Word out of MediaWorks is that there is more interest in buying the company’s loss-making TV arm than expected – maybe as many as five.

If it is true, then those would-be buyers need to understand where the viewers are going.

Anyone thinking of making a bid for Three should take a look at a poll released a few weeks back.

Horizon Research found that TVNZ’s video on-demand service had overtaken Netflix as the country’s most-used streaming service.

The survey found 59 percent of people were using TVNZ’s free service, compared to 56 percent using Netflix.

Sky TV (including Neon) was third at 36 percent, MediaWorks fourth at 28 percent, followed by Lightbox with 18 percent.

Yes, it is one poll of 1000 people and it may not be solid evidence of a surge by TVNZ in the on-demand space, but it is a sign that the state-owned broadcaster’s heavy investment in its on-demand service (platform and content) is starting to pay off.

MediaWorks’ executives have long been critical of TVNZ’s ‘uneconomic’ practice of outbidding it for programmes that would normally be played on a free-to-air channel like TVNZ1, TVNZ2, or Three and keeping them exclusively for its on-demand service.

This ‘loss-leading’ strategy upsets Three’s programmers, who are short of affordable international programming, but TVNZ has shown no mercy, despite the impact on its own bottom line.

The trend has been TVNZ’s friend. According to the last NZ on Air survey, the weekly reach of New Zealand on-demand services has gone from 29 percent in 2014 to 44 percent in 2018. Overseas subscription services (mainly Netflix) have gone from 12 percent to 32 percent. Both are likely to have increased further in 2019.

In contrast, the reach of linear television has dropped from 92 percent in 2014 to 82 percent in 2018. While that might not seem too bad, the scarier figure for the TV networks is the 22 percent drop in people under 40 who now tune in on a weekly basis.

TVNZ CEO Kevin Kenrick probably knew earlier than most what now seems blindingly obvious – that audiences would migrate from linear to on-demand viewing as fibre was rolled out across the country. But Kenrick concedes it has taken some resolve to keep investing millions while revenue lagged a long way behind.

“We had an internal discussion about five years ago and there was a big concern about the more you put into on-demand the more you cannibalise your TV business and do the returns make sense?

“The one question that galvanised our focus was ‘hands up all those who think the internet is going away?’ And as soon as you confront that and think who are the future consumers going to be and what does their behaviour look like, it becomes obvious where you have to play if you want a sustainable business.”

It is not as if MediaWorks’ executives haven’t known this. The much-maligned former CEO Mark Weldon pushed hard, and had some success in convincing the owner, US vulture fund Oaktree, to invest in on-demand, but it was mainly aimed at providing a platform for catch-up viewing.

In the last three years, under CEO Michael Anderson, there has been little or no investment in the platform or content for on-demand. To be fair to Anderson, it must have been nigh impossible to tell an owner looking to sell the business that they should pump millions into on-demand when it would just add to the substantial losses already being incurred by the television arm.

Kenrick, of course, has the luxury of a long-term owner but rails at the criticism he’s had for sinking money into on-demand. He says his detractors (MediaWorks and those who think TVNZ should be paying a dividend to the Government) haven’t appreciated the threat coming from streaming services like Netflix.

“The competitor is a multi billion-dollar business that is prepared to lose US billions of dollars in cash every year and the bit that I find ironic is that you are up against a player like that, and you got Disney+ coming out and saying they are prepared to lose billions of US dollars a year … TVNZ says, what we are going to do is to run negative cash for three years, not debt, cash that we have in the bank … that we have prepared for this and there is an outcry … how do you join the dots on that!

“If we were pouring money into a hole in the ground, that would be valid, but the fact that we are beating Netflix at their own game and that we are still growing, we think is the right thing to do.”

Kenrick and TVNZ are now in a race for scale against the global giants. It’s daunting, and it could yet end in tears, but at least they are in the race.

“We’ve got NZ single digit millions against US billions so we are not going to win by being a smaller version of the global players, you have to differentiate … it has to be with local content.”

TVNZ is upping its investment in local programmes by 25 percent this year. It also has a modest war chest of $20 million in the bank and a fair chunk of this will go into content for on-demand.

Kenrick has also chosen not to go down the subscription path with his streaming service, sticking instead to an advertising model.

“We couldn’t do what Netflix is doing and make money and we always thought it was going to become a more competitive space. Disney+ has undercut Netflix’s price. Apple TV+ has undercut their price, so we think there is going to be a bloodbath amongst these global giants and we can’t afford to get caught in the crossfire, so we are going to focus on an advertising-funded model.

“What gets lost in all of this is that it has got a whole lot harder for advertisers to reach audiences and we have got great relationships with NZ advertisers and we want to work with them and be their partner.

“The critical thing is that the consumer is willing to pay with either their cash, their time or their data and so long as there is a fair and reasonable trade-off people are up for that.

“This is why we have chosen to go with a significantly lower ad load than our global peers have done because all our research told us there was a lower appetite for ad load and if you got the balance right the consumer saw that as fair.

“In the last financial year, the growth in revenue has been close to the growth in audiences and that has continued into this financial year.”

“If you think about how content gets distributed, we have got high site tower transmission, satellite, internet (which will include 5G ). All three of these can’t survive as the industry can’t afford to fund them all. The one I absolutely know will be there is the internet, the question is how long will the other two survive?”

International media businesses are seeing consolidation as a way to future-proof themselves. In the United States, Disney has acquired Fox and AT&T has taken over Time Warner. Telco and Pay TV behemoth, Comcast, (former PM John Key is a consultant) has paid $38 billion for European entertainment giant, Sky.

Closer to home, Australia’s Nine Entertainment acquired Fairfax (which includes Stuff in NZ) and Seven Network has bought Prime – a big player in Australian regional TV markets.

New Zealand, a small media market needing consolidation, has seen very little action, apart from the proposed NZME/Stuff merger that was disallowed by the Commerce Commission.

It is an open secret that the Government is planning some sort of merger between TVNZ and RNZ but it would make more sense if TVNZ was allowed to take over MediaWorks’ TV arm.

It is unlikely to happen, and there may well be a buyer for Three out there somewhere, but they will either need to heavily invest in on-demand or become a very low-cost operator who decides to compete vigorously for the older viewers still watching live, free-to-air, TV.

Mark Jennings is co-editor of Newsroom.

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