TV revenues may still be strong, and consumers watch still plenty of free-to-air television during the week, but commercial broadcasters face serious structural threats to their models.
66% of Australians still consume more than 6 hours of free-to-air (FTA) TV a week, while 94% of people still use their TV to watch content at home instead of other devices like tablets, notebooks/laptops or smartphones, according to a new report by market research group Crosby Textor.
The stats above unfortunately aren't broken down by demographic, but I'd imagine far fewer younger people watch 6 hours or more of TV, and many people use their TV for entertainment thanks to their screen sizes – but that doesn't mean they are watching FTA TV.
Ten Network Holdings Limited (ASX: TEN), Nine Entertainment Co Holdings Ltd (ASX: NEC) and Seven West Media Ltd (ASX: SWM), owners of Channels 10, Nine and Seven respectively, will have no choice but to diversify their earnings or face annihilation.
All three networks have already begun that process, with more earnings coming from non-TV products and services in the past financial year than ever before, as you can see from the charts below.
Combined, the three networks earn more than $3 billion in TV revenues alone, with Seven leading with $1.3 billion – around 42% market share, Nine with $1.22 billion – 39% and Ten with $600 million, or roughly 19% market share. But overall revenues have stagnated over the past 4 years, and it's only a matter of time before one of them is either forced out of the market or to do something different.
Billionaire Kerry Stokes, the part owner of Seven West, has backed commercial TV networks saying they are still a powerful force and not a business in decline. Mr Stokes told The Australian,
"I keep reminding everyone that every network lost money on trading in the early nineties. All the analysts were telling me that was the beginning of the end of television. The industry has fought back since then."
The times, they are a changin'
The industry may have fought back then but, unfortunately, this time it's different. Really.
The arrival of streaming media services like Netflix, and their huge catalogues of movies and TV shows, with virtually no advertising for small monthly subscription fees, is still in its infancy but is already gaining traction.
Don't get me wrong though. The media companies Seven, Nine and Ten still have a place to play, and I fully expect them to be around for many years to come. But by then, they will likely earn nothing or close to nothing from free-to-air television, with a large percentage of their revenues coming from digital broadcasting, apps and other media.
Sports and news
Apart from their in-house developed shows, sports and news, many viewers have little reason to tune into free-to-air TV. But consumers have had enough of being forced to watch a show you like when the broadcaster dictates and suffer through numerous ad breaks when there is so much more flexibility offered by other media offerings.
Now even sports and news programs are in jeopardy of becoming irrelevant. With 24-hour news channels, news websites, the advent of Twitter and other social media services, instant news is at most consumers' fingertips, so why wait until 5 or 6 pm to watch already out-dated news on free-to-air? Especially when those news programs are regularly used to promote the networks' own shows rather than exclusively used to relay news stories.
Sports were once the protected species with Australia's anti-siphoning laws, which regulates which sporting events should be available free to the public. There are currently 10 sports types on the list plus the Commonwealth and Olympic Games. The problem is that broadcast rights are becoming prohibitively expensive, meaning Pay-TV operator Foxtel regularly partners with the FTA networks to broadcast sporting events.
To give you an indication of the cost, the Australian Football League (AFL) is reportedly seeking $1.75 billion over the next five years for the broadcast rights to its games.
The problem for the FTA networks is that they often take on huge amounts of debt to fund these licencing deals, but then struggle to pay the debt back. It's a bit like using a credit card to fund an overseas holiday. When you come back, you still have to find a way to pay off those debts.
Ten's brand-new deal
That's the primary reason why Ten sold 15% of itself to Foxtel in its recent announcement. The network was facing extinction without tying up with another media business. The broadcaster was unable to secure a Tier 1 sporting event, due to its lack of funds and high debt levels. Low viewer market share also meant it was struggling to secure advertising revenues.
The agreement with Foxtel follows similar trends around the world, with pay-tv networks buying into FTA TV networks for additional distribution platforms to offset the rising costs of programming.
The deal has still to clear regulatory approval, with the Australian Competition & Consumer Commission (ACCC) yet to give its blessing.
Foolish takeaway
If the ACCC allows the Ten-Foxtel deal to go through, expect more blurring of the free-to-air broadcasting sector. In 10 years' time, Seven West, Nine and Ten will be virtually unrecognisable – if they survive that is.
