Sales and accounting operations at cable networks and virtually every other business operation rarely speak the same language. But in the past few years, cable programmers have come to the conclusion that the simple act of integrating their sometimes disparate affiliate-sales and affiliate-finance database systems can go a long way toward getting both departments on the same page.
As an unexpected benefit, the effort has led to greater efficiency and has provided leads for new channel launches, said vendors who sell into the space.
The federal Sarbanes-Oxley (SOX) act of 2002 has spurred some networks into integration mode — particularly section 404, which requires companies to demonstrate internal controls for their accounting functions.
Under the specter of Sarbanes-Oxley — Section 404 took effect under staggered deadlines beginning in the spring — some programmers have accelerated their database integration in order to get into compliance.
COSTLY TO COMPLY
Compliance to Section 404 of the Act also can be costly, especially for smaller companies. According to a June statement from NASDAQ vice president Edward Knight before the Securities and Exchange Commission Advisory Committee on Small Public Companies, small companies on average spent as a percentage of revenue 11 times more than larger public companies to comply to Section 404.
According to Chicago law firm Foley & Lardner, average audit fees for public companies with less than $1 billion of annual revenues increased 96%, to $1 million, in 2004. For larger companies, they grew by 55%.
Foley & Lardner said the added bureaucracy also is taking a toll on management time, with smaller companies reporting a 556% rise in lost productivity costs to $1.1 million in 2004, from $160,000 in 2003.
At cable networks, the massive paper generation that the SOX Act requires can take a toll, especially for recording all the different approvals associated with the launch of a new network.
Automating that process not only made Sarbanes-Oxley compliance more efficient by automatically generating and delivering documents all the way down the approval chain, it also proved to be a valuable tool for evaluating information, according to Doug Calahan, founder and president of Atlanta-based accounting software firm Argo Systems Inc.
For example, when an affiliate-sales representative for a network signs a new system, approvals are needed from the regional vice president, affiliate operations, affiliate finance and from technical operations (to authorize the signal). Keeping track of these approvals for every headend launch can prove daunting and generate a ton of paper documents.
By automating the process, approvals are made and stored electronically. That provides a more organized repository for auditors and allows the sales representative to track the progress of the launch.
“When you automate all these processes, you give much more visibility to the rep,” Calahan said. “A lot of times, what happens is the rep will go ahead and submit this launch form and have no idea what the status of this thing is.
“Once you automate this and give them better tools, they can instantly log onto their computers and say 'I see this is currently sitting in legal, it's been sitting in legal for two days, maybe I should go and talk to somebody and find out why it's taking so long.'”
With software tools like Argo's Medea product, Calahan said, affiliate-sales divisions are armed with data that can generate sales leads.
Affiliate database information could be incorporated into Argo's software, he said, allowing networks to look at their prospect lists, determine which DMAs are most important to them and figure out which markets don't carry their network and target them for sales.
Several networks are incorporating call reports once those representatives meet with those systems, said Calahan, so all of those reps and all of upper management have a better sense of which systems represent the greatest opportunities.
Calahan also recommends that networks place all of their contact information in the database, to let affiliate marketing operations conduct targeted marketing in those areas.
Cable networks also use the Medea system for incentive, programming and production deals.
“All these areas require audit controls to guarantee the proper approvals were obtained,” Calahan said. “We can set up predefined approval routing mechanisms that really guarantee sign-off and accountability for every deal that is done. So ultimately, the automated workflow is enforcing these controls.”
Bruce Lazarus, CEO of Colorado-based Cable Audit Associates, said another reason to integrate the affiliate sales and affiliate finance databases is to eliminate the confusion surrounding new-channel launches.
Lazarus also has a unique perspective, having previously worked for cable networks CNBC, Fox News Channel and pay-per-view service Request TV.
“Most affiliate finance groups of the programmers have affiliate databases that are fully integrated [or] somewhat integrated,” Lazarus said. “Generally speaking, historically, affiliate sales people and affiliate finance people basically don't talk the same language. That has created a problem over the last couple of years. SOX has made it apparent that the accuracy of your financial statements are ultimately dependent upon the quality of your affiliate database.
“When you start peeling back the onion, everything goes back to: Are you launching systems correctly? Are you setting them up correctly? Are you billing correctly? Is the MSO remitting correctly? Are we all using the same names? That sounds reasonably simple, but it gets pretty messy out there,” Lazarus continued.
