Can a switch in time save Ten?

Ten Network's investment in sports programming has failed to deliver a halo effect on ratings. Time is running out for Hamish McLennan to transform the struggling network.

The magnitude of the challenge Hamish McLennan faces in trying to turn around Ten Network was laid bare in the network’s first-half results. Ten grew its television revenues ahead of the broader market but the rate of growth in costs was almost double the rate of revenue growth.

The 8.2 per cent increase in costs was explicable, given that Ten invested heavily in domestic cricket’s Big Bash competition and the Sochi Winter Olympics, but it illustrates the nature of the dilemma the network faces.

It needs, desperately, to grow its audience base. However, the cost of attracting viewers is out-stripping the revenue it can generate from the programming that works. It has been notable that there was no halo effect from the big investment in sports programming, with Ten’s ratings share falling back below 20 per cent once its big sports events were over.

McLennan has made no secret of his belief since taking on the task of trying to turn Ten around a year ago that there would be no quick turnaround in the beleaguered network’s fortunes. It would be a multi-year process.

In effect, the first-half result could be a pointer to the medium-term outlook for Ten, with minimal (if any) profitability as it invests more in programming to rebuild its brand.

Ten’s television earnings before interest, tax, depreciation and amortisation were down from $34.9 million to $10.1m in the half, with revenue up 4.4 per cent but costs up 14.3 per cent, leading the group to an $8m loss.

Ten ought to get a boost from the Commonwealth Games later this year, but the cost of that programming, which McLennan inherited, will be punitive.

It would be disconcerting for McLennan and his team that they couldn’t build on the success of the summer sports programming. While some of its recent drama programming has had good reviews, the programs have failed badly in the ratings. That would suggest the network has a branding issue.

McLennan has tried unsuccessfully to get his hands on the blockbuster tennis and rugby league rights, knowing that they provide bases audience for his rivals that are leveraged into their broader offerings.

There has been a lot of speculation of a News Corporation takeover of Ten should the Abbott Government remove the cross-ownership restrictions in media laws.

The big advantage to Ten that would be created if it were brought next to News’ 50 per cent-owned Foxtel business would be the ability to jointly bid for programs -- mainly sport -- that are on the anti-siphoning list.

In the absence of that kind of core programming, McLennan has no alternative but to continue to try to build its schedule incrementally.

He would be encouraged that Peter Meakin appears to be having an impact on Ten’s ratings for news and current affairs, which are rising. However, its general entertainment schedule has been studded with disappointments.

Ten’s ability to generate a profit hasn’t been helped by the difficult advertising market conditions that have persisted since the financial crisis and the continuing fragmentation of audiences caused by the introduction of pay television, digital channels and the growing impact of IPTV.

Ten described current advertising conditions as “short” and said advertisers were reluctant to commit to long-term campaigns, resulting in an uncertain outlook.

The major positive for Ten is that its balance sheet is stable, with net debt of only $35.9m. Last year the network put in place a new $200m four-year facility with Commonwealth Bank with the support of guarantees from three of its major shareholders: Bruce Gordon, Lachlan Murdoch and James Packer.

While that doesn’t relieve the pressure on McLennan to remain focused on costs -- he’s trying to renegotiate some of his content deals -- it does provide some breathing space to continue trying to build a better schedule and, in the longer term, better financial performance.

News Corporation is the publisher of Business Spectator.