Opinion

The Biggest Winner of the media reforms is… News Corp as usual

Call it Lachlan's Law. One of many consequences of the government's comprehensive package of media reforms announced over the weekend is that Ten becoming part of the News Corp family starts to look more likely than not, argues Mumbrella's Tim Burrowes

No wonder Rupert Murdoch looked so pleased as he shared a stage with Malcolm Turnbull and Donald Trump in New York on Friday night.

We’ve been here before.

Four decades after buying into Ten – and three decades after having to give it up again to pursue US citizenship – the path finally appears to be clearing for the network to return to the Murdoch family.

Mind you, we have indeed been here before.

Saturday morning’s big media reforms announcement is not the only attempt over the last decade to change the ownership laws. Both Labor and the Liberals have previously tried and failed.

This time though, I suspect it will go through.

With what appears to be consensus from all the key media owners, it would be a politician with little interest in being re-elected who stands against the media moguls’ collective wills.

And (with the exception of the Australian taxpayer) the wide ranging package of reforms leaves almost every commercial media organisation a winner.

Watch their share prices soar on the ASX when it opens on Monday morning.

It’s just that, as is so often the case, it looks like the interests of the Murdoch family stand to be the biggest winner.

The ownership laws are the most fundamental changes, but let’s leave the implications of that for a moment.

Licence fees

The most straightforward – and cosiest – win for Australia’s commercial broadcasters comes with the abolition of licence fees, replacing them with a charge to use the spectrum. Or, as the government describes it “moving to more efficient broadcasting fees”.

In practice, the changes will see broadcasters (including both TV and radio) paying just a sixth of what they were being charged as recently as 2010.

It’s only seven years since they were paying 9% of annual revenues, which amounted to $282m a year from the TV networks.

Labor’s media minister Stephen Conroy started the ball rolling with a temporary discount, which later became permanent, announced in February 2010.

Given that the figure the networks will be asked to pay will now be about $40m, that marks a triumph for the broadcasting companies’ lobbyists – and Free TV Australia chairman Harold Mitchell. And that sounds like quite a bargain to me for the ability to use public airwaves to broadcast to the entire population.

In these times of Budget discipline, it would be interesting to know what the government wants in return from the people who broadcast news bulletins to its voters every single day. Although I suspect the answer lies in the question.

The argument that the networks needed the help mainly because all the advertising money is these days flowing out to Google and Facebook does not fully stack up.

The broadcasters’ contribution to the taxpayer has been reduced by a massive 86% over the last seven years.

Yet, between 2010 and 2015 (the last full calendar year Free TV Australia released data for), advertising revenue for the networks only fell slightly from $3.97bn to $3.78bn, a drop of 4.8%.

It strikes me that the main source of the TV networks’ commercial woes has actually been their competition with each other. In the race for audience share, they overpaid for US content, often on painfully long contracts, and have pushed up the cost of sports rights.

Blaming Facebook and Google may be a tad simplistic.

Still, according to the Department of Communications, industry regulator the Australian Communications and Media Authority “will be directed to conduct a review of spectrum pricing within five years to examine the operation of the new pricing structure and ensure the arrangements
remain appropriate”.

This will remain an excellent future stick with which the government will be able to keep TV networks in line.

Given that the ACMA last month auctioned a tranche of spectrum to TPG and Vodafone for $1.5bn, and sold another $2bn worth to Optus and Telstra in 2013, the annual $40m the TV networks will be paying between them starts to look like remarkably cheap.

Restrictions on gambling advertising

The price the TV networks will pay to get the package of reforms through – and presumably neutralise potential crossbench opposition from the likes of Nick Xenophon – is to accept tighter restrictions on gambling advertising, particularly when games are on live.

The principal losers on this will be Nine and Seven, whose NRL and AFL-loving audiences are attractive for the betting advertisers. Ten doesn’t have as much exposure, with its main sport now being Big Bash cricket, which it has been careful to cultivate as a family-friendly environment.

For the last few years, the television industry’s over-reliance on gambling ads has become the tobacco advertising of its time.

We hit something of a grubby low point back in March when Nine was found to be in breach of the current rules by showing ads for CrownBet during kids’ movie Spiderwick Chronicles, and trying to argue that it wasn’t a children’s film.

Few, I suspect, will feel entirely sad to see better behaviour forced upon the networks. Sports betting tends to showcase the industry at its worst.

Amending the anti-siphoning sports rules

If one reform requires a degree of bravery from the Government, it’s making any move that takes sport away from an audience used to seeing it on free-to-air television.

In a nutshell, the anti-siphoning list means that free-to-air broadcasters get first dibs on a long list of sports.

But a couple of the anti-siphoning changes are uncontroversial.

When every free-to-air secondary channel is as easily available as the primary ones, it was archaic that they weren’t treated the same. So it’s sensible to fix that.

It’s also sensible that the free-to-air broadcasters will have to make their minds up if they want an event six months out, not be allowed to dither until it’s three months away.

