGNA, for instance, revising its projection from $300 million to $370 million for the year. Political spending is expected to allow broadcasting companies to maintain relatively stable revenues in 2020, though there may likely be a contraction in the 2021 non-election year. Another factor favoring local television

MEDIA VALUATIONS

POLARIZED TRENDS AT PLAY

S

TOCK PRICES INDICATE THAT THERE’S BEEN A REAL DISCONNECT BETWEEN

Wall Street and Main Street this year. While the stock market has reached all-time highs, the economy remains in a recession and the unemployment rate is in the high single digits. Why the dichotomy? There are three explanations: ■ While overall consumer spending has decreased in 2020, those with disposable income are finding the stock market to be a welcoming place for savings. ■ Monetary policies, such as interest-rate cuts, have fostered growth and reduced the attractiveness of holding cash and bonds. ■ The stock market is forward-looking, portending a healthy post-pandemic future for many corporations. At the beginning of September, the S&P 500 price/earnings ratio was in the high 20s, soaring well above the ratio at any point this century other than a brief spike in 2009 and during the dot-com boom in the late 1990s, according to multipl.com. But while the S&P 500 performance may be an indication of a case of “irrational exuberance,” stocks in the broadcast market have settled down. That should calm worries about overvaluation for broadcast companies.

owners is the increasing share of broadcasters’ revenues coming from retransmission (distribution) fees paid by multichannel video program distributors (MVPDs) and over-the top providers. These fees have been rising dramatically and are forecast to continue to increase, albeit at a slower pace.

Retransmission revenues give broadcasters a stable and predictable revenue stream protected from the cyclicality of special sports events, like the Olympics, and political spending. Retransmission revenue has increased at a compound annual growth rate of 30% over the past 10 years. It grew

by 5.8% to $10.9 billion in 2019, though that growth is projected to level off to only 1.0% in 2022, according to Kagan, a media research group within S&P Global Market Intelligence. As of June 30, 2020, retransmission fees account for 55.9% of broadcast revenues for pure-play television companies, according to Kagan estimates. That’s up from 45.1% at the end of 2019’s second quarter. As such, the future of television companies needs to be viewed in terms of the multiple revenue streams that supplement core advertising: political advertising, retransmission fees and a host of opportunities that ATSC 3.0 can generate. Broadcasters don’t need to magically pull a rabbit out of the hat to sustain growth. While not levitating to the exuberant heights enjoyed by the broader markets, there are positive factors at play, as well as the Federal Reserve’s unprecedent monetary easing. Broadcast stocks seem conservatively valued relative to their prospects and poised for growth. Matthew Lochte is a principal and Jake Lourim is an associate at Bond & Pecaro. Lochte can be reached at mattlochte@bondpecaro.com.

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The Financial Manager • November/December 2020 19

CREDIT & COLLECTIONS

EASING THE

CHAPTER 11 LOAD

The new bankruptcy act makes it less likely for foundering small businesses to sink. There are special implications for creditors. BY WANDA BORGES BANKRUPTCY PRACTITIONERS AND SCHOLARS alike have known for many years that when a small business files for a Chapter 11 proceeding, it is often the nail in its proverbial coffin. There have been attempts to create relief for these small businesses, but most have been futile. That changed on Aug. 23, 2019, when the Small Business Reorganization Act of 2019 (SBRA) was signed into law. It created Subchapter V in Chapter 11 of the Bankruptcy Act, which became effective on Feb. 19, 2020. And it has special 20 The Financial Manager • November/December 2020

implications for creditors, including media companies that have sold advertising availabilities to the growing number of companies facing financial hardship. The primary purpose of the SBRA was to reduce costs for a small business in bankruptcy and increase efficiency to enable that small business to succeed. If a company meets the eligibility requirements under the SBRA, it may elect (but is not required) to be treated as a small business debtor under the SBRA.

that conference, the small business debtor is required to file a status report informing the court, among other things, that all tax returns and financial reports have been filed; all insurance is up to date; and what has been done to attain a consensual plan of reorganization. The small business debtor must file a plan within 90 days of the Chapter 11 filing date, and this time period is exclusive to the debtor. No one else involved with the small business debtor can file a plan in its place. The court may extend the 90-day period if the debtor successfully demonstrates that there’s need for the extension due to circumstances beyond its control. It remains to be seen how the courts will interpret which circumstances qualify for such an extension.

