KGB: Ten Network's Hamish McLennan

The Ten Network chief says free-to-air challenges are largely cyclical, and a strategic shift in target demographics will set the company up for a stronger 2014.

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Ten Network’s chief executive Hamish Mclennan tells Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz:

Alan Kohler: Well Hamish, a lot of people say that Ten isn’t going to make it, there’s really only room in this market for two commercial networks. Tell us why Ten will make it.

Hamish McLennan: We will make it. It’s a $2.8 billion market, which we share with channels Seven and Nine, and there’s profitable growth for Ten to have. The simple fact is that we’ve had the wrong strategy, and we’re starting to lay the foundations for a successful programming schedule that will take time to develop and implement. But we’re kicking off the new year with the ‘Big Bash’, which is 123 hours of primetime cricket going into the Winter Olympics – a greater focus on what we know will work.

We’ve got some very good people coming into the business, people like Peter Meakin, who’s the doyen in news and current affairs in this country, and they’re really high calibre people who not only share my vision for the business but contest their opportunities to take it up with Seven and Nine.

I think the other thing is the board and the major shareholders have also confirmed and support the strategy that we’ve got for the business, and they’re backing it up with a guarantee. And the new refinancing facility that we expect to be approved at the December annual general meeting gives me great confidence that when we kick off next year we’ll be in good shape.

AK: Of course, another way to look at that is that it was a negative, or bad, that they had to guarantee the loan.

HM: No. The issue for us was that we had very tight covenants about how we were operating with a business that does require capital. You know that better than anyone. And we’re putting our money where our mouth is. I think we all understand where we’ve come from and why we’re in this particular position but if I just looked at the trading environment for Ten at the moment, we’re feeling confident in the short and the medium terms.

AK: Explain to us what was wrong with the strategy – you said the strategy previously was wrong. What was wrong with it? Explain that.

HM: Look, we historically have gone for a 16 to 39-year-old demographic. It was adjusted to 18 to 49-year-olds. But the simple fact was that the orientation of the business was focussed around the youth market and statistically if you just look at the numbers, the biggest body of viewers – and the most profitable body of viewers – are 25 to 54-year-olds. But we were chasing a market that was just declining in overall numbers and we were producing shows like Being Lara BingleI Will Survive and The Shire that were alienating our older consumers, and those kids don’t watch free-to-air television the way perhaps we did when we were young. There’s not a lot of money to actually capture them anymore – they’re ripping stuff off the net and watching YouTube. They just don’t consume free-to-air television the way they used to. We were just chasing the wrong demographic.

Interestingly, when you look at some of the shows that had worked very well for us in the past – like Masterchef – the viewers were falling well into the 25 to 54-year-old demographic and picking up a wider pool of people. We were chasing the wrong demographic and we had the wrong shows – hence the wrong strategy. Now putting the focus back on programming like live sport, I can’t underestimate the value of things like the cricket, which we’ve secured at the right sort of price as we did with the Winter Olympics. It’s live programming that doesn’t get PVR’d (recorded on personal video recorders).

At its core Ten still has very good roots. Its DNA is very, very strong. I’m impressed by the quality of people, we’ve just got to reorientate the ship around a more profitable market and that market is 25 to 54-year-olds. And let’s not forget too that we also launched our digital channel, Channel 11, which was also cannibalising the mother ship, which was Ten. So we had strategically two channels that were fighting against each other with even more fierce competition and it wasn’t working for us.

Stephen Bartholomeusz: Hamish, you’ve made quite a big investment. You referred to the Big Bash, so there’s a big investment in sport – Big Bash, Commonwealth Games, Winter Olympics and The Breakfast Show. How big a gamble is that? I mean, if it doesn’t pan out in the next 12 months, where does it leave you?

HM: You have to back up your strategy with programming. I would just highlight that when you look at programs like the Commonwealth Games, that was a deal that was done four years ago and comes at a very, very high cost – much higher than what the Winter Olympics will cost us. The simple answer is that you can’t sit on your hands and do nothing. We’ve inherited some programming which will take time to work out of the system and I think that anyone who has a very clear view of our internal financials understands there are some contracts that we just need to work out.

We’ve got some formats that have been around for many years. A lot of them are good franchises, but we just need to start making better choices around what works. I think what pains me is … this is the network that invented Big Brother, had X Factor in its first year and launched Australian Idol and I think we let those franchises go and we were too quick to dismiss them and then move on to other things. So it’s going to be a return to shows or brands that will work for us. Reality-style programing does work very well on this network, we just need more time to do more of it and get focussed on what works.

