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Companies in the radio, broadcast television, and cable television industries also tend to have some solid competitive advantages, which often lead to above-average and sustainable profitability.

Previously, we discussed one of the most important: FCC licenses. Recent deregulation in the broadcasting industry has led to less competition, as companies own more broadcasting licenses in a specific market. Although some media activists argue that this is a negative development for consumers, there's no denying that increased concentration has been a positive development for the broadcasting companies that have chosen to take advantage of It.

Broadcasters make most of their money from advertising, which they attract by offering programming to as many people as possible. The programming that broadcasters show is one of the their largest expenses, and the cost is basically fixed—a broadcaster pays essentially the same amount for the right to show a program regardless of how large its audience is. However, the bigger the audience, the more ad dollars the broadcaster attracts, which means that incremental increases in advertising revenue fall directly to the bottom line as profit. And as broadcasters increase the number of stations they own—which deregulation has spurred—much of the fixed programming costs can be shared among the stations.

Overall, broadcasters have a solid business model, so investing in this segment is mostly a matter of valuation. If you can buy these companies at a discount to fair value, your long-term returns should be pretty good. Make sure, though, that the company isn't involved in another business that could po­tentially be a drain on cash.

Finally, there's the cable industry, which has typically enjoyed the luxury of having a monopoly in many of its individual markets. Rarely have two cable companies operated in the same market, which has historically allowed for ag­gressive increases in monthly fees. Over the past decade, though, satellite television providers have become a force in this market, forcing cable companies to step up their efforts to differentiate themselves through high-speed Internet access. The cable companies have also tried to compete on price in some areas.

These two moves have led to diminished profitability and free cash flow. Indeed, the cable industry is highly capital intensive, which has traditionally led to paltry free cash flow. That's a big negative. Although many cable companies claim that capital spending will finally start declining as they upgrade their networks to offer advanced services such as digital cable, video-on- demand, and high-speed Internet service, they've been making similar claims for years. With the relatively recent advent of satellite as a competitive force, the cable industry may have less attractive economics in the future.

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