But some anti-siphoning changes will mean a much bigger win for News Corp’s Fox Sports, and for pay TV network Foxtel, which is jointly owned by News Corp and Telstra.

There will be some grumbling from the public if they can’t watch Australia play in the Rugby World Cup without paying for it.

And in a move which will mainly hurt SBS, I suspect, international soccer is also likely to mainly move to pay TV. Only Australia’s World Cup games will be protected for free to air. Other international teams won’t automatically be in terrestrial TV any more.

And Socceroos qualifiers played overseas can move to pay TV too.

Also off the list is the English FA Cup Final.

For Rugby Union, only tests played in Australia or New Zealand will be protected. And only World Cup games involving Australia, plus the final, will remain guaranteed for free to air.

One Day cricket fans may be discombobulated to discover that internationals involving Australia will only be protected when played at home or in NZ.

And Davis Cup tennis matches played overseas will also be off the list.

Tennis fans may also find themselves paying to watch Wimbledon and the US Open too.

Meanwhile, golf could well disappear from free to air altogether, with the Australia Open, Australian Masters and US Masters all off the protected list.

In motorsports, Bathurst will go, but the Australian F1 Grand Prix will remain.

The crown jewels though – the Olympics, Melbourne Cup, State of Origin, plus NRL and AFL grand finals will all be safe.

And if Fox Sports and Foxtel is the winner here, then free to air TV will lose out on what was sometimes relatively cheap programming.

It will also create a dilemma for sports administrators who will more often face a choice between better exposure for their game on free to air, versus more dollars from pay TV.

Local content

There will also be new rules to protect local TV content if (read: when) licences change hands in what is known as a trigger event.

Whether they amount to much in practice remains to be seen, with networks already masters of fulfilling minimal quota obligations in the cheapest possible way.

Indeed, some of the new rules appear to be in direct recognition that the old ones weren’t working.

Broadly, TV broadcasters will be required to deliver 900 minutes worth of local content per six weeks (or about half an hour per day).

The requirements are halved if the programming is news. And if the content is actually filmed locally, each minute worth of content counts triple.

None of that sounds too onerous for the networks.

But the Department of Communications has made some nice graphics.

Media ownership laws

Which brings me on to the big one. The ownership laws.

Currently, the TV networks are only allowed to reach a maximum of 75% of the population. And in any local area, media companies can only be in two out of three of free-to-air TV, radio and newspapers. It’s why the big three – Seven, Nine and Ten – are twinned with regional affiliates including Prime, SCA and WIN.

That will change.

This is the one that will send share prices soaring on Monday, as the market anticipates a wave of mergers and acquisitions.

 

There are about seven key clans in the forthcoming media Game of Thrones:

The Murdoch family; Kerry Stokes; Bruce Gordon;  Fairfax shareholders; Nine shareholders; Southern Cross Austereo shareholders; and Prime Media Group shareholders. (Let’s assume for now that Ooh Media and APN Outdoor are focused on their proposed merger.)

Some are potential buyers. Some are potential takeover targets. And some are both.

To understand the complexities of ownership, take a look at ACMA’s ownership map.

 

Now look at it even more closely. Messy and complicated, isn’t it?

Decide for yourself what might happen to Fairfax. The TPG Capital proposal which re-emerged over the weekend may bring about a breakup there sooner than you think.

Of key interest are the various investments of News Corp and the Murdoch family – and their involvement with Ten.

While the Australian Competition & Consumer Commission will still have a say in any deal, this would now only be in general terms rather than anything specific to media ownership law.

And it’s hard to think of a deal big enough (with the possible exception of News Corp buying all of Fairfax’s newspapers) to see it blocked.

As I’ve written previously, News Corp’s tendrils into Ten already go deep.

  • Lachlan Murdoch owns about 8% of Ten already.
  • Foxtel (half owned by News Corp) owns about 14% of Ten.
  • Sales house MCN (majority owned by Foxtel with Ten owning 25% of it) already does advertising sales for Ten.
  • One of Ten’s two major US content deals is with 21st Century Fox (executive co-chairman: Lachlan Murdoch).
  • A sizeable proportion of Ten’s local reality formats are made by 21st Century Fox’s joint venture Endemol Shine.
  • Lachlan Murdoch is one of three guarantors on a $200m loan facility to Ten due to be called in at the end of the year.

Lachlan Murdoch: Will he be the biggest winner?

Indeed, the only thing that obviously stands between News Corp and Ten is Bruce Gordon.

The owner of regional player WIN, Gordon has a foot in the camps of both Nine and Ten, with a 15% stake in each.

Last year, WIN’s affiliation switched to Ten, after Nine dumped WIN in favour of a new deal with Southern Cross Austereo.

Like Lachlan Murdoch, Gordon holds another chip at the poker table, also being a guarantor on the loan facility.

If Ten defaults when the loan becomes due in seven months’ time, Murdoch, Gordon and the third guarantor James Packer will have a say in what happens next, including having potentially first call on the network’s assets.

