When word got out that TVNZ was going to be allowed to skip paying a dividend to the Government and was forecasting a significant loss next year, it poured petrol on a smouldering fire at Mediaworks’ headquarters a kilometre away.
A short time later the flames flared into an angry outburst from Mediaworks’ news boss Hal Crawford and pleas from chief executive Michael Anderson and journalist Duncan Garner for the Government to stop what they consider to be anti-competitive behaviour from TVNZ.
TVNZ staff were unhappy with the public attack on their employer but TVNZ management stayed quiet.
The response finally came yesterday when chief executive Kevin Kenrick did his usual round of media interviews after the release of TVNZ’s annual result. It was dismissive of Mediaworks but reflected the frightening reality of free-to-air television’s future.
“The competition in the market has shifted from local versus local to local versus global and my whole focus in a competitive context is around what do we need to do to compete with global scale players. If we get distracted by the little scrap between local players we will take our eye off the main challenge.
“It is a bit like the Mitre 10 Cup compared to the Rugby World Cup. I’m dealing with You Tube and Netflix and we have a lot of work in front of us.”
This was a defensive reaction from Kenrick and partly designed to be heard around the recently-renovated offices of TVNZ’s Hobson Street building.
He also took a ping back at the grumpy Mediaworks bosses, whose TV arm has been losing money for close to a decade.
“We are the guys who have been running a profitable company and paying a dividend rather than the reverse.”
It is true that TVNZ is profitable but its performance is hardly impressive. On revenue of $310 million it eked out a mere $2.9 million net profit. That’s a margin of less than one percent.
This year’s profit is down 44 percent, although, as Kenrick points out, most of the downward movement was due to booking a loss on foreign exchange contracts. The previous year TVNZ booked a gain.
But there is no way to spin the $8 million dollar drop in revenue, despite TVNZ’s crowing about its 80 percent lift in video streams delivered from its OnDemand platform and the fact it has 19 of the top 20 TV shows.
Like Mediaworks, NZME and Stuff, TVNZ is having revenue ripped away by Facebook and Google and its audience eaten by Netflix.
In fact, Kenrick says Netflix has been the catalyst in his decision to begin a complete transformation of TVNZ.
“I was looking at Netflix spending US$13 billion on content and then I looked and saw they were going to lose US$3 billion of cash in 12 months and I thought how do you compete with that? And the thing that became blindingly obvious was that spending less on content and trying to preserve a relatively modest profit didn’t feel like it was a smart way to compete, and that sparked the conversation… I do my best thinking in the shower in the morning with the shampoo in the hair, what little I have left of it.”
Kenrick’s ‘Netflix moment’ will have huge implications for TVNZ, its staff, the New Zealand production sector and competitors like Mediaworks.
“We are going to increase our local content spend by 26 percent next year and that is a big shift for us.”
In the next three years TVNZ will run down its inventory of overseas programmes and ramp up its local content. In essence, the state broadcaster is jumping before it is pushed.
“International content will be distributed direct to the consumers by the owners of that content, so we can’t rely on that [content] as much as we have in the past.
“We could optimise near term profitability and make incremental changes but we think the highest value thing we can do for the owners of this business is go really, really, hard at that right now and transform the way we do business.
“It’s a three-year transformation plan and we will still be profitable at an operational earnings level, at a net profit level we will post some losses and we have set ourselves up in such a way that we can sustain that for the transformation period.”
Earlier signals coming out of TVNZ suggested that next year could see it post a loss of $17 million.
Does that means losses in the $17m to $20m area for the next three years?
“Potentially, yeah if that is what it takes,” says Kenrick.
But he rules out asking for government help. “I don’t think it is appropriate for us to be looking for a handout or a subsidy; we are a self-sufficient business financially and we need to continue to be so.”
In the disrupted media landscape, Kenrick seems to have convinced himself, and his board, that the choice is binary – invest or die.
“When you look at what Netflix, look at what Amazon is doing, and Disney+ (Disney’s new steaming service launching in New Zealand in November), they are all investing heavily to build a future business. I think Sky is doing the same thing in the New Zealand marketplace, you’ve got NZME investing to try and create a future. This is not unique to TVNZ. You are either in that game or you’re not and we have chosen to be in it.”
Choosing is one thing but executing successfully is another. Local content is a lot more expensive to produce and while the best will compete with international shows, mediocre productions tend to get hammered.
On the cost front, TVNZ’s second most watched show, Hyundai Country Calendar, still requires a subsidy from NZ On Air of $573,537 for 40 episodes. That’s $14,000 for every half hour show.
The one area where TVNZ enjoys a considerable advantage over its competitor and is making money from a local programme is news. While most TV news shows around the world lose money, Kenrick says 1 News is going against the trend.
“News would be some of our most profitable content, because we have such significant scale … It is high cost to make but it attracts a really big audience.
“On a typical night we would expect our news audience to be three times our competitor’s, Seven Sharp to be two and a half times, we would expect our breakfast audience to be twice our competitor’s and when you have that scale you can make it viable. That’s why it is critical for us to keep investing in it. News is our crown jewel.”
TVNZ looks reasonably well placed to at least give its ‘local’ strategy a good go. It has cash in the bank and no debt. Kenrick has also indicated that some investment money will be devoted to “simplifying the business”. He says the company will look at its “process and systems”, which is usually another way of saying ‘we don’t need as many people working here’.