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Media – Same old story, whole new ball game

Streaming and subscription are the new media buzzwords. The old television networks are now fighting the same battle for survival that their print cousins have endured against the internet but the outcome looks bleak.

 

Nine’s earnings downgrade was dumped into the market late last Friday ahead of the long weekend. The company said the free-to-air television advertising market was likely to decline in 2H15 due to “particularly soft conditions in May and June”. The single digit decline now expected contrasts with the previously optimistic 2% growth forecast at last November’s AGM.

 

Unfortunately, it’s not a good look when the CEO sells $1.5 million of stock just a few weeks before the market is made aware of the deteriorating conditions.

 

The market reaction to NEC’s downgrade was understandable. The negative reaction on Seven West Media’s share price was perhaps more interesting given SWM had only recently reaffirmed its FY15 underlying net profit guidance and did so again this week. Either the market does not believe SWM or the share price is now arguably oversold.

 

The Nine, Seven and Ten television networks are scrapping over a national metropolitan advertising market worth around $3 billion each year. Seven takes the biggest bite with just over 40% revenue share, Nine earns about 38% and Ten picks up a sickly 22% or thereabouts. Audience share generally drives revenue share but it is important to understand that media buyers do not want to see Nine and Seven gain further dominance over Ten as the negotiating power would slip further into the hands of the networks, not the buyers.

 

Ten’s Obi-wan Kinobe moment (“help me Obi-wan, you’re my only hope”) is a deal with Foxtel that could reinvigorate the content schedule for Ten that would lift its audience and revenue share. Programming success at Ten has been more miss than hit and it has Buckley’s chance of improving its situation without some fresh help from the Jedi Knights at Foxtel (News Corp and Telstra).

 

Ten’s all-star cast of shareholders can’t seem to agree on how to make the best of a bad situation but something has to give to allow Foxtel onto the register.

 

Until then, Seven and Nine will continue to carve up the ratings and revenue between themselves, as well as the best of the available new content.

 

Of course, both Seven and Nine have cleverly spruced up their respective balance sheets (Nine sold its Events division for $640 million, Seven raised $311 million equity) and are both ready to duke it out for the next AFL and NRL broadcasting rights contracts.

 

The free-to-air networks are still prodding the government to eliminate the odious/onerous (in their opinion) broadcasting licence fees which could put around $50 million back into Nine’s pocket for example.

 

Nine will also jettison its longstanding US studio agreement with Warner Brothers when that content supply agreement expires in January 2016. That will free up about $80 million a year which Nine seems to have already sunk into reality and news programming to revive its prime time schedule.

 

Nine is now also posturing to renegotiate its affiliate arrangement with WIN Corporation in which it currently takes 39% of WIN’s revenue amounting to approximately $80 million a year. Nine thinks it can extract more than 50% of WIN’s revenue but that sounds more like a threat rather than a promise.

 

Persistent suggestions that Nine might try to buy Southern Cross Austereo Group as an alternative still requires the dismantling of the 75% reach rule and the government has dragged the chain on this aspect. Besides, Nine would only want to buy SXL’s regional television stations and not the radio businesses.

 

NEC is pretty much a pure play commercial television network and therefore its primary earnings risk is the volume and price of its advertising inventory. The price it pays for its content is a close second.

As audiences fragment and generally watch less network television, the revenue side of the equation starts to stall and even go backwards. As the cost of key content such as live sport continues to rise, profit margins get skinnier. The combination of these factors makes network television less appealing as an investment.

 

The evolution of new TV services may not offset the structural decline of commercial television earnings just as print businesses have succumbed to competing online businesses.

 

The paradox of the internet age is that free content has proliferated but quality content has not. This has had the dual effect of making the price of commodity news and information shrink to almost zero while the value of niche premium content (live sport especially, premium movies and TV shows) has soared.

 

Among the tastier morsels of the media world recently were two anecdotes that caught my eye.

 

Apple has decided that its iTunes model of selling individual songs around the $1 mark is no longer the way to go and it has now launched a subscription model. This is a deliberate strategy to try and catch up to Spotify which has nailed the streaming music market. Last year, Spotify had US$1 billion in revenue from 60 million monthly users of which 15 million are paying subscribers. Spotify recently raised US$350 million which value the total enterprise at approximately US$8 billion, double that of listed competitor, Pandora.

 

Secondly, The NFL has awarded the streaming rights to the Jacksonville Jaguars vs Buffalo Bills match, being played in London this October, to Yahoo! The NFL broadcasting rights are tied up until around 2021 with the major US TV networks but the NFL is toying with a potential new way to sell its incredibly valuable content.

 

The launch of subscription video on demand (svod) in Australia has really taken off this year with Netflix entering the market with a full head of steam. The main local challengers are Presto (Foxtel and Seven West Media) and Stan (Nine Entertainment and Fairfax Media).

 

Suffice to say there will be tears and tantrums on the corporate side as customers help themselves to all the free trials while they decide which service offers the best content. Stan, for example, has already sunk $100 million into its effort and will likely not see much return on that investment despite the chest-pumping subscriber numbers it will trumpet. When I see revenue and positive operating earnings from ventures like this, then I will give due credit. Until then it just looks like a black hole.

 

Some analysts are arguing that NEC’s earnings downgrade is just a cyclical twitch due to the very short term nature of bookings for advertising. Others attribute at least some of the pain to structural changes with the advent of new streaming services taking more audience share from traditional television programming.

 

I think both views have merit which only spells trouble for the commercial television networks.

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