TFM November/December 2022 Issue

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INFORMATION AND INSIGHT FOR MEDIA FINANCE PROFESSIONALS NOVEMBER/DECEMBER 2021 THE FINANCIAL MANAGER

ALSO INSIDE

TAXING DILEMMA:

Digital Ads

Retrans Fights Escalate RISKY BUSINESS:

Live Events

DEEPENING THE REVENUE POOL

A SPECIAL REPORT looks at two revenue

offshoots that are grabbing attention: NFT extensions and shows tailored for overseas audiences.


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TFM

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 A Failed Experiment

JANET STILSON, Editor TFMeditor@MediaFinance.org

While many believe that digital behemoths aren’t paying enough taxes, remedies at the state level could be unfair to media companies.

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:

BY SEAN HETZLER

14 The Bruising Retrans Battle

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.

Broadcasters and their distributors are waging war more fiercely than ever, and blackouts are likely to rise following a COVID-19 slowdown. BY KRISHNA JAYAKAR

Subscription $69.00 per year. Copyright, 2021. All rights reserved.

SPECIAL REPORT: MAXIMIZING CONTENT RETURNS

18 Diving Into the NFT Business

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 webinars, 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.

NFTs, which are also known as digital collectibles, have huge revenue potential. A growing number of companies are taking the plunge. BY RICHARD TAUB

22 Crossover Dreams To reap the largest financial rewards of global distribution, U.S. programming must adjust to local-country cultural and linguistic norms. BY TERESA PHILLIPS & CHRIS CAREY

DEPARTMENTS 4 From the Chairman Adapt or Perish 6 Dear Expert Live Event Risks 7 Human Factor Breaking Old Habits

8 Credit Where Due Developing Sources 9 Board of Directors With Association News 26 Last Word Music Licensing

The Financial Manager • November/December 2021 3


FROM THE CHAIR

Adapt or Perish

Words to the wise proliferate in this issue about potential dangers and new avenues for growth that could lie ahead.

A

s 2021 draws to a close, I’m advises. There are myriad types of licensreminded by the articles in this issue es, and using music without securing the of TFM that the financial side of the appropriate one will likely result in a costly media industry continues to be in flux. I’m outcome. also encouraged by the wealth of knowledge In “A Failed Experiment,” Sean Hetzler and information our experts generously of TEGNA dissects the digital advertising tax share here. laws being considered by numerous states. In our special two-part report, “Maximiz- What started out as a noble recommendation ing Content Returns,” Richard Taub delves to keep companies like Google and Facebook into the fascinating world of digital collectfrom profiting richly when they sell user ibles. The media industry stands to profit information for targeted ads has turned handsomely from digitizing – and selling – into a complicated, unfair and perhaps sports memorabilia, comics, unconstitutional set of toys, books, stamps, coins, proposed laws. I particularly like film posters, music and Maryland is the consultant Josef autographs. first to enact a digital Martens’ ‘Human As an example, Taub advertising tax, and while its suggests that collectibles Factor’ piece, where implementation is currently related to the 1980 Winter he tells of his attach- on hold, it’s something to Olympics’ “Miracle on Ice” which I’m paying particular ment to a sailboat event could provide royalattention since my company he’d found. ties to the U.S. Olympic is headquartered in the state. Committee and others that In his “Credit Where would continue if those assets are passed Due” column, Nat McCall advises against down and resold. With a global estimatrelying on a single source of credit. He suged market of $70 billion to $120 billion gests several alternatives for companies in digital collectibles, the market promises without the resources for multiple credsome serious returns. it check providers. They include using Part II of the report, “Crossover Dreams,” BCCA’s Media Whys service and old-fashdeals with localization of television and ioned credit check approaches. movies. Teresa Phillips and Chris Carey disOur “Dear Expert” column takes a look cuss the importance of improving content at liability issues that may crop up now that localization. Advancements can result in concerts and other live events are returning. better products that more effectively reflect Chubb’s Maxime Lefebvre provides some global cultures and values. As American sage advice. programming continues to dominate the I particularly like consultant Josef Marworld market, it would be wise to heed their tens’ “Human Factor” piece, where he tells advice. of his attachment to a sailboat he’d found, Penn State professor Krishna Jayakar’s arti- but it was sold to another buyer. It’s a great cle, “The Bruising Retrans Battle,” examines example of why holding on to certain the history, current status and outlook of the notions, patterns and practices is doing ourongoing and increasingly challenging negoselves an injustice. tiations between cable operators and broadAs we anticipate the casters. Huge money is at stake, and consum- new year, we’d be wise ers are caught in the crossfire. As you’ll read, to continue to adapt there’s no easy answer. to whatever the future In “Last Word,” Janet McHugh, CEO of brings. Look to MFM the Television Music License Committee, for guidance and unravels the complications of music licenssupport. ing fees. Those looking to use music in local Dave Bochenek is Chair of MFM/BCCA’s Board of Directors; dbochenek@sbgtv.com. programming should do so cautiously, she

4 The Financial Manager • November/December 2021

EDITORIAL ADVISORY BOARD SALLY BUCKMAN Member Lerman Senter PLLC GREG LECHOWSKI Market Controller, Phoenix Bonneville International NAT McCALL Senior Manager, U.S. Credit & Collections Discovery, Inc. 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 DAVID BOCHENEK Sinclair Broadcast Group CHRIS CAREY Iyuno-SDI SEAN HETZLER TEGNA Inc. KRISHNA JAYAKAR Penn State University MAXIME LEFEBVRE Chubb JOSEF MARTENS

NAT McCALL Discovery Communications JANET McHUGH Television Music License Committee TERESA PHILLIPS Sphere RICHARD TAUB Pequan Group


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DEAR EXPERT

Rockin’ Without the Risks

Concerts and other live events are coming back. Do you know all the liability issues? Insurance executive MAXIME LEFEBVRE provides some advice.

Dear Expert, My radio station is producing some concerts featuring well-loved artists over the next year. It’s been a while since we did this. What are the property and liability risks? — Making Music in Memphis Dear Memphis, You are not alone in expressing concerns. After almost two years with the lights off and the curtains down, many entertainment events – indoors and outdoors – are reopening nationwide. Like anything that hasn’t been used on a regular basis, “rust” can develop, increasing the potential for risk. An organization hosting or sponsoring an event where thousands of people congregate is subject to risks including property, general liability and workers compensation. In all cases, it is best to discuss these and other potential exposures in advance with your loss control and risk engineering teams as well as your insurance broker or agent to minimize risks. But what follows are some of my topline recommendations. PROPERTY HAZARDS Bear in mind that no two venues are completely alike. Each is different in terms of topography and utilities. The weather is sometimes unpredictable, with events and locations subject to extreme temperatures or unexpected storms. If the stage is not prepared to limit the impact of weather, a sudden deluge or extreme heat and humidity can damage expensive instruments and equipment. Replacement costs can be significant. If the event is taking place indoors in a facility that has been largely vacant or unused for numerous months, an insurance agent or broker may recommend that the 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.

