What Is the Average Profit Margin for Cable Television?
The cable television industry is highly concentrated as a result of a number of mergers and acquisitions in the past two decades and the high barriers to entry for newcomers. The cable television industry consists of cable operators and cable networks. Although cable operators have strong competition from satellite television service providers, cable companies tend to dominate in high-population metropolitan areas. The profit margin varies between operators and networks.
According to a study by Ernst & Young, in 2010 cable operators generated high profit margins of 38 percent while cable networks had margins of 31 percent. The study used EBITDA divided by revenue for its profit margin calculation. EBITDA -- earnings before interest, taxes, depreciation and amortization -- is a cash flow-based profitability measure. Value Line published another study basing its average on 20 firms. EBITDA-based profit margins dropped for the sector as a whole to 33.4 percent as of January 2013. Average net profit margin for the 20 firms in its study was lower -- 7.34 percent.
The cable television industry in the United States contains a number of well-known public companies, including Time Warner Cable and Comcast. Nearly 85 percent of households in the U.S. subscribe to a pay TV service as of the date of publication. Many cable operators also deliver phone and Internet services to a growing number of households. Cable operators have high entry barriers, including the time, effort and financing to pursue and secure municipal franchise rights and the costs of rolling out a wire-line network. Wire-line networks can cost in hundreds of millions of dollars.
According to IBIS World, there were 406 cable television networks in the United States in 2012. The time and expense required to meet Federal Communications Commission registration requirements and regulatory compliance create a major barrier to entry. However, production and distribution costs are dropping, decreasing the cost of operating a cable network. Cable networks generate revenues from advertising fees, subscriptions and pay-per-view fees. In early 2013, cable operators paid ESPN $5.13 per month per subscriber, according to SNL Kagan. They paid as little as one cent per subscriber for networks such as Nick Too. However, smaller companies can operate profitably by delivering highly targeted specialty programs that are attractive to specific advertiser demographics.
Net profit margin indicates the amount of each revenue dollar earned by a company as profit. Net profit is calculated by deducting all expenses, including the cost of goods sold, operating expenses, depreciation and income taxes from gross revenues. Net profit margin is net profit divided by gross revenues. Gross revenues and net income are all shown on the income statement. Generally, when "profit margin" is used, it refers to net profit margin. An owner can use profit margin across the cable television industry to compare his company's performance to its peers.
Cable television companies can require high capital expenditures to install and maintain cable lines across its areas of operation. The use of an EBITDA-based profit margin removes the impact of the infrastructure development's debt financing on the profitability analysis. Therefore, the use of the EBITDA profit margin may be more useful than the net income profit margin.