Prime Time For Packers To Tune Out Of Tv
Sydney Morning Herald
Saturday February 9, 2002
Advertising slippage and big costs ahead take the edge off Nine for a family cashing in on casinos, reports Brian Robins .
The management shake-up at Kerry Packer's Nine Network and the policy backflip that has seen Packer support foreign ownership within the local media sector have reignited speculation that he is a willing seller.
The immediate reason for the senior management changes at the start of the year was the slide in ratings by the network following the switch to the OzTam rating system, which lays greater stress on the youth market where Seven and Ten have worked hard to boost their standing.
In turn, earnings of the network have been hurt when it faces higher programming costs from developments such as winning some of the AFL broadcast rights.
The traditional advertising rate premium Nine has charged compared with its rivals' rates has been eroded a burden which will weigh on earnings of Publishing and Broadcasting, the Packer family arm which holds the network in the year ahead.
``I believe they are sellers of that asset," said one media analyst, who declined to be named. ``They have a great cash generator in the Crown Casino, and the feedback that I get is that a sale is one option."
More than a decade ago now, the Packer family sold the network to Mr Alan Bond for $1 billion, buying it back for a headline figure of $400 million a few years later, although the actual cash cost was much lower. Analysts now value the group's television operations at as much as $3 billion, comfortably ahead of the $2.5 billion tag put on the gaming arm.
In 1999, the Packer family signalled that Nine Network was not a core asset when they sought to sell it to Telstra near the top of the boom in telecommunications and technology share prices. Since then, some within the company have argued that the network is for sale at the right price.
Within PBL, the gaming division is on the verge of outdistancing TV as the major profit centre indicative of both the unusually strong operational performance of the gaming division and the pressures on the television operations.
Both James Packer and PBL's recently installed managing director, Peter Yates, are seen as less wedded to its media assets and more focused on its gaming operations. Increasingly, TV is seen as a high-risk asset especially given technical changes looming with the anticipated shift to digital broadcasting in a few years.
At the start of the year, the Packer family ousted the long-standing head of the network, David Leckie, replacing him with Ian Johnson, who was running Crown Casino. Before that, Johnson was at GTV, Nine's Melbourne arm, so he is no greenhorn when it comes to television. Former The Sydney Morning Herald editor John Alexander was put in as the head of all the group's media operations.
Leckie may have run Nine for the past 11 years, but there was apparently not much love lost between him and the Packer family, making it easier to push him out the door once the succession had been worked out.
As CSFB analyst Lachlan Drummond put it: ``PBL's Nine business has struggled with declining audience and revenue share for the past year and is expected to continue to suffer for at least the next 12 months as it pays the full revenue price for the loss of audience through 2002."
Now, with the management changes at the top, senior staff at Nine are waiting for the second shoe to drop, with another round of changes further down the management tree along with an expected shift of emphasis in programming. Kerry Packer has made it clear he wants more local drama on the network, a change which would take a few years to emerge as well as taking time to impact on the ratings.
Since staff returned from holidays late last month, senior management has been locked up in meetings, which has fed the internal rumour mill that more deep-seated changes are afoot.
For PBL, the most obvious factor militating against selling the Nine Network is the fat margins around 30c in the sales dollar which are nearly double those it generates from either the magazine or gaming operations. Those margins are hard to replicate, although they are under pressure in the wake of Nine's loss of market leadership. It still dominates the AB market profile sought by most major marketers, but the premium it has charged advertisers has gone.
BNP Paribas Equities, for example, reckons that Nine's traditional 5 per cent advertising premium over its competitors has evaporated, and will take time to be revived.
The clearest indication that Kerry Packer is hoping to sell Nine is his support for removing all controls on foreign companies moving into domestic media. He will be a major beneficiary if the Government shifts its stance.
With the highest quality network, an open door to foreign bidders would boost the possibility of an attractive offer, especially with the oversold Australian dollar making the assets cheap for a foreign buyer.
And even with the caution about the role of foreign investors in the local media industry, they are already here in droves. News Corp, which dominates the print media and is desperate to get back into television (it formerly controlled the Ten Network), is controlled by that naturalised American, Rupert Murdoch, with Izzy Asper's CanWest controlling the Ten Network, while Irish investor Anthony O'Reilly has been working hard to bulk up his family-controlled APN. Then there is the UK's Daily Mail Group, running rings round Village Roadshow's Austereo in the radio industry, with the stunning early success of its FM network Nova 96.9 in Sydney and Nova 100 in Melbourne following its launch.
Who would be interested in buying Nine Network?
``News Corp has flagged it wants to acquire an existing TV network or build a new network, and it already has a small magazine empire which could be merged into ACP," says BNP Paribas Equities analyst Finola Burke. ``AOL Time Warner is a long-standing content supplier to Nine and has, under previous management, often looked to expand its interests in Australia."
Fairfax is another interested party, this analyst argues, although its smaller size would limit its ability to pay cash. Along with News Corp, it could only be a buyer if existing cross-media laws were changed.
For the Packer family and PBL, the long-term threat posed by pay TV, coupled with the impact of technical change, may mean the time to cash in is looming.
The shift to digital technology will bring a heavy cost burden, and there is also caution about the likely impact of interactive broadcasting, both in terms of likely cost and prospective return.
With pay TV, after five years of hard work none of the three Foxtel, Optus and Austar has yet reached a position of strength in the domestic market, and they are in only around one in five households. The poor economics of the industry have forced Optus and Austar into merger talks.
The low local penetration compares with more than 35 per cent in New Zealand and well over half in the US and the UK where, for example, aggressive bidding for sporting programming, in particular, gave pay TV the edge. Here, pay TV operators bemoan the fact that anti-siphoning legislation, which blocks pay TV from monopolising major sporting events, limits their take-up.
But the inflating cost of sports programming was made clear with the deal between Nine Network, Foxtel and Ten Network in pitching a $500 million joint bid for broadcast rights to the AFL.
And the importance of sports to programming was highlighted again in January, with Nine rating well ahead. This was thanks largely to the cricket although early retirement of a number of top tennis players also reduced viewer interest in the Australian Open. Even so, it matters little, as the formal TV ratings season doesn't begin until tomorrow just as Seven's coverage of the Winter Olympics gets under way.
In the world of pay TV, Foxtel claims 780,000 subscribers (up from 750,000 in September), Austar around 440,000 and Optus is put at 260,000 (a marginal rise from around 250,000 in September). All up, around 3 million have access to pay TV, spread across around 1.4 million households about 20 per cent of the total.
Subscriber numbers are showing ongoing modest growth, although the growth curve has flattened significantly. Foxtel's 780,000, for example, is up a modest 4 per cent better than its competitors, but not enough to push it into the black soon.
For the pay TV industry, so-called churning the high drop-out rate among subscribers means that it is an ongoing battle to build subscription numbers.
Foxtel lost $62 million before tax last financial year, for example, with losses expected to rise further this year, on the back of the AFL broadcast rights.
© 2002 Sydney Morning Herald