them. Outdoors, neither may be the case. Precautions and safety measures include securing wires to the floor and brightly marking them to avoid a tripping accident. Similarly, ingress and egress should be marked and illuminated during evening premises be surveyed by a loss control team performances. to ensure the location is in good condition. Event organizers are responsible for The staging/set decor, lighting and ensuring the safety of not only performers sound system at each venue must be hastily and outside contractors but audiences as assembled and taken down pre- and postwell. Hazards include trip-and fall-accievent. Aside from the physical injury risks, dents as well as injuries caused by special there is the possibility that an improperly effects. secured piece of equipment may fall and be Crowd control is critical. During a weather-related disruption or Potential hazards affecting audience power outage, audience members are at risk of panicking and safety must be identified, along causing conditions in which with the efficacy of existing safety people can be injured. Potential precautions and emergency plans. hazards affecting audience safety must be identified, along with the damaged – or result in harm to the venue efficacy of existing safety precautions and or people involved. emergency plans. Another property hazard is fire. Concerts Chubb has published a detailed checklist consume an enormous amount of power can help identify hazards. It’s available at due to the electrical equipment involved. https://news.na.chubb.com. In the “Topics” Since each venue has different electrical section, click on “Risk Management.” You consumption considerations, make sure can adjust it to meet your use and needs. you don’t overload the system. With many Follow the checklist regularly during your venues closed for an extended period, loss event or production. control and risk engineering personnel By bearing in mind these precautions, should discuss the need for a comprehenyou’re likely to produce an enjoyable – and sive review of the electrical system with an hopefully profitable – entertainment expeinsurance agent or broker. rience for everyone involved. PEOPLE CONSIDERATIONS In many cases, show technicians may not have worked in a while. A previously welloiled machine may now be out of practice, increasing the risk of accidents and injuries. Performers are subject to similar risks. For example, an orchestra that used to perform in the same indoor venue on a regular basis may now be performing in a different environment. Indoors, the lighting and sound equipment is fixed above the stage. Entrance and exit areas are known to

6 The Financial Manager • November/December 2021

This document is advisory in nature and is intended to be a resource to be used together with your professional insurance advisors in maintaining a loss prevention program. It is an overview only and is not intended as a substitute for consultation with your insurance broker, or for legal, engineering or other professional advice. Maxime Lefebvre is senior vice president, entertainment, at the global insurer Chubb. She can be reached at mlefebvre@chubb.com.


HUMAN FACTOR

Letting Go, Sailing Forward

There are ways that we subconsciously limit our ability to grow. Careful observations can help us move past them. BY JOSEF MARTENS

E

arlier this year I went sailing with a friend of mine. In the slip next to his boat, there was – by the standards of most weekend sailors – an enormous sailboat, a 78-foot ketch. I mentioned how great the boat looked. He told me that it was for sale. The seller had left the keys with him, and he’d be happy to show it to me. How could I resist? He gave me a tour, and it was spectacular. When I checked it out online, to my surprise, I found that I could afford it. (Although I assumed there was more work to do than met the eye.) Owning a boat has been on my bucket list for years. I never imagined I could own such a big one. Over the next few days, I fell in love with the idea of buying it. I started negotiations with the owner, then talked to lenders, insurance companies and marinas. It was easy to imagine how I could use the boat in addition to sailing it myself. Maybe I could run executive retreats on board; charter it out for weddings; use it as a specialty Airbnb. Everything seemed fine until suddenly, the seller become hard to reach and wouldn’t return calls or emails. After a week or two of not quite knowing what was going on, I discovered that I was just a backup buyer. He had sold the boat to someone else. It made me fume; it was very disappointing. After I got over the initial hump of emotions, I tried to turn lemons into lemonade: I had done a lot of work to prep for a boat purchase, so why not go ahead with that plan – just with another boat? I started looking. But all the options fell short. There was always something that didn’t seem quite right. Then I realized, the problem was not with the boats. The problem was with me. I had become attached to the first boat and wasn’t able to let go of it. You may be able to think of an example in your professional or personal life where you were in a similar situation. We invest time, energy and emotions in something or in a relationship. We become

Every routine that occurs during the week means that we are saying ‘yes’ to something — and ‘no’ to all the alternative options. attached to a certain outcome. Maybe we get what we want; maybe we don’t. This happens much more often than we realize, in hidden ways that we don’t notice. There are many instances where we hold on to patterns in our lives. It may be a regular schedule; it may be as simple as a certain route to drive to the office, the supermarket or the church. It may be the habits we have developed in our relationships. We hold on to customs not always because we decide to do so, but because we’re used to it. And here’s the kicker: every pattern that we cling to, every habit that we keep, every routine that occurs during the week means that we are saying “yes” to something – and “no” to all the alternative options that we have. We don’t do this intentionally. It just happens. Your feelings of attachment to a certain custom may not seem as strong as my excitement about that boat. But in truth, they can be deeply rooted and hard to let go.

What are the things that you hold on to? What do you say “yes” to – and as a consequence, say “no” to? Over the next week, try to become more aware of these implicit decisions that you make. Become more intentional so that you get clearer about the choices you make all the time. In that same spirit, it’s time for me to let go of contributing to “Human Factor.” It’s been a pleasure writing for you, and to you, over the last couple of years. I wish you fair winds and following seas as you sail onward. And by the way, I haven’t bought a boat yet – but I’m still sailing the best (and cheapest) boat there is: one owned by a friend. 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 2021 7


CREDIT WHERE DUE

When Old School Is Like Gold

While technology has vastly improved the art of credit checking, an over-reliance on just one credit-check service is risky. BY NAT McCALL

I

magine you’re just starting your work from multiple suppliers can be expensive that were once the law of the land. With week, and it promises to be a very busy and might be cost-prohibitive due to the the advances in reporting, a lot of these one. No sooner have you hung up your budget or size of a company. How then techniques fell by the wayside. Maintaining coat than there’s an urgent request to set do you get multiple data points without contacts with your trade groups and up a new customer. You open your browser breaking the bank? How do you implement vendors will often alert you to issues before to perform a credit check and upon clicking redundancies? they show up in monthly reporting. Preparation for the next phase of COVIDthe bookmark, you get ... NOTHING. An easy and cost-effective way to 19, or another type of crisis, is likely to result Such was the case for credit professionals broaden your reporting capability is to in old-school-meets-new-school practices. recently when they logged into a major go through trade partners. The National Credit professionals need to embrace provider. Emails urgently seeking both ways of getting information, as information from the provider navigation will be as much about art as went unanswered. Finally, the it is about technology. company released information late There has never been a more in the day. They had taken everyimportant time to communicate with thing offline due to a detected sales teams about customers, soliciting intrusion. word-on-the-street information. Calls Imagine the disruption to your or emails to customers, even if it’s just business if you were reliant on a to touch base, are also essential. single source of credit that went LinkedIn, trade groups (particularly offline for a week, months or ones that are industry-specific), trade forever. shows and good old-fashioned contacts If you’re reading this column, will be needed to help make decisions I probably don’t need to tell you that could one day mitigate or prevent that in today’s fast-paced world, There has never been a more important a loss. As offices reopen, networking automation of credit reporting and time to communicate with sales teams needs to occur like it never has before. decisioning has become the norm. about customers, soliciting word-on-theAnalytics and data streams are Technology greatly improves our awesome tools for forecasting and ability to digest and process lots street information. predictions. However, they rely of information quickly, decrease on someone to model them based on decision time and increase speed to market. Association of Credit Management and intelligence provided by people. There is COVID-19 revealed what an unseen other groups often have discounted a very real possibility that companies that threat can do to businesses and created a subscriptions or a la carte reports that can have survived thus far will not make it ripple effect that impacted every aspect of be pulled from major providers like Dun through a resurgence or may be impacted life. “Adapt or perish” quickly became the & Bradstreet and Experian. You may by breaks in their supply chain. rallying cry as industries and their credit already be part of an organization that can Be prepared. Seek out and pay attention professionals attempted to recover and navi- provide these reports with media-focused to your peers across gate the ever-evolving pandemic situation. intelligence. your industry and If credit professionals have learned Making BCCA’s Media Whys service a anything from COVID-19, it’s that we part of our tool kit is a cost-effective way to ones that interface need to plan for the worst and hope for the add a second or third source of information with it. As a result, you may see a best. that also has the benefit of industry-spepotential problem on “Two is one, and one is none” is a saying cific knowledge that might otherwise be the horizon before it that resonates in many people’s lives. It missing. looms large. means that you always have more than In addition to multiple reporting one of whatever you need so that you’re agencies, many companies have chosen Nat McCall is the senior manager, never without. That certainly applies to to go old school. They rely more heavily U.S. credit and collections, at Discovery credit-check providers. on reference requests, calls to peers, trade Communications. He can be reached at nat_mccall@discovery.com or (865) 985-7787. Obviously, subscription-based services group memberships and meetings – options

