Brian Gaynor: Static about TVNZ blurs real picture

TVNZ's annual report, which was released this week, gave the company's competitors the opportunity to launch yet another hysterical attack on the government-owned operator.

TVNZ faces a number of challenges, but most of the criticism has been uninformed and exaggerated. The company has made several mistakes, but it has a difficult mandate in a changing and competitive environment.

The first point to note is that TVNZ employees are not overpaid when compared with CanWest MediaWorks (NZ), the owner of TV3, C4 and a number of radio networks.

TVNZ had total revenue of $436.7 million and 145 staff members paid $100,000 or more while CanWest had revenue of $250.3 million and 124 employees in the $100,000 plus bracket.

Sky Network TV, the country's only "pay-for-view" company, operates under a completely different business model and had only 37 employees paid more than $100,000 in the June 2005 year.

The number of highly paid TVNZ employees has fallen in recent years as 177 individuals were paid $100,000 or more in 2003, although that was before the wind-down of the company's satellite services division.

The latest annual reports indicate that the top man at TVNZ is not overpaid when compared with his counterparts at CanWest and Sky.

Brent Impey of CanWest was paid $770,424 in the latest year. John Fellet of Sky TV got $687,500 and the top salary at TVNZ, assumed to be Ian Fraser, was between $670,000 and $680,000. Judy Bailey's salary, which is $800,000 for the 2005 calendar year, was not included because she is contracted through her company.

The second point to note is that TVNZ has a strong balance sheet.

As at June 30, the company had cash and short-term deposits of $32.3 million and no debt. CanWest has $187.8 million of long-term debt and SkyTV is highly geared since its merger with INL on July 1.

On a negative front, TVNZ experienced a drop in operating earnings in the latest year, has a low operating margin and is rapidly losing advertising market share to TV3 and SkyTV.

TVNZ's operating profit, or ebitda (earnings before interest, tax, depreciation and amortisation), fell from $79.6 million in 2004 to $72 million in the latest year. In the same period, CanWest's operating profit rose 11.3 per cent to $67.8 million and SkyTV was up 23.1 per cent to $230.5 million.

The Crown-owned company had an ebitda margin of 16.5 per cent in the latest year compared with 47.1 per cent for SkyTV and 27.1 per cent for the CanWest group. TV3 and C4 had an operating margin of 25.7 per cent.

It is difficult to assess the impact of the charter on TVNZ. The annual report shows that programmes with charter funding of $10.7 million were broadcast during the year. It is not clear whether TVNZ lost money on these programmes.

TVNZ appears to be overstaffed compared with CanWest. TV3 and C4 have 365 employees whereas TVNZ has 1173 staff members for its two channels.

The real threat for TVNZ is that its share of the advertising market, which is its main source of income, is falling. The state broadcaster's share of the major advertising market - which contains TVNZ, CanWest and SkyTV - has fallen from 73.1 per cent to 65.9 per cent since 2001. CanWest's share has risen from 23.7 per cent to 27.3 per cent and SkyTV's from 3.2 per cent to 6.8 per cent over the same period.

The most dramatic fall has come in the past 12 months with TVNZ's advertising share falling from 68.6 per cent to 65.9 per cent. In that period, the total television advertising revenue of the three companies rose from $488.8 million to $522.1 million with CanWest capturing 45.7 per cent of the increase, TVNZ 27.3 per cent and SkyTV 27 per cent.

That is an extremely worrying development for TVNZ, although the broadcaster's senior executives are quick to point out that CanWest has only $142.4 million of television advertising while TV1 and TV3 have $344.1 million.

The state broadcaster's main problems are that it has conflicting objectives and faces two tough competitors. Chairman Craig Boyce wrote succinctly in the latest annual report: "TVNZ has been given a uniquely challenging business model; public service broadcasting using primarily commercial revenues within a largely deregulated environment, and with specific dividend and profit goals."

By contrast, SkyTV has a simple and successful business model.

Unlike some other countries, important sporting events are not protected for free-to-air operators, and SkyTV has an almost complete monopoly over rugby, cricket and soccer. This forms the base of its spectacular growth in subscriber numbers, which now stand at 630,000.

Sky subscribers watch one of the 54 channels about 40 per cent of their viewing time and Sky's viewing share of all New Zealand homes is about 20 per cent.

This gives the company plenty of growth potential as recent figures in the United States show that pay-for-view operators have just over 50 per cent of total viewing time and attract one-third of the advertising revenue. Sky's advertising income is rising rapidly, but it still has less than 7 per cent of the total market.

Sky also has a digital platform that gives it huge advantages as audiences become more fragmented, with viewers wanting to watch more and more channels. Before digital was introduced in December 1998, Sky had only five channels whereas it now has 86, 54 of which are television channels.

Sky is leasing space on a new satellite to be launched next year. This will enable it to introduce a large number of new channels whereas TVNZ is restricted to its current offering until it moves to a digital platform.

CanWest is a successful radio operator that is making an excellent fist of turning TV3 into a highly profitable television channel.

The beauty of radio is that it is far more stable from an earnings point of view and offers relatively high operation margins.

In the August 2005 year, CanWest radio produced ebitda of $33.8 million and a margin of 31.3 per cent while TV3/C4 had ebitda of $36.7 million and a margin of 25.7 per cent.

CanWest's success is partly due to chief executive Impey, who is highly regarded.

CanWest and SkyTV are two well-run and profitable listed companies with good prospects. But it would be silly for them to think that TVNZ is past its use by date and the state broadcaster is not a serious threat.

TVNZ is wounded, but it has the ability to bounce back under a visionary, energetic and extrovert chief executive.

If the TVNZ board can find this individual then Impey and Fellet will have to work a little harder to stretch further ahead of the sleeping giant.