KGB: Ten's Hamish McLennan

Ten Network chairman and chief executive Hamish McLennan tells Alan Kohler and Stephen Bartholomeusz:

• His event TV strategy is not very expensive, and cost increases include legacy costs as well as investment in new programming.
• Ten’s problem is not with its brand, and the brand will be improved by future programming.
• He’d hoped for a greater halo effect after Big Bash and the Winter Olympics, and is focussed on getting back into NRL or AFL when rights come up for auction, as well as producing more higher-margin network own content.
• The group is "obsessed by costs" and there's certainly more scope for Ten to reduce costs.
• Media law must be reformed to enable a more level playing field for broadcast networks, reflecting the post-Google era.
• Multiple potential dance partners exist for Ten, including the possibility of a radio merger, and the company needs more balance sheet bulk.

Alan Kohler: Well Hamish, welcome to Business Spectator. Thanks for joining us.

Hamish McLennan: A pleasure. Thank you.

AK: Now, in the profit released this week you talked about the costs going up 8.2 per cent which was largely due to the Big Bash League as well as the morning program. Now, that’s the problem with the event TV strategy that you’ve got; it’s very expensive, isn’t it?

HM: No, it’s not. We paid a hundred million all up for the Big Bash over five years and we will make good money on that franchise. I think what’s wrapped up in some of those cost increases are sort of, you know, legacy contracts as well as some investments in new programing that you would know better than anyone else; it takes time to build these franchises and your payback comes back after many years. If you look at a show like The Project for us, it costs us a lot of money to get it going in the beginning, but now it’s a good rating programme and we make good money on it. So, it just takes time to invest in these franchises to get your money back.

AK: But is it fair to say that the fundamental problem you have with the network is that you don’t really have a big rating, 26 week, ‘million people a night’ kind of show from which you can launch other things, whether they’re events or anything else. That your best rating show is, you know, in the mid fives or something?

HM: Look, it’s more complex than that. I have the belief that we need more winter sport and we need a major code there. But what we saw with the success of the Big Bash and Sochi is that you can get big numbers in droves and that worked very well for us. If you look at the F1, that rated very well for us. We were 10 cent up year-on-year. And you’re right. You do need some big franchises. We’ve had that in the past with Masterchef.  It’s not rating the way it did a few years ago.  But when those shows do stick, they do drive your overall performance. We just need to work out of some of our older contracts and our older franchises and then start investing in new content.

SB: Hamish, you referred to the Big Bash and the Winter Olympics and they did certainly have an impact on your ratings, but the minute they were over your ratings seemed to have dropped back quite sharply. Did you expect to get a halo effect from those events? And can you explain why you didn’t?

HM: Look, I would’ve hoped for more of a halo effect. But the simple fact was a lot of those shows that were launched post Sochi were created and shot when we were focussing on a younger demographic. And, you know, I’m not offering any excuses, but when you look at our issues, we’re getting growth and good ratings out of sport, Peter Meakin with news and current affairs, there’s Sutton to weave his magic in that regard, we’re number one in daytime and whilst our zone one general entertainment is a very big bucket, that is the issue and we have to solve for that. 

But, as I’ve said, those programs were targeting more of the old demographic and I think are reflective of shows that are at the end of their lifecycle, not at the beginning, and so we need to get into producing more of our own content; those bigger shows like The Block and My Kitchen Rules that you’re intimating about are the style of shows that, you know, we need to look at and if you can own that content, you can monetise them a lot better and make more margin.

SB: I tend to watch news and sport more than most things, Hamish, but a couple of your drama shows – and I know what you’re saying, that they were commissioned before you got there – but Puberty Blues and Secret and Lies actually got really good reviews, but very, very poor ratings. Is it possible that the problem isn’t your schedule and isn’t the programs, but is it’s actually the Ten brand?

HM: No.  Look, I think the brand will be fixed via the shows that you have. This was a non-issue for us during the Big Bash and Sochi, so people turned on to Ten and they loved it and we got some very, very positive feedback. I think the issue is around what style of shows we have that we want to put on the network.  We know that with The Bachelor as a case in point. People watched that. We won the night for its finale. People loved it. I think it was new and fresh and it had never been shot in Australia before and it worked very well for us. You know, we’ve got to fill three channels up every night of every day of the year. So, it’s easier said than done, but when you find the right content, viewers will find it.

AK: With the benefit of perfect hindsight, do you wish you hadn’t let go of the AFL?

HM: Look, I think we lost a lot of momentum when we lost the AFL and I think the board fully recognises that we need a winter sport and that’s why I say it’s going to be a multi-year turnaround. You know, we’ve solved the summer sport issue – and we’ve never had a major summer sport for as long as I can remember on Ten – and that worked very, very well for us. So, you know, by increments we’re sorting out our schedule and we’re getting new properties.  The V8s next year will be terrific for us. That’s another example of a good sport that we’ve secured at the right sort of price. But yeah, we need to get back in either with the AFL or the NRL and that’s something we’re focussed around doing when those rights come up for renewal again.

AK: Yeah. And I guess then, as you say, the other thing you’ve got to do is replace Masterchef. Did it actually fall away faster than you might have expected?

HM: No. Look, that show has been around for a long time. I think the mistake that was made was that it was run multiple times in any given year, so there were a few years there where we were running it twice a year and I think that those franchises get just a little bit tired. And I think the viewer feels that they lose their freshness. So it’s, you know, it’s easy for me to say coming in, but I think that we’ve got to manage those franchises like brands and maybe not milk them as hard as they were milked. 

AK: So, now you need to come up with My Block Rules or something. What about that?

HM: There you go.