8 The Financial Manager • November/December 2021


ASSOCIATION NEWS

MFM

BOARD OF DIRECTORS CHAIRMAN DAVID BOCHENEK Sinclair Broadcast Group VICE CHAIRMAN/

2022 CONFERENCE CHAIR DAVE BESTLER Hubbard Radio

SECRETARY/ CONFERENCE CO-CHAIR LORI LOCKE Discovery Inc. TREASURER MARIE TEDESCO Beasley Broadcast Group IMMEDIATE PAST CHAIRMAN MELISSA MITCHELL Bonneville International

MFM/BCCA DIRECTORS JENNA HARDY Gearbox Entertainment Software CAL MOSTELLA WarnerMedia CHRISTINE OLIVER Deloitte & Touche KIM PARKER Graham Media Group PAUL RAHMLOW Midwest Communications DEE STEVENSON Gray Media Group ELIZABETH BRAMOWSKI Audacy

JENNIFER HURLEY The Washington Post PAUL KELLY KTRK-TV/ABC/Disney DAN McGUIRE KPMG LORI BROCK Meredith Local Media Group MATT DEPREY C-SPAN

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The Financial Manager • September/October 2021 9


A FAILED EXPERIMENT BY SEAN HETZLER

10 The Financial Manager • November/December 2021


TAXING MATTERS

While many believe that digital behemoths aren’t paying enough taxes, remedies at the state level could be unfair to media companies.

S

UPREME COURT JUSTICE LOUIS

Brandeis popularized the idea that individual states can serve as “laboratories of democracy” for the country. In a famous dissenting opinion, Brandeis describes how states are free to try novel social and economic experiments that may otherwise prove too risky for the entire nation. Indeed, state experimentation has provided the framework for numerous federal laws. For example, the Affordable Care Act, a landmark Barack Obama-era legislative achievement, borrows many aspects from health care reform enacted in Massachusetts and signed into law by Gov. Mitt Romney. Unfortunately, the latest round of state experiments has cooked up a particularly bad batch of proposals known as digital advertising taxes. They seek to impose an additional, discriminatory financial burden on any company that sells digital advertising. These tax proposals achieve an impressive feat: they’re deeply unpopular, bad tax policy and unconstitutional. However, despite their significant flaws, the proposals continue to surface in state legislative sessions and represent a challenge that the media industry will be dealing with for years to come.

STATE TAX ACTIONS As the coronavirus pandemic swept across the U.S., many state governments decided to take the advice of economist Paul Romer, expressed in a New York Times opinion piece, regarding big technology companies; their outsized influence on our everyday lives; and minimal tax payments. (See sidebar, page 12, for more on his views and the international community.) In some cases, states were looking for additional sources of tax revenue amid plummeting budget projections. In others, there was simply political animus towards big technology companies. Either way, state legislators

brought forth several proposals to implement digital advertising taxes. These proposals largely fell into one of two categories: 1) a new tax on gross revenue from digital advertising; or 2) an expansion of the existing sales tax base to cover digital advertising. States such as Connecticut, Massachusetts, Maryland and New York embraced the gross revenue approach. Most of the proposals closely resemble taxes enacted across the European Union. Countries in the E.U. have enacted taxes that are essentially a surcharge on digital activity to make sure digital companies are paying what the countries deem is appropriate for the business they do within their borders. Maryland has the ignominious distinction of being the only state in the U.S. to successfully pass a digital advertising tax as of the time this issue went to press. Its tax is simply calculated as a tax rate times the amount of gross revenue derived from digital advertising services in Maryland. In a surprising twist, the percentage of tax assessed increases depending on the global annual gross revenues of the taxpayer, not gross revenue from digital advertising or gross revenue in Maryland. Presumably, this is an effort to make sure the biggest worldwide digital advertising providers bear the largest tax burden. However, Maryland’s law does not address some of the most pressing questions that taxpayers have, such as how exactly one should determine which digital advertising is from Maryland. Instead, the law simply states that the Maryland state comptroller shall adopt clarifying regulations. Other states – including Louisiana, South Dakota, Washington and the District of Columbia – have proposed an expansion of the existing sales tax base to include digital advertising. In contrast to the gross revenue taxes described above, which are assessed on the seller of digital advertising, a sales tax

The Financial Manager • November/December 2021 11


would be imposed on the purchaser of digital advertising. Nevertheless, the seller of digital advertising would still be tasked with collecting the tax from customers and remitting the funds to the state tax authority. The sales tax would effectively serve as an across-the-board price hike on the purchase of all digital advertising in the state. FLAWS IN THE LOGIC It is likely that many Americans share Romer’s concerns, mirrored by Democrat and Republican lawmakers who have become increasingly hostile to the societal problems that these companies exacerbate. Unfortunately, no matter how noble the goal, digital advertising taxes are fatally flawed and are the wrong way to fix the problem. The first problem with digital advertising taxes is that they violate several tenets of

sound tax policy. Many tax professionals agree that it is economically inefficient to impose tax on business inputs (i.e., items purchased by businesses to facilitate their operations). The classic example involves a retail store that purchases inventory from a distributor before selling those products to individual customers. The store charges sales tax to the individual customers when they make purchases; however, the distributor does not charge sales tax to the store on its purchases. It is easy to see how a problem will emerge if tax is charged on every step of the transaction. If the distributor charges sales tax to the store, the store has incurred more expense to acquire inventory. All else equal, the store can either decide to “eat” the additional cost and reduce margins or raise prices for its customers. If prices are raised, customers will still pay a certain percentage of sales tax on their purchases, but a portion of that tax will now

ORIGINS OF THE TAX

T

O UNDERSTAND TODAY’S DIGITAL ADVERTISING TAX LANDSCAPE, IT IS

helpful to know where the idea began. Nobel prize winning economist Paul Romer is widely credited with beginning the U.S. movement with a 2019 New York Times opinion piece. In it, Romer argues that dominant digital platform companies, including Facebook and Google, are eroding the shared values and norms on which democracy depends by creating a haven for misinformation and hate speech. He notes that the digital giants have generated enormous profits from a business model that relies on the collection of user information to sell targeted advertisements. In Romer’s view, it is imperative that Americans wrest power away from these digital platforms. However, instead of tackling the problem through antitrust law or regulatory actions, which are either poorly suited to the problem or sufficiently undermined by industry meddling, he suggests that a new tax may be the most efficient approach. This new tax would be a modern-day panacea for all the ills caused by big technology, in Romer’s opinion. It would incentivize a move towards “healthier” ad-free, subscriptionbased revenue models; grant easier access to new market entrants; and discourage mergers and acquisitions that stifle competition. However, as far as implementation is concerned, Romer only vaguely suggests that states impose a “type of sales tax on the revenue a company collects for displaying ads to residents of the state.” The current batch of state proposals also borrow heavily from ideas born on the other side of the Atlantic. In recent years, governments have become increasingly concerned that the digital giants of the world are paying less corporate income tax than their non-digital counterparts. They note that current international tax rules generally impose corporate tax in the country where a company has a physical presence as opposed to where its customers are located. Therefore, it is possible to be a U.S.-based digital company with numerous French users (and enormous profits from advertising to those users), but still pay a relatively low level of French tax. In response, many countries in the European Union have enacted digital services taxes in addition to their existing corporate income tax regimes. These taxes effectively impose a surcharge on digital activity in the country and are intended to make sure multinational digital companies are paying their “fair share.”