We did an analysis last week where Anchorif you look at the top 60 programs in the country, 75 per cent of them have been around for more than a few years. My point being, that once you get a franchise you’ve got to work damned hard to make sure that it works and you’ve got to be focussed on making it fresh and new. I think that we’ve been too quick to walk away from what’s working. Some of those franchises, like reality television, you can imbed advertising more easily and there are great client opportunities to do integration, and those things will all drive a more profitable outcome for the network. And again, if you look at what we’ve done with Studio 10 and Wake Up, they’re formats that we own.

So it’s very early days. It took a couple of years for Sunrise and Today to really drive great growth, so you’ve got to get new audiences acquainted with your network. We own the IP on those shows. They’re a great opportunity for us to then cross-promote throughout the day through to the evening schedule, and that will work for us. And I think when I anecdotally look at those shows, whilst it’s very early days, they’re quality programs that I’m proud of and it’ll just take time to build.

Robert Gottliebsen: Hamish, guaranteeing loans for a public company by major shareholders when there are outside shareholders is a very rare thing to happen and only happens in situations of distress. Why did the shareholders do that? And why didn’t they simply just take it over and then own the whole thing?

HM: I would say it’s not a typical financing arrangement, but the way I look at it is that those shareholders who all understand media realised that the old strategy was not working and the new one has a very good chance at succeeding, and they believe in it. It worked for both parties and I’m delighted by the arrangement and the way it’s been structured. I guess the clients have always wanted great commitments in businesses like the media business and I think this just shows that Bruce Gordon, James Packer and Lachlan Murdoch are very committed to Ten and that can only be a good thing.

I’ve been here for seven months. They’ve been nothing but supportive and they really believe in the future. And I just get people to look at some of the decisions that were made over the last three to four years that weren’t wise. I think we were reluctant to pause, chasing the wrong demographic, and Seven and Nine in particular have had the great benefit of an aging population and they’ve focussed in on those shows that have worked well for them. And we have to do the same.

RG: Yes, but basically the major shareholders are benefitting the smaller shareholders. Normally what occurs in those situations is that it’s a takeover bid and then –

HM: No, I disagree with that. It’ll go to the shareholders – we think that it will be supported at the AGM. I think if you look at when the information pack gets disseminated, you’ll be able to see that the way in which the deal has been constructed is very fair to Ten. And against any other given comparable, this is a fair deal for all.

AK: Hamish, do you think that you’re renovating Ten for sale?

HM: No, that’s not the case at all. I’ve set myself a target Anchorto meaningfully and strategically build the business and so I can’t predict what will happen in the future. And I know where you’re going with that question, but the reality is I’m here to improve the performance of Ten and just take time. If you look at my competitors, both Seven and Nine have had their issues over the decades. And if you look at a guy like David Leckie – whom I have great respect for and I’ve known for a long time – it took a while to fix Seven. It took a couple of years but he started to lay the foundation for a very successful network and then it turned over time. And let’s not forget that Channel Nine was in a position last year where it had to write off nearly $1.7 billion worth of shareholder equity. So these businesses can come back and if you believe the strategy, as we do, we think there’s a very good future for Ten.

AK: Speaking of Seven and David Leckie, you did – as you mentioned before – hire Peter Meakin. What are you expecting from him? What do you want him to do in your news division?

HM: If you look at how the market has changed and the way consumers digest content differently, live sport and news and current affairs are not PVR’d the way, say, American drama is. And what Peter has is a best putt basically when it comes to news and current affairs – to make the broadcast look as good as it could possibly be, attract the best on-air and off-air talent, focus on driving the Eyewitness News brand, but also look at that as making the point for our schedule to see how we can make it as good as it could possibly be, and also look at other programmes that are adjacent to that brand.

So when Meakin starts in February we’ll be looking at the schedule to see how we can use news and current affairs as a way to drive ratings growth for the business. It’s too early to say (or I can’t reveal to the public what we have planned), but no one disputes Peter’s credentials. He’s the very best in the market and he’s excited to be a part of Ten and he’ll make a big difference. 

SB: Hamish, you’ve brought to Ten a very deep and very senior background in advertising. One of the difficulties in this post-crisis period has been trying to work out in media what’s cyclical and what’s structural. Do you have a sense of how that plays out in free to air?

HM: It’s cyclical in my opinion, not structural, but I’ve spent a lot of time looking at all media with my time at News Corporation and also before that working for Young & Rubicon and WPP when I lived in New York and was travelling around the world. As a whole, whilst there’s some fragmentation around the edges of free-to-air television, it’s still a very robust business and so we’re not faced with the same structural issues as say the publishing industry is facing at the moment. So if you take it from a client perspective or an advertising perspective, they still see that free-to-air television is the anchor point to most major marketing programs and that’s where a lot of the money is consolidated.