SB: Hamish, Alan referred to the spike in costs in that first half, but you also got an above market revenue share. Given that you’ve said many times this is not something you can do quickly -- it’s a multi-year strategy you’ve embarked on -- should we expect that there’ll be less focus on the bottom line per se and much more on the top line? That you will actually invest against a long-term strategy of trying to rebuild the audience?

HM: No. Look, we’ve got to do both. We’re obsessed by costs. We’re obsessed by looking at ways in which we can reinvent the business. We clearly feel that there were some very big programming bets that were made at a high cost that haven’t paid off the way we liked over the last few years. We want to, you know, make some more strategic bets at a lower cost. 

The US content doesn’t rate the same way Australian content rates, so we feel that there’s scope at the cheaper or more cost efficient end of the spectrum for us to put some bets down.  And if you look at shows like The Living Room and Bondi Vet, they don’t cost an arm and a leg. They’re very well produced and they deliver good ratings. So we just need to change the mix of programmes we’ve got on our schedule and the genres that we have. We’ve got to get back into reality more formally, in my opinion. I think that’s an area that Ten has owned and profited from very well in the past. And just, as I said before, just change the nature of our programming.

SB: There’s been a lot of focus on the costs within the network over the last three or four years. Is there much scope to do more?

HM: The answer is yes.  Ten has always been the most innovative of all the networks from a cost perspective. We do run a lean organisation and we’ve benefitted from that in the past. 

There’s certainly more scope for us to reduce costs and the market recognises that we do a good job of that in that regard.  Every dollar that we save, we’ll put back into programming.  But we’re in business to make a profit and deliver some returns to our shareholders.  What’s taking up a lot of our time at the moment is looking at how we are spending money on general entertainment to see if there’s either a better way in which we can do it or change the style of programmes that we’ve got. 

AK: Hamish, what’s your view about free-to-air TV in general? What about the place that it’s going to have in a future where a lot of ratings have been captured by HBO and the pay TV channels and online television?

HM: It’s a great question and an issue that I’ve spent a lot of time thinking about.

With the whole debate around media reform, I think what the minister is getting at is that a lot of the laws that dictate how we operate at the moment were designed in a pre-Google era. The world has fundamentally changed and we’re not going back to where it was. When people look at free to air, there’s still a good business to be had, but I think we need to be able unshackled and if that means that we can partner with other organisations…

I have a particular issue with the licence fees that we pay. You referenced some of those technology companies and competitors that we deal with.  They minimise their tax. They domicile themselves in offshore havens and we pay our corporate tax, we pay licence fees, we’ve got commitments to local production and we deliver high-quality content. I think the government now recognises that things need to change. So the sum total of all of that is that we’re under pressure. 

There’s a good underlying business in these businesses and historically Ten has always delivered a good profit.  But the reality is that we need media reforms to come through so that we can operate on a more level playing field with the competition.

SB: Hamish, you referred to the media laws. I don’t need to say that there’s been a lot of speculation about what might happen to Ten if the laws were changed.  It’s fair to say, isn’t it, that if you were bought next to a pay-TV business, your ability to compete for the big sporting rights would be considerably enhanced?

HM: Look, that’s all speculation. I can’t comment on any of that, but what I would say is that there are multiple dance partners for Ten potentially. What we need to do is expand our balance sheet, have greater bulk. 

There’s great value in a solus free-to-air licence in Australia in metro TV, so the underlying value of Ten is very, very strong in that regard.  But we could merge with a radio company -- that would give us the multiplier effect in terms of how we’re able to cross promote our schedule and our programs and not be dependent on just one revenue source.  Ten needs to bulk up in the future, but I do believe that there’s a lot of power and value in a metro free-to-air licence in this country.

SB: The last time we spoke, you said that you thought the conditions in the advertising sector were cyclical rather than structural, particularly as they relate to free to air. 

Given we’re now nearly six years past the financial crisis and the advertising outlook is still short and has been basically for the last six years, do have to work with the assumption that basically this is going to be a very, very long cycle?

HM:  I think that’s a fair call.  But the reality is that we’re not seeing our revenues collapse from an industry point of view in the same way it has with the print business, where you’ve seen wholesale change and the disintermediation of that whole industry. 

There’s no doubt there’s fragmentation around the edges, but the whole point to this conversation about reform with media laws is to enable the free to airs and the media businesses to operate more effectively and fairly against the competition.  But it’s very intense and I’m not denying that. 

AK: Could I just ask about REA, where you’re chairman as well as being CEO at Ten and also your interim CEO at REA is Peter Tonagh, the chief operating officer at News Corp. The two leaders of REA, which is quite a big company, are both part-timers. How’s that going?

HM:  Peter’s doing a fantastic job at REA.  He’s the interim CEO. He’s been able to carve out a lot of time to be able to do that role and the staff and the management, the ELT of REA are delighted. That business continues to perform well. 

I’ve reverted back to my old role as the non-exec chair of REA, so my focus is very much on Ten.  In assuming the executive chair role, what the board wanted was for us to keep doing what we’re doing: making investment in programs like Sochi and the Big Bash and The Bachelor and fixing news and current affairs and so forth. 

More than anything, it’s just given continued clarity and focus around implementing our strategy. But having said all of that, I like work and I had a more complex role when I lived overseas across multiple geographies. In no way am I downplaying the work that I’m doing at Ten, but it’s under control.

AK: And are you very close to hiring a permanent CEO at REA?

HM: We’ve got about a half a dozen candidates -- some internal, some external -- that we’re looking at. Some based in Australia, some offshore. So, against the timeline that the board has set itself, you we’re on track. In the foreseeable future, we’ll choose somebody. We’re feeling very confident about that business and that’s going well.

AK: Thanks for joining us, Hamish.

HM: Thank you. Pleasure.

SB: Thanks, Hamish.

HM: Cheers.