12 The Financial Manager • November/December 2021

be due on sales tax already imposed (i.e., the store’s price increase). This tax “pyramiding” can quickly lead to tax rates that are far higher than the stated statutory rate. As far as the current tax proposals are concerned, it is difficult to imagine a service utilized more exclusively by businesses than advertising. Whether in the form of a tax on gross revenue or a sales tax, digital advertising taxes are likely to make advertising more expensive for numerous small and medium-size businesses already facing financial struggles. Media companies will likely also suffer due to a drop in advertising demand. Local media outlets provide a vital public service to the communities they serve and depend on advertising revenue to fund their newsrooms. Again, it is the small and medium-sized businesses who will likely suffer the most, not the technology behemoths that legislators are focused on. As noted in the sidebar, numerous countries in the European Union have adopted digital advertising taxes to overcome disadvantageous effects of the international tax system. Specifically, the concept that corporate taxation is based on a company’s physical presence as opposed to user location. These countries have a legitimate complaint, and the Organisation for Economic Co-operation and Development has responded by hosting negotiations aimed at overhauling the entire system. However, U.S. states do not suffer from the same issue. Many, including Maryland, already base their corporate taxation on the market for a company’s services (in this case, where the users who receive advertising are located). Accordingly, any revenue derived from digital advertising is already subject to corporate tax and need not be taxed twice. Not only are they bad policy, but digital ad taxes also violate federal law. The Permanent Internet Tax Freedom Act (PITFA) bans U.S. states from imposing discriminatory taxes on electronic commerce. By their nature, digital advertising taxes only apply to online transactions and do not capture their offline counterparts, such as advertising in a newspaper or magazine. Therefore, digital advertising taxes clearly discriminate against electronic commerce and run afoul of PITFA. Finally, and perhaps most damning, digital advertising taxes violate the dormant Commerce Clause of the U.S. Constitution. Generally, this clause requires that a state tax be “externally consistent.” Under that requirement, a state is only permitted to tax


TAXING MATTERS the portion of revenues that reasonably reflect Maryland tax, some states have wisely decidWith the notable exception of Maryland, activity in the state. ed to table their proposals until they have a all the digital advertising taxes proposed by However, as previously discussed, the per- clearer idea how to proceed. However, other states in 2020 and 2021 to date were evencentage of tax due in Maryland is based on a states have attempted to circumvent the legal tually shelved or defeated. Many states emtaxpayer’s global annual gross revenue. That issues with alternate approaches. braced these taxes during the height of the means two companies with identical MaryFor example, the District of Columbia pandemic, but additional funds provided by land digital advertising sales could have wildly proposed an expansion of its sales tax to all a faster-than-expected economic recovery and different tax liabilities based on foreign activ- forms of advertising, regardless of how it’s historic federal stimulus spending lessened ity that has no relation to Maryland. lawmaker’s appetite for tax increases. Despite this clear violation of the No less than a week after Maryland’s Nevertheless, many legislators external consistency requirement, still have a bone to pick with big digital ad tax law was enacted, four several other states have borrowed technology, and they may conclude the Maryland approach when draft- trade associations filed a federal that, despite legal and policy coning their own proposals. cerns, tax is the most effective tool lawsuit to challenge it. at their disposal. REVISING THE PLANS Pending the results of Maryland litigation, delivered. That approach certainly avoids the No less than a week after Maryland’s digital discrimination against electronic commerce many experts expect to see a fresh wave of ad tax law was enacted, four trade associations that plagues other taxes on digital advertising proposals in 2022. Media companies should filed a federal lawsuit to challenge it, citing the but does nothing to avoid the policy concerns. be ready to express their concerns at the flaws discussed above. Maryland lawmakers In contrast, New York proposed a tax that local level and make their voices heard. Only provided some relief to taxpayers by passing focuses not on digital advertising, but instead through activism and resolve can we finally a follow-up bill that delayed the implementa- on the collection of consumers’ personal data. prove that digital advertising taxes are an tion of the law for a year and exempted certain As with other initiatives, this proposal is in- experiment gone wrong. broadcast and news media entities. However, tended to target business models favored by the central issue remains and will surely lead big technology companies. Sadly, the proposal Sean Hetzler is a senior director and leads the to years of contentious litigation. is sufficiently broad to sweep in other unsus- corporate tax department at TEGNA Inc. He can be reached at shetzler@tegna.com. Due to the litigation that has embroiled the pecting businesses as well.

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The Financial Manager • November/December 2021 13


REVENUE TRANSITIONS

THE BRUISING

RETRANS BATTLE

BROADCASTERS AND THEIR DISTRIBUTORS ARE WAGING WAR MORE FIERCELY THAN EVER, AND BLACKOUTS ARE LIKELY TO RISE FOLLOWING A COVID SLOWDOWN. BY KRISHNA JAYAKAR

C

LOS E TO 1 6 M I LLI O N H OU S E H O LDS WE R E

impacted nationwide when AT&T’s DirecTV and U-Verse services dropped the signals of 64 TEGNA television stations on Dec. 2, 2020. For 18 days the blackout continued, igniting a social media firestorm and flooding complaint hotlines. More recently, in October 2021, a TEGNA dispute with the satellite provider Dish resulted in close to 3 million Dish subscribers losing access to local broadcasters in 53 markets. The reason for the blackouts? Breakdowns in retransmission consent negotiations between the companies. The TEGNA disputes are among the latest in a series of retransmission-related blackouts in recent years. In early 2020, a dispute between ViacomCBS and Comcast affected almost 12 million subscribers in 15 markets. Another one, in 2019, between Nexstar Media and Comcast affected 11 million. Despite the negative publicity and the severe consumer backlash, both TV stations and multichannel video program distributors (MVPDs) are willing to risk blackouts as part of their negotiation strategy. While they’ve been going on for a long time, blackouts seem to occur more frequently and last longer with each passing year. To examine the trends, I compiled data from Kagan from 2011 to 2020, on 413 publicly reported retransmission agreements involving network-affiliated full-power commercial TV stations.

14 The Financial Manager • November/December 2021

Of these, 161 carriage negotiations (39%) ended in deadlock, blacking out more than 1,400 TV stations. The percentage of negotiations that triggered a blackout increased over that time, from 21% to 50%. (See chart, page 16.) Blackouts also lasted longer. If the typical blackout was 37.4 days in 2011, it rose to 99.4 in 2018 and an unprecedented 170.8 days in 2019. The blackouts settled down to 37.2 days in 2020, but that was an anomaly. Under the shadow of the pandemic, only 10 retransmission deals were finalized. Though five involved a blackout (50%), these were settled relatively quickly. The long-term trend indicates that 2020 was only a temporary plague-year truce. In 2021, as this article goes to print, the trade press is abuzz about an impending blackout that threatens to be the largest ever, involving the Dish network and 108 of Sinclair Broadcast Group’s TV stations. A blackout reportedly was averted in recent months as the two parties agreed to short-term extensions while they continued to negotiate. There’s an obvious reason why retransmission consent is such a contentious issue: money. BROADCASTER VANTAGE POINT In 2020, U.S. television stations made a record-setting $13 billion from retransmission revenues, up 9% from the previous


THE PLAYERS IN RETRANSMISSION CONSENT ARE COMING TO THE ARENA INCREASINGLY BULKED UP AND READY TO DO BATTLE.

