TVNZ faces losing cash cow

By RICHARD BRADDELL

More than a century after Italian Guglielmo Marconi transmitted the first signals through the air, the demand for wireless communications shows no sign of abating.

Television and mobile phones are just two of the appliances modern consumers find it increasingly hard to do without, and Communications Minister Paul Swain is not alone in expecting that wireless technology will soon replace fixed wire for rural telephone services.

Mr Swain is one of those who is pinning his hopes on Television New Zealand's low-profile transmission unit, Broadcast Communications Ltd (BCL), in showing the way.

As if living in the politically charged shadow of TVNZ is not enough, BCL is at the centre of a Government policy debate that could lead to it being split from its parent and made a separate state-owned enterprise.

A report from consultants Arthur Andersen is likely to be considered by the cabinet at the end of the month.

At the start of her tenure as Broadcasting Minister, Labour's Marian Hobbs described BCL as a "wonderful golden goose" which, with the convergence between television and telecommunications, had the potential to become an important rival to Telecom or TelstraSaturn.

But if Ms Hobbs worried then that splitting BCL off would give transparency to an effective monopoly, that is not the rationale now prominent in the Government's thinking.

Instead, it is considering combining TVNZ's commercial operations - BCL, its satellite operator Satellite Services and its outside broadcast unit Moving Pictures - under one roof in a profit-oriented state-owned enterprise.

The broadcasting activities would remain in a less commercially oriented new crown entity charged with implementing the Government's public broadcasting charter.

People characterising BCL as a boring haven for engineers could not be more mistaken. It has built a position as a key part of nearly every radio and satellite communications pie in New Zealand, not to mention a few in Australia and Asia.

Not only does it provide transmission facilities for free-to-air broadcasters such as TVNZ and CanWest, but it also caters to Sky Television's UHF network, FM radio stations, emergency services, the military and most telecommunications companies.

Closer to Mr Swain's heart, it has agreements with internet service provider Ihug and Walker Wireless to co-locate transmission equipment on its many sites so they can bypass Telecom's rural network with high-speed telecommunications services.

It is also investing $35 million in a new digital radio network that will give it full broadband telecommunications capability. And it has spent $30.5 million getting rid of a restraint-of-trade agreement with Clear Communications so it is now free to operate in the telecommunications area.

The terms of that deal have not been disclosed, but it is unlikely Clear was paid $30.5 million in cash.

While BCL could probably compete for retail customers in the telecommunications market, that is seen as highly unlikely because of its strong niche as a carrier's carrier.

Of greater interest to the Government is the role it might play in ensuring New Zealanders can take part in the information society.

One broadcaster estimates it would cost $1 billion and take 20 years to duplicate BCL's string of strategically placed transmission facilities. It is this network which sets it up as a vital facilities provider, not only to broadcasters but to New Zealand telecommunications operators who use its facilities and employ BCL to maintain their own.

But it is this strategic role that also makes some nervous about it being formed into a stand-alone SOE - traditionally the first step towards privatisation.

British cable giant NTL is one overseas company that would be keen to get its hands on the asset. NTL manages a large chunk of Australia's transmission network and was TVNZ's original choice of partner for its digital TV plans.

Crown Castle, a United States-based company whose Australian division is partly owned by a company with links to Sir Michael Fay, David Richwhite and the Todd family, is also seen as a likely buyer.

While Labour has ruled out selling BCL, its future will always be in question once it is carved off.

The chief executive of TV3 and TV4, Rick Friesen, has nothing but praise for BCL's innovation, engineering and customer service.

So, too, does Sky Television's John Fellet. But Mr Fellet feels there has been insufficient transparency in BCL's operations.

The unit is widely regarded as a cash cow for TVNZ and it has been argued that splitting it would be catastrophic for the broadcaster, since it would no longer be able to cross-subsidise its broadcasting activities.

BCL's contribution to TVNZ's profit is buried in the consolidated accounts. But claims that BCL and satellite activities account for 60 to 70 per cent of cashflow and profit seem overstated.

TVNZ's annual report for the year to June 2000 shows that advertising revenue made up 63 per cent of total revenue of $473 million.

A BCL profit statement for the same period obtained by the Business Herald shows that it and other TVNZ trading operations are claiming an increasing share of the bottom line.

After BCL more than doubled its turnover to $75 million last year, its after-tax contribution to TVNZ's net $43 million profit also doubled to $15.2 million.

Meanwhile, TVNZ's Australian subsidiary doubled its contribution to $4.8 million.

The impact of operations such as Moving Pictures on the $23 million difference is not clear. But a year on, and with TVNZ's admission that advertising has weakened, their importance must be even greater.

If carving off the commercial activities creates problems for the rump of TVNZ, it may also be less than helpful for a TVNZ partnership forged with TelstraSaturn.

TelstraSaturn will soon start a digital service using TVNZ-owned satellite rights to carry TVNZ's free-to-air channels as well as its own pay channels.

TVNZ plans to use the same satellite capacity to deliver its own free-to-air channels, as well as interactive services.

Undoubtedly, new terms can be negotiated to accommodate any restructuring of TVNZ. But the deal with TelstraSaturn illustrates that BCL will not be the only way to Mr Swain's goal of bringing highspeed data and internet to a wider audience.

A key feature of the partnership between TVNZ and TelstraSaturn is that the two will cooperate on programming.

A shining example is the rights to All Black rugby at the end of the year, which normally would be the preserve of Sky.

But satellite content, which will compete head to head against a similar offer from Sky, will just be the stalking horse for TelstraSaturn to boost its telecommunications business. Without satellite, TelstraSaturn would be confined to its cable networks, so far operating only in Wellington and Christchurch.

Satellite distribution covering the entire country opens the opportunity to bundle long-distance telephone services as well as internet, giving a head start in provincial and rural markets when the business case for cable or wireless delivery justifies them.