So whilst we are dealing with some stressors in the business, the reality is it’s a very powerful driver for getting brand messages out there at the moment. And let’s not lose sight of the fact that in Australia, it’s free – you get a fantastic product for free, funded by the advertisers. Our forward projections over the next few months in the year show some growth in the market and the clients that we’re talking to are not only being supportive of Ten as a media buyer, but we’re looking for an increase in terms of our share year-on-year. And we’re pretty confident that we’ll be able to deliver it. So it’s not a structural decline, but just a cyclical issue that we’re dealing with.

SB: So, you don’t see a fragmentation of the audiences created by the digital channels, by pay TV and internet protocol TV (IPTV)?

HM: AnchorThere is fragmentation, but if you look at total TV viewing, video consumption is half or more. And what we’ve got to do, as an industry, is a better job of driving those digital platforms into our business and capturing those audiences. And that’s a good example – or a good segue, I should say – for us at Ten.

If you look at our new digital platform, the Ten Play app that we launched in six months, we’ve had 400,000 downloads of that particular app. And there are certain shows like The Bachelor which are getting as many people viewing it online as on the linear broadcast. So there are some really interesting things happening and I guess I’ve seen in my career how important it is that with your digital product you do chase that and captivate that audience. The next challenge for us is then to say, how can we monetise those viewers?

But that’s all upside and an opportunity for us, so there’s no doubt that we are dealing with some fragmentation, but people still love watching TV. And the best way to reach a mass audience is still through free to air. You may think that this is quite an ironic statement, but the more the media fragments, I think the better it is for free-to-air television because ultimately there are very few mediums that can powerfully attract a large audience. And we’re the ones who still do it. 

This is why you’re seeing genres and formats like live sport. It’s changed to such huge dollars because you can captivate an audience and that drives those big numbers. That’s why the Big Bash and the Winter Olympics will be important for us, and so will the Commonwealth Games. Despite the fact that the contract is costing Ten a lot, it’ll be a great event for people to view.

RG: In the television market, with the influence you just talked about, there is also a parochial aspect to it. It’s something that Seven actually takes advantage of – for example, the AFL football has been used to capture free-to-air audiences in Melbourne in particular. Do you see differences in the states that require a different approach? Or is it just a straight national approach, which is quite dangerous?

HM: Well, what you highlight is the value of, whether it be parochial or not, quality premium content and in this case sport. We have to think laterally about what our schedule over a given year will look like and what we have to do is leverage not only what we’ve got, but do better with our programming. The success of the network is not defined by whether you have sport or not. I happen to personally believe that it is critically important, which is why we’re delighted with the Big Bash. But the Big Bash is an example of how we were able to force our competitors to pay a lot for what they ended up getting and for about $18 million we picked up the Big Bash. If you look at that as a format – the Big Bash sort of format in India – the Indian Cricket League is booming. So things change in the marketplace and we’ve got to be smart to be able to capitalise on those trends.

In much the same way, the success – if I go back five or six years – of Channel Ten was driven around multiple programmes like Australian Idol or Big Brother. So we just have to back ourselves on those new formats that come up. And then what I’d like, just as a bit of insurance, is to have a portfolio of shows that are quite diverse that we can rely on and not just rely on one or two formats that happen to pop at any given time.

AK: I suppose the advantage of the Big Bash is there are lots of wickets, so you can run lots of ads.

HM: That’s true. I think the great monetisable opportunity is there as people watch the cricket. But look, it’s a loose form of cricket, very family friendly. We think a lot of people will go out to the games. We think, as a backdrop for summer, a lot of people will be on holidays and they’ll watch it. We think it’ll do very, very well for us and our modelling suggests that we’re certainly setting ourselves up for the best launch for the year. As you guys know, the market really works on a calendar year basis, and against what Nine has had with the cricket and Seven with the tennis, we’ve never had a summer schedule that’s had anything of note.

So I would say, as opposed to running lots of reruns over the summer period, what we’ve got is quality live sport that’s growing. This cricket format will be interesting – I think the repetition of having 35 games in primetime is going to be super helpful for Ten, to have a platform to launch at the beginning of the year. And then we’ll go into shows like our dance program, which we term ‘shiny floor show’ (So You Think You Can Dance), that will be very good. We’ve got the Winter Olympics. We then go into the F1. There’s lots of good stuff we’ll be able to launch the year with, which will drive our share.

AK: We’ll leave it there. Thanks very much, Hamish.

HM: Thanks.

SB: Thank you, Hamish.

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Ten Network’s chief executive Hamish Mclennan tells Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz:

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