The Financial Manager • November/December 2021 15


70 year, according to Kagan. Retransmission revenues now account for fully 36% of TV station revenues. Considering that retransmission consent comprised less than 4% of TV station revenues in 2009, this is a phenomenal growth rate. Average monthly per-subscriber rates, which were around 25 cents when retransmission consent was first introduced, have increased to $2.71 for each station. Largely due to retrans revenue growth and to a smaller extent, digital/online revenues, television stations have managed to eke out a 5.6% annual growth in total revenues over the last decade, according to Kagan. In sharp contrast, broadcasters’ advertising revenues on their traditional outlets have faced significant challenges. That revenue stream has been buoyed by the biennial blockbuster political sector, and a phenomenal growth in spending tied to online sports betting, in the many markets where it’s legal. But non-political advertising dwindled during 2020 as the pandemic kicked in. And before that, over the last several years, growth in some core (non-political) advertising categories has been anemic. Another factor for stations involves their affiliation agreements with the national broadcast networks. In the distant past, the industry practice was for the networks to compensate their local affiliates for carrying their programming. The networks recovered these costs by embedding national advertising in their feed. That cozy system began to change in

60%

44%

55%

27% 21%

18% 27%

20 0 2011 10 2011

2012

2013

18%

2014

50%

44%

61%

53%

21%

0

55%

53%

60 40 50 30 40 20 30 10

61%

60%

60 70 50

50%

44% PERCENTAGE OF 44% BLACKOUTS

PERCENTAGE OF BLACKOUTS 2015

2016

2017

2018

2019

2020

Note: Percentage of retransmission negotiations that triggered a blackout, by year.

2012

2013

2014

2015

2016

2017

2018

SOURCE: Kagan

2019

2020

Note: Percentage of retransmission negotiations that triggered a blackout, by year. SOURCE: Kagan

170.8

AVERAGE BLACKOUT DAYS

170.8 99.4

AVERAGE BLACKOUT DAYS 37.4

2011 37.4

30.5

26.6

2012

2013

30.5

26.6

2015

37.2

34.3

22.7 40.5 2014

99.4

52.7

40.5

52.7

2016

2017

2018

34.3 22.7 Note: Average duration of blackouts, by year.

2019

2020 37.2

SOURCE: Kagan

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 the early 2000s. After years of decline, Another worrisome trend for television Note: Average duration of blackouts, by year. station revenue from network compen- stations is the networks’SOURCE: new Kagan practice, sation died out in 2012. Instead, the dubbed affiliate bypass, of licensing their networks began to demand that the content directly to MVPDs, which cuts stations compensate them out of grow- out stations altogether. Between reverse ing retransmission revenues. Practically compensation and affiliate bypass, TV unknown before 2005, these so-called stations are experiencing a threat to rereverse compensation deals have become transmission revenues, their best chance $13.02 $11.96 standard industry practice in the net- of revenue growth. $11.06 RETRANSMISSION REVENUES work-affiliate relationship. TIGHT $9.52 MVPD SQUEEZE $13.02 (IN BILLIONS) $8.10 While retrans revenues$11.96 were a godsend $11.06 RETRANSMISSION REVENUES $6.52 to TV stations, they put MVPDs in a $9.52 tight bind. Traditional multichannel sub(IN BILLIONS) $4.92 $8.10 scriptions fell by a whopping 8.3%, to 73 $3.66 OR YEARS, RETRANSMISSION CONSENT WAS ONLY AN OBSCURE PROVISION $6.52 million in 2020, and that decreased reve$2.44 in the Cable Television Consumer Protection and Competition Act of 1992. So-called must $1.80 nue for the operators as well. Tempted by $4.92 carry rules required cable systems with more than 12 channels to allocate up to a third of their streaming video subscription services and $3.66 2011 provisions 2012 for 2013 2015 the 2016free2017 2019 2020 capacity to local commercial TV stations. That came in addition to other public2014 and lowsocial 2018 media content available $2.44 $1.80 power stations. Note: For U.S. TV stationsonly 56.5% of U.S. households online, Led by the efforts of Nexstar Media, TV stations began demanding retransmission consent Kagan now subscribe to legacySOURCE: multichannel 2011After2012 2013 2015 2016 2017 2018 2019 2020 payments from the MVPDs. Initially, the distributors refused to pay. all, why would2014 they pay cable systems, according to Kagan. Refor content that they had previously received for free? Note: For U.S. TV stations subscribers often go to lower maining SOURCE: Kagan However, they began to relent in the mid-2000s when broadcasters — especially those offering tiers of service, in what has been dubbed professional and college sports coverage — exerted their leverage. From that trickle in the mid“cord shaving.” 2000s, retransmission revenues have now grown to $13 billion, according to Kagan. Aware that consumers have choices and are increasingly price sensitive, MVPDs

HOW RETRANS BEGAN

F

16 The Financial Manager • November/December 2021


REVENUE TRANSITIONS

RETRANSMISSION REVENUES (IN BILLIONS)

$11.06

$11.96

$13.02

$9.52

$8.10

$6.52 $4.92 $1.80

2011

$2.44

2012

$3.66

2013

2014

2015

2016

2017

2018

2019

2020

Note: For U.S. TV stations SOURCE: Kagan

have reluctantly passed along retransmission fee increases to consumers, accelerating subscription losses. To avoid annoying customers further, these price increases are often hidden as confusing and misleadingly labeled “fees,” notes Consumer Reports. In this environment, the MVPDs allege that the broadcasters’ demands for year-over-year retransmission-fee increases are unreasonable and contrary to the latter’s public interest obligations. They point out that total retransmission consent payments have increased annually even when the subscriber base has shrunk because per-subscriber rate increases have outpaced the subscription declines. MVPDs also point out that these fee increases come at a time when they are under pressure to increase their infrastructure investments, to satisfy greater consumer expectations for connectivity and speed. NCTA, the internet and television association, reports that its members have collectively spent $290 billion on infrastructure over the last two decades. But though they are unified in opposition to the television stations, MVPDs are hardly a homogeneous group: wired cable and broadband providers are long-established and stable incumbents in many markets, while satellite distributors are still struggling to find a footing. The MVPD sector also includes small single-market cable systems, as well as large groups with national footprints. Comcast and AT&T are large and well-financed behemoths, with a history of aggressive competitiveness. In many cases, they butt heads with each other as much as they do with content providers.

A fourth type of player adds another pressure point: streaming video platforms. Both TV stations and networks license their content to online platforms – many of which can be accessed over the top (OTT), on TV sets. THE MERGER FACTOR Another trend that makes the retrans fight increasingly contentious is industry consolidation. Five companies own 33.5% of all full-power U.S. TV stations according to S&P Capital IQ data in March 2021. Among them are Nexstar (161 stations, 9.7%), Gray Television (128, 7.7%), Sinclair (112, 6.7%), E.W. Scripps (93, 5.6%) and TEGNA (63, 3.8%). The cable television market may be even more concentrated: a single company, Comcast, has a 25.8% share, and along with Charter (21.3%), controls almost half the multichannel video subscription market. On the network side as well, megamergers such as the 2019 CBS-Viacom deal and the NBC-Universal merger a decade earlier have created content production powerhouses, even as Netflix and other streaming platforms pump money into original programming. The players in retransmission consent are coming to the arena increasingly bulked up and ready to do battle. Consider that a retrans deal in 2011 involved 6.5 TV stations on average and spanned 4.3 markets. In 2020, it was 20.9 stations and 15.3 markets, according to my analysis of Kagan data. (Last year’s numbers are slightly down from 2019 due to the slowdown in retransmission negotiations during the pandemic.) The scale acquired through mergers and acquisitions allows both station

groups and MVPDs to drive harder bargains. The outcome: more frequent and longer blackouts. Given all these dynamics, what does the future hold for retransmission consent? Clearly it will continue to be a contentious issue. However, blackouts of popular television shows and sporting events are highly resented by audiences and have generated huge public relations backlashes for all the parties involved. No one wants a blackout, and yet no one is willing to back down to avoid one. RULE MAKERS WEIGH IN Legislators and regulators have gotten into the act. Since 2000, the Federal Communications Commission (FCC) has had rules to ensure that both television stations and MVPDs negotiated in “good faith” on retransmission. However, these provisions were rarely enforced, partly because bad faith is hard to determine. But in recent years the FCC has moved more aggressively. For the first time, in December 2019, the FCC imposed (and later upheld on appeal) a $9.5 million fine on several stations in the Sinclair group for bad faith in retrans negotiations. Also in 2019, Congress passed the Television Viewer Protection Act, which (among other things) allowed smaller MVPDs – often at a disadvantage when negotiating with station groups – to coordinate their actions through MVPD buying groups. There is also a proposal currently in Congress, called the Modern Television Act of 2021, which would allow retransmission of a broadcasters’ signal for up to 60 days without an agreement while the parties negotiate. It would also require mandatory arbitration under FCC oversight if negotiations fail. But given the political gridlock in Congress, not much action can be expected in the current legislative session. There’s little doubt that viewers will continually face more blackouts, and the retrans war will wage on for some time to come. Krishna Jayakar is a professor and head of the Department of Telecommunications, Bellisario College of Communications, at Penn State University. He can be reached at kpj1@psu.edu.