Alternatively, Murdoch and Gordon could back Ten’s board by guaranteeing a new facility. The board says it needs this to be $250m in order to continue to be competitive.

When this was revealed last month, the value of Ten on the ASX halved in less than a week. At close on Friday, it was worth just $80m. That’s just a sixth of what it was six months ago. And just a tenth of what it was worth less than two years ago.

I’m sure that, with the licence fee relief and changes to the law, we’ll see a bounceback of Ten’s share price too on Monday.

Regardless, there’s been little fun for Ten shareholders who are on the ride for investment reasons rather than to simply have a say in the end game. Not that there are many value investors left, I suspect.

That, I’m sure, is what’s behind last month’s announcement to the ASX from Lazard Asset Management that it has started to sell down it’s 10% stake, dropping back to 8.75%.

And, Ten still has plenty of turmoil ahead.

One possibility is that Ten will once again have to issue (a lot of) new equity. if the loan isn’t rolled over, it could yet be nudged into administration. It’s already got restructuring firm KordaMentha on its books.

The task facing Ten’s management still looks tough.

First, the broadcaster needs a new $250m loan facility. That’s a big ask for a company with a market capitalisation of less than a third of that.

And the only thing standing between the company’s directors and insolvency is that loan facility.

The only likely way for it to come through would be for the three directors who guaranteed the previous facility, to put their money behind a new one.

So the intentions of the three shareholders – Lachlan Murdoch, Bruce Gordon and James Packer – become vital.

Their intentions were signalled a little in last month’s update. It suggested that the loan could be rolled over if a) A cost cutting restructure plan – aka “transformation process” could be put in place; b) The licence fee was cut; and c) The US studios let it off some of its liabilities.

A couple of weeks back, all three things happening seemed unlikely. Now though, the planets have aligned.

The government has done its bit – and not even waited for Budget day – by announcing the licence fee axeing.

Then there’s internal cuts, sorry, transformation. That’s why management consultants McKinsey have been in the building. And that’s the key lever that management can directly pull directly.

Deep job losses at what is already a tightly run ship will, I’m sure, be a certainty. Outsourcing the entire news operation to the News Corp’s Sky News starts to seem logical.

The third key component is the cooperation of the US studios – CBS and 21st Century Fox – in renegotiating their content deals.

In both cases these studios are already in three-legged races alongside Ten.

These were deals entered into when US drama and comedy rated better – and all three of Australia’s networks raced to hand money to the US studios. In those years, the US studios benefited greatly from the competition between Seven, Nine and Ten. By contrast, the only currently bankable trend is reality.

In CBS Studios’ case, the three-legged race is the unusual arrangement it has with Ten regarding its secondary channel, Eleven. Back in 2010, Ten and CBS found a way to slip inside the rules on TV licences to give CBS a stake in Eleven in return for supplying content. Ten owns two-thirds of ElevenCo (and the licence) while CBS Studios provides the content, and owns the other third.

A single line in last week’s ASX update reveals that in the last six months, there was no dividend for CBS Studios based on the performance of ElevenCo. That was compared to a modest $700,000 dividend in the previous period.

Ten’s ASX update briefly mentioned the CBS Studios relationship

Given that Ten’s had no dividend to pay CBS for the performance of Eleven, one wonders just how much goodwill Ten has in the bank with the US studio over slimming down its main output deal which is reportedly as much as $120m a year (although I suspect it may be a bit less than that).

It’s worth noting that it cost Nine a reported $100m to get out of its output deal with Warner Bros back in 2013. Seven allowed its own deal with NBC Universal to expire.

However, CBS Studios will also be aware that if cutting a deal helps Ten survive, it will be in its own interests. Getting something is better than nothing.

The other major studio Ten has an output deal with is in a different kind of three-legged race.

As I’ve mentioned above, 21st Century Fox is a Murdoch company, with Lachlan Murdoch co executive chairman.

What of course none of us are privy to, are what the three guarantors are actually thinking and saying to each other. Although it becomes ever more telling that Murdoch has chosen not to replace his representative on the Ten board which makes conflict of interest marginally less of an issue.

Does Lachlan Murdoch actually want Ten? If you’d asked me on Friday, the mountain to climb of getting the media ownership laws changed would have made me doubt it. But then came Saturday morning’s announcement.

What of Bruce Gordon’s intentions? He’s been a long term investor. But is also 88-years-old. A major motivation for him will be how to secure the future – or failing that, the value – of the WIN assets he’s spent a lifetime building up.

And the wild card of James Packer’s 8% stake. Originally, he and his friend Lachlan Murdoch had agreed to vote their shares in concert; but there was a falling out when Murdoch poached James Warburton from Seven to run the network.

And of course, we don’t know whether Murdoch and Gordon have even already come to an arrangement.

But here’s my prediction: In the intrigues that lie ahead, News Corp will be the biggest winner. It always is.

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