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Economics of a Linear Network October 2007
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2 Executive Summary Launch Major Linear Channel Network AlternativesAssumptionsExpected Costs/IRR Launch a general entertainment cable network distributed by all cable and satellite carriers on par with FX, HBO, TBS Invest significantly upfront in marketing and programming Break even in 3-5 years Cost: $150-300MM IRR: 30-50% Launch Targeted Linear Channel Launch a niche cable network with a unique easy-to-reach audience and limited initial distribution Market aggressively to a small audience and utilize existing strengths for programming Cost: $50-80MM IRR: 30-50% Invest Contribute cash or content for equity in an existing network (e.g., HDNet, Hallmark, Starz) Cost: TBD IRR: TBD Creative Alternatives Launch a non-linear network (e.g., Free VOD) Create new carriage for Crackle Channels or Screening Room Cost: TBD IRR: TBD License Distribute film and television content through a targeted channel with DirectTV; provide equity to DirectTV Assumed to be similar to MGM HD Channel Cost: TBD IRR: TBD 1 2 3 4 5
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3 Yrs to turn cash flow positive IRR* Two Traditional Approaches to Network Launches Tennis Channel GSN FOX News FX Hallmark Channel G4 *IRR Assumes 8x cash flow multiple exit in 2008 Source:Kagan, SPT Analysis FUSE Size of bubble represents total cash investment Slow-growth networks Fast-growth networks Size: $61MM IRR: 55% Size: $107MM IRR: 42% Size: $391MM IRR: 30% Size: $288MM IRR: 4% Size: $132MM IRR: 10% Size: $93MM IRR: 9% Size: $87MM IRR: -12%
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4 Cash Flow Implications Slow Growth Networks Smaller up-front marketing and programming expenses Slow customer acquisition Fast Growth Networks Big up-front splash Large upfront programming and marketing expenses Faster time to profitability Hallmark Tennis Channel GSN FUSE FOX News FX G4 Videogame TV Source:Kagan, SPT Analysis Cash Flow $ MM Cash Flow $ MM
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5 Net Ad Revenue License Fee Revenue Total Revenue Program- ming Expense Free Cash Flow Revenue and Cost Breakdown of an Average Cable Network Revenues/Costs % Source:Kagan, SPT Analysis Other Revenue SG&A Original Programming Acquired Programming
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6 Next Steps Further investigate changes in cable television landscape –How have network economics changed in the last few years? Switch digital costs HD availability/demand New cross-platform opportunities including broadband and mobile –Is there a new opportunity for SPE? Evaluate library of owned content and existing cross-platform distribution agreements HD Hardware ties/synergies PlayStation synergies Further evaluate expected costs/IRRs for 5 alternatives Determine possibilities for specific network description –Programming focus –Operational execution (skills, management, etc.) –Carriage options –Marketing strategy –Etc.
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7 APPENDIX
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8 Deepwater Investments and IRR by Network A large investment doesn’t necessarily correspond to a big IRR Deepwater Investment $ MM IRR* % *IRR Assumes 8x cash flow multiple exit in 2008 Source:Kagan, SPT Analysis
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9 G4 Videogame TV Economics
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10 FX Economics
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11 FOX News Economics
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12 FUSE Economics
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13 GSN Economics
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14 Hallmark Channel Economics
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15 Tennis Channel Economics
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