The Financial Manager • November/December 2021 17


SPECIAL REPORT: MAXIMIZING CONTENT RETURNS

NFT DIVING INTO THE

BUSINESS

Also known as digital collectibles, NFTs have huge revenue potential. A growing number of companies are getting involved. BY RICHARD TAUB

Y

OU’RE FAR FROM ALONE IF YOU’VE BEEN WON-

dering why something called NFTs have captured such interest in the media industry. One way to understand them is by referring to the past: just as digital technology hugely impacted the music industry, it is now on the verge of doing the same to another age-old industry, collectibles. Music was ripe for change at the time Napster came on the scene in 1999. The business was laden with several major inefficiencies in its path to purchase. Among them, the physical product was shipped through many middlemen; inefficient pricing forced consumers to buy more songs than many wanted via albums; and there were difficulties related to discovery and selection. Little wonder that music was the first analog media product to experience first-hand the relentless drive toward digital efficiency. Consumers were soon the winning beneficiary of an industry that was forced to trade “analog dollars for digital dimes.” Soon after, those of us in other areas of the media business realized that digitization would also find us – wherever we worked, whatever product we managed. Video content, gaming, news, books – everything changed. NFTs, more formally known as non-fungible tokens,

18 The Financial Manager • November/December 2021

represent just another way, another inefficiency, that digitization has revolutionized. Yes, another one. However, there’s a major difference: this form of digitization isn’t cannibalizing the diffuse, venerable and fragmented collectibles industry. This time, we are not exchanging analog dollars for digital dimes. Instead, we’re transforming a large, untapped and unorganized, global market. It’s one that our firms haven’t been able to meaningfully profit from in the past. Yes, profit – this is a business conversation, not a technology one. To make things simpler, let’s use the term digital collectibles (DCs) instead of NFTs; let’s not use the term blockchain; and let’s certainly not talk about crypto currencies. None of those sometimes-confusing terms are necessary to understand this potentially new and large revenue stream. Here are some commonly asked questions and explanations: How valuable might the DC market become for media and entertainment companies? To get a useful idea of the economic opportunity that lies in the digitization of the age-old collectibles business let’s first look at the global market overall. Today, it’s valued by different sources at $200 billion to $370 billion per year, spread across sports memorabilia, comics, toys, books, stamps, coins,


The Financial Manager • November/December 2021 19


SPECIAL REPORT: MAXIMIZING CONTENT RETURNS film posters, music, autographs and more. Some tech companies involved in this space believe that one-third of that revenue will go digital, so perhaps $70 billion to $120 billion. BIGtoken, a research company covering consumer attitudes and adoption of digital collectibles, has a more conservative estimate. It projects that the market will “only” be $20 billion to $30 billion by 2030. By comparison, Alphabet’s annual profit is $40 billion; total U.S. sales of movie theater tickets reached $11 billion the year before COVID-19. For the most part, this $20 billion to $30 billion is likely to be shared by a handful of large companies. Sports and organizations that control intellectual property (IP) own a significant percentage of content that sparks passion, nostalgia and identity amongst consumers. How exactly do digital collectibles get made and distributed, and how do media companies get paid? Manufacturing, or minting, DCs is not terribly difficult. Some companies do this as an outsourced service, such as NFT.kred and Mintable. These companies also serve as digital trading markets for the assets. Other modes of distribution are further propelling the industry. For example, Samsung introduced phones in June 2020 that have a pre-installed digital asset wallet for storing DCs. Consumers pay through distribution hubs that serve, at least for now, as the retail storefronts. DC sellers, including media companies, not only get paid for the initial sale, but

subsequent, secondary market transfers, as well. This is enabled by smart-contract technology that stores the owners’ data. Each time a DC sells, a royalty payment can be instantly generated to the underlying owners. (Universal Studios? U.S. Olympic Committee and members of the 1980 “Miracle on Ice” team? Estate of Elvis Presley?) Smart contracts can also be amended so

to match the 20 players on the team. To further distinguish this asset, real autographs are secured and applied digitally to the asset from all living players, U.S. and Russian, as well as reflective commentary by Michaels and notable people. One image can be isolated by an owner for display inside a frame on a wall. By playing the video, the entire 60 seconds and unique,

We’re transforming a large, untapped and unorganized, global market. It’s one that our firms haven’t been able to meaningfully profit from in the past. that owners of royalties can easily sell their title to revenues, at any time. In other words, ownership stakes in these illiquid assets become instantly liquid – a revolutionary step. What is an example of a great, media-based DC, and how would it work? Let’s use the aforementioned “Miracle on Ice” game – the stunning upset by U.S. college hockey players in the 1980 Winter Olympics over the dominant Soviet team in Lake Placid, N.Y. It was an indelible moment for many, dramatized in the 2004 Disney film “Miracle,” starring Kurt Russell. Let’s imagine that a 60-second clip of the end of the game is rendered in digital form. It includes ABC sports commentator Al Michaels’ countdown and the infamous line, “Do you believe in miracles?” American players are seen tossing their gear into the air at the final buzzer. Only 20 copies are made

DEFINING DIGITAL COLLECTIBLES

S

IMPLY PUT, DIGITAL COLLECTIBLES (DCS) ARE A UNIQUE, OR AT LEAST SOMEWHAT

scarce, representation of intellectual property. They are rendered in digital form with full ownership that is provable and authenticated. They can exist as graphics or video on your phone. That’s a simple example. Or in a more sophisticated form, they can be projected onto a frame and displayed in your home or anywhere else. (Press play and watch the last moment of the hockey game.) Now it gets interesting. These assets are also tradeable on a global scale, instantly and with few transaction expenses. The possibilities are vast. Trading cards like Garbage Pail Kids (remember Adam Bomb?); videos from Wimbledon (such as Englishman Andy Murray’s 2013 victory) and artwork (digital artist Beeple’s $69 million sale). And royalties are automatically paid to the IP owners with each transaction in perpetuity. The National Basketball Association has reported that it scored DC revenues of $500 million in first quarter 2021. Warner Bros. launched DCs tied to the new LeBron James movie, “Space Jam: A New Legacy,” in July. And the month before, Mattel launched DCs of three Hot Wheels classic toy cars. If you have desirable content, you can make DCs at any price range, in any volume.

20 The Financial Manager • November/December 2021

added content rolls to the enjoyment of the owners, their friends and family. The U.S. Olympic Committee (USOC) may be able to sell each of these 20 copies for $500,000 each, at an 80% margin – and voila, $8 million in new revenues accrue to that organization. This item, appealing to so many, using footage available on YouTube and elsewhere, has now been transformed into a rare and very special asset that could be extremely valuable. But there is more. The USOC and players will earn a royalty when any of the copies is subsequently sold at any time. Accounting and legal expenses associated with the secondary market of these items has been radically reduced, as well, through automation. Let’s say one owner of this DC passes away, and the inheritor decides to sell it. The DC is placed on a global exchange where bids are placed simultaneously; a highest bid is realized; and the asset’s code is immediately sold and transferred. Royalties are paid immediately back to the USOC and even all the way down to the individual players and their estates. Of course, there are plenty of details and further wrinkles in the market yet to be ironed out. But DCs represent such a large opportunity for companies with content. We can expect more of them – along with more tech companies – to expand the business. As with any new technology that has identified consumer demand, we can expect this to happen soon, and when it does, we will wonder how the previous, “analog” status quo remained intact for so long. Like old fashioned records and cassette tapes. Richard Taub is managing director of Pequan Group, a consultancy that specializes in audits, artificial intelligence and blockchain solutions. He can be reached at rtaub@pequangroup.com or (201) 715-0909.