A small business debtor is defined under the SBRA as one engaged in commercial or business activities where the aggregate noncontingent, liquidated secured and unsecured debts is no more than $2,725,625. (See sidebar, page 22, on how the CARES Act is temporarily changing that maximum amount.) While the SBRA granted more Chapter 11 protections to a small business, faster deadlines compel that debtor to move through its bankruptcy proceeding quickly. This was one of the original goals of SBRA, as it was often said that the longer a small business remained in Chapter 11, the likelihood of its success diminished. TIMELINE REQUIREMENTS A status conference must be conducted by the court within 60 days of the Chapter 11 filing. At least 14 days prior to

CONTENTS OF THE PLAN The Plan of Reorganization submitted by a small business debtor must contain a brief history of the business operations of the debtor. The financial information must include a liquidation analysis, which shows creditors what they will receive under the plan as opposed to what they would receive if the business were to be liquidated. Financial projections must show the ability of the debtor to make the payments as promised under the plan. As part of the plan, the debtor must indicate that it will submit either all future income, or part of it, to the supervision and control of a trustee. This is commonly referred to as “current monthly income” or “disposable monthly income.” This trustee is more akin to a Chapter 13 trustee. The trustee does not operate the debtor’s business but will help facilitate the successful reorganization. All plan payments will be sent to the trustee, who will make the distributions to the creditors. Unlike a standard Chapter 11 proceeding, there is no statutory deadline for acceptances of a plan in a small business Chapter 11; the deadlines in section 1121 of the Bankruptcy Code are no longer applicable to small business debtor reorganizations. It also is not necessary for creditors to accept a small business plan. It can be confirmed even if all classes of impaired claims reject the plan. Payments due to administrative expense claimants can be stretched out over the term of the plan. Unlike a traditional Chapter 11 proceeding, equity (i.e., the owners of the small business) can retain the ownership interest even if the unsecured creditor class is not paid in full and rejects the plan as long as all of the debtor’s projected disposable monthly income over three to five years is used to make plan payments. Upon confirmation of a consensual plan, the debtor will receive its discharge. Where there is a non-consensual plan the discharge will be granted upon completion of all plan payments. After the plan is confirmed, it can be modified before The Financial Manager • November/December 2020 21

CREDIT & COLLECTIONS substantial consummation. But this can only happen if it still meets the requirements for confirmation, or after substantial consummation at any time within three to five years. The court must hold a hearing upon notice to all creditors in order to approve a modified plan. CHANGES TO PREFERENCES Trade credit grantors have always grumbled that a trustee, debtor-in-possession or committee should do its homework before commencing a lawsuit to recover alleged preference payments. Now, that homework is mandatory! Described as a change to avoid abusive practices, section 547(b) of the Bankruptcy Code has been amended by the SBRA to add a due diligence requirement prior to the commencement of preference litigation. Section 547(b) now reads, in pertinent part: “except as provided in subsections (c) and (i) of this section, the trustee may, based on reasonable due diligence in the circumstances of the case taking into account a party’s known or reasonably knowable affirmative defenses under subsection (c), avoid any transfer of an interest of the debtor in property.”

IMPEDIMENTS ELIMINATED THE PAYMENT OF QUARTERLY FEES to the Office of the United States Trustee has been eliminated, which is a cost savings to the small business. There is no creditors’ committee in a small business Chapter 11 unless the court, for cause, orders otherwise. While this may not seem palatable to trade credit grantors, the debtor will save money by not having to pay for the committee professionals. A small business debtor does not have to file a separate disclosure statement to accompany its plan. The information generally required by a disclosure statement can be inserted directly into the Plan of Reorganization.

