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principles of finance. a la shmoop. depreciation versus amortization. ok

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people two words. depreciation and amortization. sing it with me. [definitions]

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alright well they're kissing cousins and both reflect the

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same notion. things wear out -like my vocal cords .they must be replaced. not my

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vocal cords. thank you alright key idea here people. depreciation is for tangible

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things- i.e. things you can touch. like a tractor smelting factory. yeah things

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gonna wear out. amortization is for intangible things like patents and

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contracted for distribution relationships and FCC licenses. and here

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we're gonna talk about a broadcast license- which is intangible right? or

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amortize away its value. okay the big question that unites them is when and

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well really at what rate right when are we gonna execute these things. well

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there's a little story to help illustrate. and we're rounding dates and

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times to keep the math as easily digestible as possible. in the 1980s cap

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cities owned what is today the ABC television network now owned by Disney. [abc logo]

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in those days the law was such that the FCC would grant broadcast licenses for

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periods of time .a network would apply to renew that license, and as long as they

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quote did right unquote by the public, ie

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broadcast hurricane warnings aggressively air public service messages,

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against drunk driving and sponsored charitable picnics with mucky-mucks, well

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then their licenses generally got renewed. the law changed a few times

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along the way allowing for ownership concentration to increase, and that is [judge bangs gavel]

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they allowed one station to buy another. since a given target acquisitions

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broadcast license was a huge part of their total value in an acquisition well

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that licenses remaining duration had to be amortized away. well you can imagine

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that in a portfolio of a dozen station acquisitions there ended up being a ton

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of broadcast license amortization fact that had to be

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amortized away. while some stations had only two years left on their license so

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they were a small line item in the acquisition others had like 17 years [broadcast license pictured]

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left and others had a dozen or more. all

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right well the result cap cities had a lot of

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quote false unquote expenses. that is in a given quarter if they had a hundred

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million dollars of revenue and fifty million dollars of expenses that were in

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cash they'd have booked attribution of another forty million dollars of

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amortization of quote costs unquote that had to be run through the income

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statement meaning those costs were amortizing down the license. so instead of showing

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that they actually earned a dollar seventy a share in cash, while their real

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income statement earnings showed like only a dime in earnings. and Wall Street [cap cities income statement shown]

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hated this. the street had just come off a terrible bear market in the 70s and

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investors were in no mood to pay much more than 15 times real earnings for a

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stock no matter what the earnings quality looked like. well cap city's

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thought this was just lunacy because on a free cash flow basis while they traded

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at about six times cash earnings. and that's for ABC, which was at the time

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one of the premier media properties in the entire free world. and maybe the

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unfree world we're not sure what licenses go for in China. so the company

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was the first to really buy back its own stock. basically giving the middle finger

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to Wall Street. and oh by the way there was one investor who totally got the [middle finger shown to wall street stock traders]

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stupidity of the accounting rules behind cap cities you've probably heard of him

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yeah he became their largest shareholder.

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