MSO CONFUSION TOO
That difficulty in communications also spreads to MSOs, which often assign names to systems and headends that don't jibe with the networks.
One particularly confusing time for programmers is after they launch a network and try to match up the systems with the MSOs' launch authorization forms, Lazarus said.
Many times, he said, the MSO has a unique name for a system that does not jibe with the Nielsen Media Research database's names for the headend.
For example, a programmer might see from its launch authorization that its network was launched on an MSO's Denver headend. But according to the Nielsen code data, the headend that was set up in Denver also serves surrounding communities in Aurora and Highlands Ranch and therefore doesn't match.
“Do this a couple of thousand times over a year, and guess what you have? A disaster,” Lazarus said.
That matching-up process is still largely done by hand — CAA offers services to facilitate the process for programmers.
Matching affiliate-sales information with the Nielsen database can help identify sales prospects, Lazarus said. And hooking up affiliate-sales and financial data also allows for better payment reconciliation and billing collection.
The problem when these databases don't match is that the data becomes less accurate.
“In a fairly large programming company with 5,000 payment names, only a small fraction [not matching up] becomes a major issue,” Lazarus said. “Not only does it affect this month, it's compounding every month that you don't address it. And every time you don't address it and you're billing incorrectly, you're accruing wrong receivables, you're accruing wrong revenue. It's a real process to keep on top of this.”
In the past, Lazarus said, programmers either “winged it or you had reserves. You did the best you could. The world gets a little more complicated every day.”
SCRIPPS TOOK STEPS
Scripps Networks vice president of affiliate finance Elaine McCall said she began integrating affiliate sales, marketing and finance databases at the stable of networks in 1998. While that was well before Sarbanes-Oxley, she said there was a need for each division to be able to communicate with each other. In 1998, Scripps tracked affiliate data with Microsoft Excel spread sheets.
“The Excel files were just becoming massive,” McCall said. “Even back then, [when] we had 30 or 40 million subscribers with HGTV, these Excel spreadsheets can become absolutely massive. It just wasn't working for us.”
Today Scripps has five cable networks — Home & Garden Television, Food Network, Fine Living, Do It Yourself Network and Great American Country. HGTV and Food have 89 million and 88 million subscribers, respectively, while Fine Living has 28 million, DIY has 34 million and recent acquisition GAC has 38 million subscribers.
Scripps toyed with the idea of developing its own database in-house, as have several other networks, but decided going to an outside vendor (Argo) was the right course.
Aside from the financial issues inherent with in-house software development, there is the question of whether a company has a large enough and capable enough information-technology team to devote the manpower to developing the database.
And then there's the question of whether those developers truly understand network accounting.
“There is such a learning curve,” McCall said. “This is not like a retail operation where you have a product, ship it, collect your money and move on. One of the obstacles is making sure that anyone who is going to write the database understands that.”
'DEALING WITH ESTIMATES'
McCall also pointed out that network accounting has its own distinctive characteristics.
“The affiliate side is so unique because you're always dealing with estimates,” McCall said. “You've got to wait on that MSO to report subscribers. So when you're accruing revenue, you're constantly working off of estimates and then truing them up after the fact. It's a little bit different accounting.”
McCall said Scripps uses the Medea software to track a host of other information.
“We use it to track our converter inventory, our IRD [integrated receiver-decoder] authorizations,” McCall said. “You can get all sorts of technical information and contacts. Even the local ad-sales piece — who inserts on what networks — so our local ad-sales group can use the same database to access information about which affiliates.”
Signal authorization is also a growing part of the database, Calahan said, in that it also enables networks to manage every signal sent to an affiliate to assure they aren't giving their signal away for free.
An example would be an affiliate rep that signs a deal, gets the signal authorized and discovers a few months later that the affiliate hasn't launched the network.
“They need to build in better controls to make sure that they go back and deauthorize that signal to that affiliate,” Calahan said. “This is something I expect to see a lot of people addressing much more heavily in the coming year or two.”
McCall agreed, adding that Scripps is “definitely focusing” on signal management, adding that keeping track of signals is easier if all the networks have a scrambled signal. While Scripps' four other networks are already scrambled, Great American Country, which was bought last year, only became fully scrambled earlier in July.
“That's the first step in being able to reconcile the signal management and make sure you have a reonciliation between your accounting records and what your transmission shows as being authorized,” McCall said. “It's not an easy task, but [Argo's] signal maintenance module has been quite helpful.