Creditors who are sued for the return of a preference still retain the burden of proving defenses to those preference actions. In addition, the venue provision that forces a trustee or debtor-in-possession to commence litigation on smaller claims in the district court where the defendant resides has been increased from $13,650 to $25,000. It is hoped that trustees will be less likely to commence suit on preferences and other claims seeking recovery of less than $25,000 because of this change. However, the change does nothing to resolve the conflicting court decisions as to whether this venue limit applies

ALONG CAME COVID-19

J

UST AS THE SBRA WAS BECOMING effective last February, the COVID-19 pandemic struck. In speed not often seen at the legislative level, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted on March 27, 2020. The purpose of the CARES Act was to provide emergency assistance and health care response for individuals, families and businesses affected by the 2020 coronavirus pandemic. The portions of the CARES Act that relate to small businesses includes a maximum aggregate debt limit for a business (excluding affiliates and insiders) to qualify as a small business debtor under Chapter 11. It has been increased to $7,500,000 from $2,725,625. Not less than 50% of that debt must be derived from the operation of the business. The intent is to enable small businesses to use Chapter 11 to survive the pandemic and repay their debts without hardship. Payments made under federal law relating

to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to COVID-19 (commonly referred to as stimulus payments) are excluded from the definition of “current monthly income,” which a small business is required to use for its bankruptcy plan payments. This exclusion is a relief granted not only to small business Chapter 11 debtors but also to Chapter 13 debtors who may be small businesses, as well. In particular, these payments are excluded from the disposal income, which is required to be paid by Chapter 13 debtors. These changes are not permanent , however. The relief granted to small business Chapter 11 debtors and Chapter 13 debtors by the CARES Act are due to expire on March 27, 2021, which is one year from the date of enactment. It remains to be seen whether the CARES Act sunset date will be extended.

22 The Financial Manager • November/December 2020

to preference and other avoidance actions. TREATMENT OF GUARANTORS In the six months since the SBRA has been effective there have already been decisions written by various courts on whether or not guarantors of business debt are eligible to file small business Chapter 11s and whether or not the businesses from which the debts were derived must still be in operation. In the case of In re Wright, 20-01035, 2020 WL 2193240 (Bankr. D.S.C. April 27, 2020), the debtor had guaranteed business debts for two businesses that were defunct at the time of Wright’s Chapter 11 filing. Wright filed as a small business debtor, produced evidence that more than 50% of his debts were derived from the operation of those businesses and met the monetary criteria. Judge Helen Burris held that the personal guarantor of business debts (even when the business itself was defunct) qualified to file as a small business debtor since he met the criteria, and in this instance, he was “engaged in commercial or business activities” by addressing residual business debt. In the case of In re Blanchard, 19-12440 (Bankr. E.D. La. July 16, 2020), relying in part on the Wright case, Judge Meredith Grabill held that two individuals who owned several businesses and owed substantial debt as a result of personally guarantying those business debts qualified as small business debtors under the SBRA. Trade creditors should be watching their guarantors since these courts have opened the door for them to file as small business debtors whether they are currently or formerly engaged in business. Wanda Borges is the principal member of Borges & Associates, LLC. She can be reached at wborges@borgeslawllc.com or (516) 677-8200.

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Shifting Sands Here’s a briefing for non-tax professionals on how recent changes in regulations impact the financial health of companies. BY NICHOLAS SANCHEZ

W

HEN THE TAX CUTS AND

Jobs Act (TCJA) was enacted in 2017, it ushered in the most sweeping tax-law changes since the Internal Revenue Code was overhauled in 1986. To a tax practitioner like myself, it appeared to be a once-in-a-career sea change. Yet, tax laws remain constantly in flux. Take the CARES Act, for example. More formally known as the Coronavirus Aid, Relief, and Economic Security Act of 2020, it introduced many new tax provisions in an effort to soften the

24 The Financial Manager • November/December 2020

blow of the COVID-19 pandemic. Even if you are a non-tax professional – working outside of your company’s tax office – it pays to have a basic understanding of some notable changes of late in order to understand their implications for your company. Let’s take a look at just a few of the important new developments to be aware of. PPP PECULIARITIES The CARES Act created the Paycheck Protection Program (PPP), which needs little introduction. PPP loan proceeds

may be used to pay payroll costs, certain employee healthcare benefits, mortgage interest, rent, utilities and interest on other existing debt. To the extent that the loans are used for these specific allowable expenses over the “covered period” of the loan (either the eight-week or 24-week period after loan origination), PPP loans may be forgiven. This forgiveness, which would otherwise result in cancellation of indebtedness income, is excluded from gross income under provisions of the CARES Act. However, many people question whether these expenses are still deductible.