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The Financial Manager • November/December 2021 21


CROSSOVER DREAMS

When Captain America pulled out his to-do list in the movie “Captain America: The Winter Soldier,” the items changed in the film’s various overseas versions to account for cultural differences.

22 The Financial Manager • November/December 2021


SPECIAL REPORT: MAXIMIZING CONTENT RETURNS

W

HILE AMERICAN PROGRAM -

ming has been available to overseas viewers for decades, the sheer quantity, and opportunity, for content producers cranked up to a whole new level with the advent of streaming. From one streaming platform that was available in 2007 to over 300 worldwide today, the capability of releasing movies and TV shows to nearly every country on the planet almost simultaneously has forever changed our industry. With that change comes the challenge of preparing content for international release. While not everyone on Earth may speak the same language, a huge number of people may like the same story. The job, then, becomes translating the story so viewers around the world understand, appreciate and enjoy it. The trick is doing it well and doing it right. The process for doing so is called localization. Localization is a very broad and generalized term that can mean many things to different people. In this article, we are focusing on what it means for the media and entertainment industry. We’re excluding localization of websites, printed media or videos used by other industries. Along the pipeline, movies and TV shows are shot, post-produced, finished and then localized for global distribution to consumers via any number of viewing services, including traditional broadcast, pay TV and on-demand. Changing perceptions, on the part of global BY TERESA PHILLIPS consumers as well as the production and distri& CHRIS CAREY bution companies, have caused localization to undergo a major strategic shift.

TO REAP THE LARGEST FINANCIAL REWARDS OF GLOBAL DISTRIBUTION, U.S. PROGRAMMING MUST ADJUST TO LOCAL-COUNTRY CULTURAL AND LINGUISTIC NORMS.

DUBBING MADE BETTER Historically localization involved the dubbing and or subtitling of a show into different languages. Today, the process includes several additional factors to make content culturally acceptable to different consumers and governments. In the past, when consumers contemplated the idea of watching a dubbed foreign film they might have conjured up memories of a terribly out-of-synch and out-of-character voice coming from the screen that took them completely out of the story narrative and was almost a distraction. That’s why the localization process has changed. It now involves all the creative and artistic tools of original filmmaking.

The Financial Manager • November/December 2021 23


Because the art in dubbing is more sophisticated today, content is more attractive to a large group of consumers who may previously have never wanted to watch a foreign film before but can now do so easily and enjoyably. A few of the major components of a high-quality dub include: ■ Script Adaptation – This ensures the translation is not just literal, but also takes into account the linguistics and context of the messages. It also involves choosing the right word to best fit the original actor’s lip movements. ■ Casting – The actor used for dubbing needs to have the voice and performance style that fits the original performer’s. ■ Directing – A director helps guide the best possible performance from the voice actors. ■ Recording and Mixing – By using state-ofthe-art acoustics and sound recording technologies, soundtracks deliver an experience equal to the original version, and allow the viewer to be fully immersed in taking the journey into the storytelling experience. DEEPENING THE FOCUS Production and distribution company executives no longer wait until a big opening

KNOW THY REGULATOR

R

EGULATORS SEE THEMSELVES AS

defenders of their country’s culture and values, and they take their role very seriously. Ignoring them can mean the difference between a successful or unsuccessful international release. This is serious stuff and just a few examples make the point: ■ An LGBTQ+ kiss can get a show banned in Russia. ■ Depicting a government negatively can trigger censorship in any number of countries. ■ Drug use that’s normalized or glorified is banned in Singapore. ■ Depiction of suicide that’s romanticized or detailed can draw the attention of regulators in New Zealand and the United Kingdom. ■ In India, portraying a character with religious sensitivities could land you in deep trouble with the law. That happened with the TV series “Tandav.”

weekend for a film in the United States, and then say, “Oh, by the way let’s see if we can make some money internationally.” Today, a fully localized global release is very much part of the day-one production planning process. That’s because the multitude of streaming services have allowed content producers to reach global consumers much more easily, which can unlock substantial revenue. The same holds true for productions that premiere on various forms of television in the U.S. To do so, savvy producers think about culture beyond language. Other factors directly inform and beneficially influence localization. Knowing where you were born, the religion you’re likely to practice and even the part of a country where you grew up gives companies involved in localization informed ideas about who you are or may be. Knowing where you live also gives clues about your values, your customs, your beliefs, your history and what stories you may like. It tells companies what holidays you’re likely to honor, how you may dress and what you may eat. Culture is like a fingerprint: it helps identify you. For example, Marvel and The Walt Disney Co. made some slight changes to its 2014 release, “Captain America: The Winter Soldier.” When Steve Rogers (Captain America) pulls out a to-do list of all the things he missed while frozen, the list is different from country-to-country to account for culture. For example, the U.S. audience sees “Star Trek,” while the United Kingdom audience sees “Beatles,” and the Korean audience sees “Dance Dance Revolution” (a video game series). Culture-specific information suggests which stories may entertain certain viewers without offending them or trigger censorship by regulators. Subjects that should be avoided and ways stories should be written also become clear. Culture is what makes a story understandable and acceptable. While localization is fixed in a specific language and geography, culture travels with the viewer wherever they go. For example, a Korean mother who lives in San Francisco may want to filter and select TV shows for her children based on her Korean values, not American values. And if her multi-generational family is living together (as is frequently the case for Asian and Indian families), her parents will most certainly want to screen content based on their native language and culture.

24 The Financial Manager • November/December 2021

Here’s a parallel that makes this more understandable. The food in your favorite Chinese restaurant isn’t tasty because the owners speak Mandarin. It’s because their cooks understand how the recipe should be prepared. They use a certain combination of ingredients. It might be that “grandma’s secret ingredient” is what makes it taste better than anyone else’s. Authenticity comes from knowing how the flavors come together when it’s cooked. And needless to say, there are real differences between Chinese, Korean, Vietnamese, Thai and Japanese food, too. That’s culture. And yet, while that’s true, there are certain stories that travel across cultures. The Academy Award-winning South Korean film “Parasite” was successful and viewed by many millions of people around the world not because it was translated into multiple languages, but because the story of a family of grifters scheming to live off a wealthier family was relatable and engaging. AVOIDING AGE LIMITATIONS Culture is constantly overlooked as a factor when a movie or TV show applies for or utilizes an age rating. Every country or territory requires a rating regardless of distribution method (theatrical, linear, streaming or disk). The process and rules for obtaining one vary from country to country. It’s not just the finished work that can cause problems. Artwork, packaging, placement and trailers can all raise concerns or create controversy. One example that may be more well known to U.S. readers is the “Cuties” controversy at Netflix. Known in other countries as “Mignonnes,” the “Cuties” film focuses on the story of a “young Senegalese girl living in Paris who struggles to find her identity, torn between her family’s Muslim traditions and her peer group’s attempts to emulate the sexualized personae of women as portrayed in Western culture and on social media,” according to Yahoo. The difference in the artwork is what triggered the controversy. The original artwork for the film depicted four girls walking up a street in Paris, while the U.S. artwork depicted the girls provocatively dancing. This led to criticism of the film in the U.S. Sen. Ted Cruz, who had admittedly not seen the film, and Rep. Tulsi Gabbard called the film “child porn.” The film was also falsely labeled by QAnon as promoting pedophilia, feeding