TAX MATTERS

The answer to that question came on April 30, 2020, when the IRS issued Notice 2020-32. It clarifies that no deduction is allowed for an expense paid with PPP loan proceeds that are forgiven. For example, if a borrower uses PPP loan proceeds to pay wages to employees during the covered period, and the loan is subsequently forgiven and excluded from income, those wages may not be deducted on the borrower’s tax return as a business expense. This still holds true for wages that would otherwise be an ordinary and

necessary expense, and therefore deductible. The disallowance of the deduction does not result in income to the borrower, but it limits the benefit of the forgiveness. Many tax professionals had assumed this would be the case, but the IRS’s guidance was nonetheless a disappointment. While the agency’s position is consistent with certain tax law principles, the denial of a deduction is logically contrary to the intended purpose of the PPP loan program. Many, including the American Institute of CPAs, have advocated for a legislative fix.

While Congress is aware of this issue, and certain proposals have been introduced, no relief is currently available. Consequently, this important issue needs to be monitored. For those involved in tax planning, or those reporting to their organization’s tax department, expenses paid with forgiven PPP loan proceeds should be segregated. PAYROLL TAX DEFERRALS On Aug. 8, 2020, President Donald Trump issued a “Memorandum on Deferring Payroll Tax Obligations in Continued on page 29 The Financial Manager • November/December 2020 25

Media Finance

FOCUS

2020 CONFERENCE

ROUNDUP

PUNCHING UP BUSINESS

The second part of TFM’s recap of the annual Media Finance Focus conference looks at video games, alternative revenue and new consumer habits. BY JANET STILSON

Among the live events Turner Sports held in 2020 before COVID-19 struck was the ELeague FIFA Ultimate Team (FUT) Champions Cup Stage III.

Esports’ Unique Propositions TO UNDERSTAND THE UNIQUE WAYS THAT VIDEO GAMES

are interacting with consumers and addressing advertiser needs, look no further than the streaming service Twitch, which is owned by Amazon. “One of the goals of Twitch is to allow conversations to happen between viewers, streamers and the games,” explained Drew Smith, senior strategic development manager at Twitch, during an MFM conference session. Within the company’s toolchest is something called extensions. They involve overlaying information on the screen, which might take the form of polls or statistics about a game. In the case of Borderlands 3, a role-playing shooter game developed by Gearbox Software, the extension on Twitch allows viewers to interact directly with the game and the streamer. “Viewers can enter simple things on their screens,” Smith said. “They don’t need to do anything after that, but it would have some material effect on the game, such as a mini boss that the player would need to fight. “With the innovation that Gearbox put in, on top of the extension

26 The Financial Manager • November/December 2020

tools that we have, we were able to put something together that became truly different,” Smith added. “In comparison with streams where no extensions were active, we saw there was almost double the viewing time on channels that had an extension going,” said Cullen Sweet, formerly of Gearbox. “That’s massive when you consider that the average viewing time for a lot of these people is an hour and a half. Now we were seeing that we captured their attention We saw there was almost for almost three hours.” double the viewing time on Another way of prochannels that had an extension viding interactivity with viewers is to create a “badgoing. That’s massive. ass” creature, and then se­— Cullen Sweet, Gearbox lect a lucky viewer to take ownership of it. “Immediately, they would see their name above that creature with the celebrity or influencer’s game,” said Sweet. “The rest of the viewers can then vote on how to make that enemy even stronger, to try to beat the influencer. It’s led to all-around silliness that the influencers enjoyed and the viewers enjoyed,” Sweet said.

Dissecting Gamer Data STATISTICS FROM DELOITTE

add to the picture of how sticky games can be. Forty-eight percent of all U.S. consumers have done some kind of gaming since COVID-19 forced them to largely stay home. Among members of Gen Z, the figure rises to 75%, and among Millennials, it’s 69%. Gen X, the first group that grew up on videogaming, are behind that, at 56%. Hanish Patel, managing director of Deloitte Consulting, sees big correlations between binge video viewers and binge gamers. He pointed to data showing that 38% of U.S. consumers binge video content on a weekly basis, and 29% binge on gaming in an average week. “What’s interesting is there’s a distinct overlap between binge gaming and binge watching: 57% of binge gamers are also binge watchers on a weekly basis,” Patel said. In a Deloitte study conducted during the pandemic, members