SPECIAL REPORT: MAXIMIZING CONTENT RETURNS conspiracy theories that had nothing to do In Germany, for example, the difference with the film. between the number of moviegoers who could The media backlash resulted in a boycott of attend a film deemed suitable for people aged Netflix, and many offended customers can- 12 and up, and those who are 16 and up, celed their subscriptions. While the film was is 3.7 million. The average German movie not banned or pulled ticket costs $12.50, so in the U.S., Turkey’s obtaining a “16” rating Age ratings are more censorship board, the rather than a “12” rating RTUK (whose formal important now because would mean the loss of a name is translated as of streaming platforms’ potential $46.7 million the Radio and Televiin additional box office sion Supreme Council), explosive growth and revenue. ordered it removed from the increasing amount Once content moves the service in Turkey on online, adversely rated the grounds that the of new content. or banned titles may film contained images not be discovered by of child exploitation and abuse. consumers due to platform search engines or Age ratings are more important now parental preferences that exclude them. Again, because of streaming platforms’ explosive this can have a significant impact on revenue. growth and the increasing amount of new There’s a familiar maxim in business about content that’s available overseas. They are “knowing your customer,” that even in the often the only indicator consumers have to old days meant you had to understand their determine whether content is suitable for their interests and learn their wants and needs. children or family members. Obtaining a rat- That’s what culture is all about. It is as true ing that is too restrictive can have an adverse for the media and entertainment sector as it impact on box office, and not just in countries is for any other business. with assertive regulators. Without understanding a market’s culture

and incorporating that understanding into the content creation process – from writing to production to post-production through distribution – localization is an incomplete process. And it may not contribute to box office, or streaming, success. Language translations alone may not provide significant economic payback. While some content producers have experience in localizing their titles, many more do not. The trick is doing it well and doing it right. The financial benefits for taking the time to do both can be significant and well worth the investment. Plus, it affirms the value of local cultures in an increasingly connected global society. The good news is that expertise exists and is readily available to anyone seeking to release content internationally and willing to take advantage of it. Those that do will be glad they did. Teresa Phillips is CEO and co-founder at data and technology company Sphere. Chris Carey is EVP marketing and corporate development at Iyuno-SDI. They can be reached at teresa.phillips@spherex.com and chris.carey@iyunomg.com, respectively.

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The Financial Manager • November/December 2021 25


LASTWORD

When Pop Tunes ‘Pop’ Expenses

Hasty decisions about using well-known music in programs can increase your licensing fees. Know what you’re getting into. BY JANET McHUGH

S

uppose you are a business manager takes a per program license from any of the files detailed monthly reports with the or lawyer for TV station operations, PROs, the savings your station otherwise PRO showing, among other things, what and you get a call from a producer gets could be reduced, potentially signifi- programs it aired that month and whether who wants to use popular music in a cantly, by incorporating popular music into any music has been licensed through means feature piece or a news bump. And guess what? news bumps. Let me explain. other than the PRO. By licensing perforShe wants to use it the next day. Some local stations license their music mance rights directly with composers, This request doesn’t come as a surprise be- from the PROs through a blanket license publishers or suppliers, or by acquiring or cause TV station productions operlicensing performance rights from ate at a fast pace. At times, it appears a music library, a station can pay to be organized chaos. Stories and lower total fees to the PRO than shoots can involve rapid changes, they would pay under a standard and content is often created at the blanket license. last minute. But do you have the There are tradeoffs. Under the proper music licenses? Will the use per program license, stations have of popular music increase expenses? greater recordkeeping and reporting Music licensing is a complex subrequirements than under the blanject. The use of popular music in ket license. news bumps or elsewhere in local If a station has a per program license, programming has both legal and the station’s license fee depends on the financial implications. I want to number of programs that have been discuss both, but this also leads into “cleared” of music licensed through the an explanation of the different types PRO. To “clear” music, stations can get of music licenses. performance licenses from individual From a legal point of view, you copyright holders, music libraries, or, can use the popular music in your The per program license is an essential in some cases, from program producnews bumps under your current licensing option for stations because it ers – for example, the producer of a public performance music licenses allows stations to engage in some actual network or syndicated show. that TVMLC has negotiated with competitive transactions. Since popular music typically is ASCAP, BMI and SESAC (perfornot available from a music library mance rights organizations, or PROs) as and some through a per program license. and is usually not able to be “cleared” in some long as that music falls within one of their For the 1,200 stations that TVMLC rep- other fashion, incorporating this music into repertories. However – and this is a big resents, it’s about an even split. the program can result in per program license “but” – you will probably need other music A blanket license allows a station to fees going up, even if every other bit of music licenses. Public performance licenses allow broadcast any of the songs included in the used in the program has been “cleared.” you to broadcast the music, but the actual repertory of a given PRO for a single fee. Third-party administrators can analyze production or creation of the programming, A per program license gives a station the a TV station’s music use and determine mixing the music with audiovisual content, same copyright infringement protection they whether the station may require synchronization and/or master get from the blanket license. Under this li- ca n save money by use licenses. cense form, a station is still entitled to broad- switching from a blanFor more information on these licenses, cast any music it wants from the PRO’s reper- ket to a per program call TVMLC or consult our newly released tory. However, the per program license is an license. To locate a book, “Music Licensing: A Practical Guide.” essential licensing option for stations because third-party adminisEven if you obtain the proper licenses, it allows stations to engage in at least some trator, please contact there could be a financial downside for actual competitive transactions for music TVMLC. using popular music in local programming. performance rights, such as getting licenses Janet McHugh is president and CEO of the There’s something called a per program li- directly from music creators. In many cases, Television Music License Committee and author of cense, which helps to save on music licens- this can bring license fees down. “Music Licensing: A Practical Guide,” available on ing fees, in general. However, if your station Under a per program license, a station Amazon. She can be reached at janet@tvmlc.com.

26 The Financial Manager • November/December 2021



Thanks for 50 incredible years! We couldn’t have done it without you. It’s not often a company accomplishes 50 years of serving clients, especially in the media business. But here we are, the first and largest media debt collection service, MORE focused than ever on delivering MORE debt dollars to our awesome clients. We also would not be here today without our talented employees who combine the art of diplomacy with savvy negotiation skills.

“...Szabo Associates more than delivers. They work as an extension of our internal teams helping us collect past due accounts. They are easy to work with, provide excellent service and their results have been outstanding...” Christopher Sterling Director of Credit & Collections Local Media Group Meredith

We asked a few clients to share why they continue to partner with us. Here’s a sampling of what they tell us.

“We were looking for an affordable collection agency that would be courteous and non threatening to our clientele. Szabo has been that company! They took the time to understand who we are as a company and how we want our clients handled while also collecting over 90% of our debt. I would recommend Szabo to anyone who is searching for a collection agency.” Darlene Mixon Credit Manager Evening Post Publishing Group

“It is with much enthusiasm that I am writing this letter on behalf of Szabo Associates, Inc. AARP began our business relationship with Szabo in June 2001 and for the past 20+ years we have been serviced with the utmost care and professionalism by their entire staff but specifically by Charles L. Langgood…We recommend Szabo for any of your collection needs and look forward to continuing our relationship with them.” Linda Mitchell AARP Credit & Accounts Receivable Manager “I am so pleased with the incredible progress that has been made in the reduction of our DSO. Not only has the DSO for multiple PAGE members been reduced, Szabo has tackled some of the larger outstanding debts—all with great and continued success. I also want to compliment you on your customer service approach—always affable, but firm.” Gary Blakely CEO-PAGE Cooperative

Discover more reasons why we’ve thrived for 50 years and how we can help you recover MORE media debt dollars. Visit our new website Szabo.com to learn more.

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MORE is better than less.

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