of younger generations stated that gaming has actually helped them get through a difficult time, Patel reported. “A total of 27%, across all generations, have stated that it actually helped them stay connected with other people. That number is significantly higher for Gen Z and Millennials,” he added. More games information was offered up by Jennifer Dill, vice president of esports at Turner Sports, in a separate session. “Internal research tells us that everyone, in one form or another, is a gamer,” she said. “There’s not a stereotypical gamer.” While there’s certainly a concentration of gamers among Gen Z and Millennials, there is a lot of diversity within them, in terms of what they watch or play. “We look to make our content on their terms. We might have a television offering, but many available options are on VOD [video on demand] or live game play,” said Dill. “We always

make sure its immersive. “Many people who game might not necessarily call themselves gamers. People might spend most of their free time gaming, and they skew male. But there are others you would consider more casual, who love to watch others play, who skew female,” Dill said. COVID-19 hasn’t really slowed production down. Dill said that videogame productions were adapted to be fully remote. “Our talent and guests are highly adept, not only in tech needs, but at handling many of the production elements themselves.” “Long term, I think there will be adjustments to competition formats, until there’s ability to travel again,” Dill added. “For certain latency reasons, teams need to be able to compete in the same space. So world championships might take a different form, thinking of things from a more regional level, so there’s no complication there.”

“Long term, I think there will be adjustments to competition formats, until there’s ability to travel again.” — Jennifer Dill, Turner Sports

Games Economics THE VIBRANCY OF THE GAMING SECTOR FROM “We’re getting closer to the new consoles being rea valuations standpoint was made clear during a Duff leased. Some of the monetization of the new cycle has & Phelps presentation. Mark Mondello, a managing been impacted by COVID because of delays in producdirector who is part of the firm’s valuation advisory tion, but generally speaking the video game industry has practice, referenced data from PricewaterhouseCoobeen immune to all the disruption,” said Arya Rahimian, pers (PwC) showing a vice president in Duff that the social/casual & Phelps’ technology, The higher price point for NBA 2K21 marks the games sector is likely media and telecommufirst time that games publishers have hiked to have a compound nication practice. retail rates in 15 years. Others are likely to annual growth rate Mondello pointed follow suit, said Mark Mondello, Deff & Phelps. (CAGR) of 6.3% beto one of the underlytween 2019 and 2023. ing reasons for future software games growth: “TakeDigital/online console games are expected to have Two [Interactive] announced that they’re raising prices a 10.0% revenue lift, and digital/online PC games on their NBA 2K21, which will have a suggested retail are likely to move up 7.6% in the same period. price of $70. It’s the first real boost in retail pricing in On the flip side, physical PC games are likely to this sector in about 15 years,” he said, noting that in drop 13.9% and physical console games will move the past the price point has been around $60. down 4.3%. “Most of the analysts see that [rise] as positive and The whole global gaming business is expected to expect the other gaming publishers are going to follow rise from $123 billion last year to $154.3 billion in with that pricing. A lot of that increase will drop to 2023, according to PwC. the bottom-line profits,” Mondello added.

Arya Rahimian, vice president, Duff & Phelps

The Financial Manager • November/December 2020 27

CONFERENCE ROUNDUP

Venturing Beyond Newspapers NECESSITY HAS ALWAYS BEEN THE

STREAMING SHIFTS WITH COVID-19

T

he stay-at-home world we’ve been living in has certainly impacted how consumers have responded to video streaming services. That was made clear during a presentation by Mark Orne, executive vice president, cross-platform group, at the research company Screen Engine/ASI. Comparing survey data from the last half of 2019 with a survey in the first half of 2020, Screen Engine found there was a slight uptick in subscription video on demand (SVOD) popularity: ■ The average number of SVOD

services used by consumers moved from 2.4 to 2.7.

■ The maximum number of SVOD

services respondents were willing to pay for went from 2.5 to 2.6.

■ The number of SVOD services

actually paid for rose from 1.8 to 2.0.

However, Orne questioned how many subscribers would stick with newer services after their initial free-trial period expired, given the economic uncertainty. Screen Engine’s surveys in the last two second quarters (2019 and 2020) showed that the average number of hours spent weekly watching free streaming/advertising supported VOD services rose from 6.5 to 8.0. And SVOD hours rose from 6.3 to 6.7. On the other hand, live TV and DVR viewing declined, from 9.3 to 7.2.

mother of invention. But the COVID19 pandemic became one heck of a “mother” prompting some significant reinventions within two Gannett Co. businesses that fuel the newspaper conglomerate with alternative sources of revenue. So explained Jason Taylor, president of the Gannett Ventures division, who spoke at a Media Finance Focus session. While it had produced virtual events in prior years, the company ramped

that was hosted by ESPN personalities and had the biggest names in sports in every category.” Because Gannett could record some segments in advance and didn’t need to fly celebrities into various markets, it was able to increase the level of star wattage. It created an hour-long broadcast with segments specific to 59 markets. All told, it garnered 14 million shares online, and about 200,000 people live-viewed it across the country. Gannett didn’t charge attendees,

Gannett Ventures’ virtual high school sports award event garnered 14 million shares online, and about 200,000 people live-viewed it, according to Jason Taylor.

them up significantly as the pandemic gripped the world. Gannett’s live events business was on track to rope in some $120 million this year before COVID-19 hit. Social distancing made the in-person events impossible, needless to say. However, “this past quarter alone, our virtual events helped us carry 65% of our budgeted revenue for the quarter, which is significant when you consider that most companies that rely heavily on events were averaging about 3% of revenue they had budgeted for the quarter,” said Taylor, referring to the second quarter and companies like Live Nation and the Ironman Triathalon. For Gannett, high school sports have been a big event opportunity. In the past Gannett’s ESPY-type high school sports awards were bestowed during red-carpet events across the country, with one well-known sports figure as a keynote speaker in each market. “[This year] we brought people into a portal where they could watch a show with prerecorded elements and live elements

28 The Financial Manager • November/December 2020

and because of that it was able to keep all its sponsors. The events were “very profitable,” Taylor said. Meanwhile, Gannett’s promotions unit has also revved up its efforts with sweepstakes, contests, quizzes and special recognition programs. Taylor noted that a backyard makeover contest – where the ugliest backyard undergoes a transformation – is a great lead-generation opportunity for advertisers, such as landscape companies. Promotions is a highly profitable division for Gannett, with a database of some 5.6 million consumers. Among the other promotional ideas Taylor threw out during the session was the creation of a bundle of merchandise specific to a certain geographic area of the country, delivered once a month to participants, or on a one-time-only basis. “People are looking for something to give them joy,” Taylor said. For Gannett Ventures, the trick is to find out where the joy resides and figure out how its team can tap into it.

TAX MATTERS SHIFTING — Continued from page 25 penalty for a non-intentional failure to file an employees do want to participate). Light of the Ongoing COVID-19 Disaster.” It Notice 2020-65 also makes clear that information return up to 30 days past its due directed Treasury Secretary Steven Mnuchin employers are responsible for payment of the date. It increases to $110 if the return is more to defer the withholding and payment of the deferred Social Security tax even if the em- than 30 days late, but before Aug. 1. And the employee share of Social Security tax. The ployee is no longer employed when payment penalty rises to $270 if filings are made on deferral applies to any employee whose wages is required. or after Aug. 1. are less than $4,000 during any bi-weekly pay This penalty is for each information reEven with this clarification, many issues period. The amounts deferred are not subject remain. The IRS has released a draft revised turn! If that penalty scheme doesn’t seem to any penalties or interest. Form 941 (Employer’s Quarterly Federal Tax punitive enough, the IRS can also assess the The memorandum further directed Return) on which employers report Social penalty a second time for failure to provide Mnuchin to issue guidance to implement Security tax. The draft form contains a line such 1099 filings to the payee at the required the deferral and to also explore avenues, in- item for the deferred taxes, and a subsequent time. Filers with otherwise impeccable comcluding legislation, to eliminate payment of revision will likely contain a line for the pay- pliance histories were shocked to receive the deferred taxes. IRS notices proposing to assess hundreds ment of such deferred taxes. After weeks of speculation about of thousands (and even millions) how the deferral would be implementof dollars for late-file Forms 1099Filers … were shocked to receive ed, the Treasury issued guidance in MISC reporting NEC. the form of IRS Notice 2020-65, “ReTo avoid confusion and reduce IRS notices proposing to assess lief With Respect to Employment Tax issues that resulted from requiring hundreds of thousands (and even Deadlines Applicable to Employers taxpayers to separate Forms 1099Affected by the Ongoing Coronavirus MISC filings into two categories, the millions) of dollars for late-file (COVID-19) Disease 2019 Pandemcreated an entirely new form for Forms 1099-MISC reporting NEC. IRS ic.” The notice provides that the due the purpose of reporting NEC, approdate for withholding Social Security priately called Form 1099-NEC. That tax (or the equivalent railroad retirement tax) The IRS may need to revise Form W-2 as began in calendar year 2020. on “applicable wages” is postponed until the well, as Social Security tax withheld (reported For information return filings starting in period Jan. 1, 2021 through April 30, 2021. in box 4) will not reconcile with Social Secu- 2021 (for calendar year 2020), Form 1099Applicable wages are defined in the no- rity wages (reported in box 3). NEC will be used to report NEC that was tice to mean wages paid to an employee Organizations that participate in the em- reported on Form 1099-MISC in box 7 preon any pay date during the period Sept. 1, ployee Social Security deferral will need to viously. The due date for Form 1099-NEC 2020 through Dec. 31, 2020, but only if the implement new information reporting, as well will be Jan. 31, while Forms 1099-MISC will wages for a bi-weekly pay period are less than manage payroll systems to ensure the deferred be due Feb. 28 (or March 31, if applicable). $4,000 (or the equivalent threshold for other tax is withheld during four months of 2021 by Given the new Form 1099-NEC complipay periods). ance obligation and deadline for payments double withholding of Social Security. Consequently, only employees with annumade in calendar year 2020, organizations al compensation of less than $104,000 are NEW 1099 RULES must ensure that their payee data is propereligible for the deferral, for the most part. There have also been due-date changes that ly segregated so that NEC can be properly However, the determination is made on a relate to the Protecting Americans From Tax categorized; provided to the tax department; pay-period-by-pay-period basis. For example, Hikes Act of 2015 (PATH Act). It required and reported on the new form by the earlier employees that receive more than the thresh- Forms 1099-MISC reporting nonemployee deadline. old during one pay period may still be eligible compensation (NEC) in box 7 to be filed by While I have cherrypicked three critical for the deferral in a subsequent pay period in Jan. 31 whereas the reporting deadline for issues to monitor as we head into 2021, there Forms 1099-MISC reporting other types of are myriad other tax developments that rewhich they receive less than the threshold. An “affected taxpayer” (i.e., the employer) payments remained Feb. 28 (or March 31 if quire your attention. If you report to your must withhold and pay the total applicable filing electronically). company’s tax department or are otherwise The separate boxes relate to the different integral to its tax compliance processes, it is taxes that were deferred ratably from wages paid between Jan. 1, 2021 and April 30, 2021. types of outside workers that trigger 1099 important to stay abreast of these issues as the Employers “may make arrangements to oth- filings, such as independent contractors stakes are higher than ever. erwise collect the total applicable taxes from as well as payments to attorneys for legal Reach out to your tax department; monitor services. Consequently, Forms 1099-MISC outside tax counsel’s website and social media; the employee.” While Notice 2020-65 provided much had different due dates depending on the sign up for webinars; and – as in all things needed guidance, it also raised many new type of income being reported thereon. The related to tax – stay on your toes. questions. Among them: are employers re- PATH Act also eliminated automatic 30-day quired to participate in the deferral, and, if extensions to file information returns that so, can employees opt-out? The IRS has since report NEC. Nicholas Sanchez is a tax attorney who is a The bifurcated due dates caused much partner in Miller Kaplan. He can be reached at explained that employers are not required to participate in the deferral (even if their confusion and noncompliance. There’s a $50 (415) 217-4900 or nsanchez@millerkaplan.com.

The Financial Manager • November/December 2020 29

LAST WORD

A Bridge of Friendship

Creating great relationships with technology staffers involves an investment in strategic planning and open communication. BY IVAN W. NG

T

SECURITY & COMPLIANCE If your company is in the process of implementing a new finance system, ask questions about how security role design is being approached and how it will be monitored after the system goes live. Many times, security doesn’t get adequate focus during the pre-implementation phase. Early communication and testing are vital to avoid high-risk exposures and an inability to access the system post-implementation. Be vocal about areas of access that you see as unacceptable during security role design and testing. Internal audit and compliance departments should also be hyper-aware and communicate control considerations at this PLATFORM SELECTIONS time. As you are probably aware, there are many If you are in a post go-live posture, finantechnology platforms and vendors that cial managers should communicate excompete for your dollars, ready to help Technology departments need your cessive access and process-control issues you better process, store, secure, control to the technology department for rectithoughtful input in order to make and report on your financial transacfication so that fraud and financial mistions. It is not uncommon for technology well-informed, optimal decisions that statement risk can be reduced. A security departments to lead in the evaluation and improve your workday. access and process control monitoring selection of these new platforms. As part technology can help automate reviews of this selection process, financial managers Technolog y departments need your and enable timely communication of such should participate in product demonstrations; thoughtful input in order to make well-in- issues before they proliferate and result in help develop business use cases; and provide formed, optimal decisions that improve your financial loss or misstatement. feedback to technology staffers so that the workday. That will help you become more No matter what initiatives between tech right option can be jointly selected. efficient and grow in your career. and finance staff are underway, open comAt times, depending on in-house skills munication should be embraced by leaders and knowledge, a professional service pro- FUTURE STAGES on both sides and should not be limited to vider can be helpful in navigating through a After a finance technology implementation managers. Staff members who process transpotentially confusing plethora of technology project “goes live,” there are opportunities actions daily can and should be encouraged choices. When evaluating a platform, it can for further improvements in planned future to surface ideas to improve processes. Esbe useful to ask for referrals from clients phases and subsequent technology product tablish project steering committees and that are similar in size and nature. Repre- enhancements. Technology managers will be periodic process-imsentatives from both finance and technolo- at the frontline of managing future stages and provement meetings gy should participate in these client-referral reviewing as well as testing product enhance- that include relevant ments. But financial managers should contin- finance and technoldiscussions. ue to talk with them about pain points in ogy stakeholders to TRANSFORMATION PROCESS current processes as targets for improvement discuss pain points Communication channels should stay open and keep abreast of new features released as and identify future after technology platforms have been selected. part of technology upgrades. improvements. This is critical, whether you are participating Doing so can either help avoid unpleasant in your first finance technology transforma- surprises after an upgrade or a missed opIvan W. Ng is the application security audit tion project or are a battle-hardened veteran. portunity to take advantage of a new feature manager, finance operations, at Hearst. He can be reached at 212-649-7303 or ivan.ng@hearst.com. When communicating your detailed business sooner rather than later.

he relationship between finance and technology departments can vary between dysfunctional friction or harmonious collaboration, kind of like a marriage. In order to enjoy the positive end of that spectrum, and receive optimal business benefits, it’s important to consider the ways that financial managers and staff can help to foster better communication with technology personnel. The common piece of advice running through all of my suggestions below can be summed up as: “Don’t let the technology tail wag the finance dog!” But let’s get down to some specifics.

requirements for your assigned financial process, rather than describe what you currently do as part of your current processes, embrace the opportunity to describe your vision of the future state. Modern finance technologies now have robust automation features such as machine-learning-enabled invoice-coding algorithms; configurable approval workflows for financial transactions; and reporting analytics – to name but a few. By educating yourself about these options, you can become a proactive process-improvement driver. You can do this by reading documentation about key technology product features. As you begin to understand them and test out the features, you’ll be able to participate in discussions that influence key design decisions.

30 The Financial Manager • November/December 2020

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Recovering less money is not the same as recovering MORE.

A lot has changed in the media collections industry over the years. As the very first media collections company, we ought to know. Lately, we’ve noticed a disturbing trend. There are a lot of collection companies promising quick receivable recoveries. The problem is they are getting quick recoveries of a lot less money than what was owed. Pennies on the dollar. What kind of a deal is that? At Szabo, we follow one simple rule when collecting accounts receivable. Collect MORE.

So we make it our business to give you MORE — MORE experience, MORE resources, MORE expertise, and almost always, MORE collections. We’re not after a quick fix of a few dollars. We know how to work with your clients to collect the maximum amount possible, yet without damaging your valuable client relationships with heavy-handed tactics. Don’t settle for less. It’s your money, and we think you deserve MORE of it back. You may have heard people say, “less is more”. People that say that don’t work at Szabo.

Szabo Associates, Inc. 404-266-2464 www.szabo.com info@szabo.com

MORE is better than less.