McLennan miracle needed to renovate an imperfect Ten
Warburton got too involved and double-guessed people's choices, which turned out to be a disaster.
When Ten Network announced a shock $230 million equity issue on December 6 - its second capital raising in six months - the die was cast to find a replacement for James Warburton.
The board, consisting of the country's richest person in Gina Rinehart, Lachlan Murdoch, Bruce Gordon and Jack Cowin, were not happy being forced to throw good money after bad as the share price and ratings continued to tank.
Murdoch and James Packer had jumped into Ten in 2010 when the share price was trading at $1.40, with a plan to fix a network that at its peak made more money than its two other commercial rivals combined.
Rinehart followed suit, paying even more for a 10 per cent stake and a board seat. Two years later, the company had its begging bowl out for a second time, asking shareholders to support a highly dilutive equity issue at 20¢ a share.
What makes the Ten story extraordinary is that despite spending most of its corporate life as the younger, cooler sibling to its old, warhorse rivals, whose brand was built on playing the antithesis of the TV establishment, it was now majority-owned by some of Australia's oldest - and richest - families.
What makes it even more extraordinary is that inclusive of Grant Blackley, Ten is on to its third chief executive since 2011 with the appointment of Hamish "the Hammer" McLennan, and its second acting chief executive.
It is a company whose share register is now populated by surnames such as Murdoch, Packer, Rinehart and Gordon. More lately, the billionaire media mogul Kerry Stokes bought 3 per cent of Ten.
So, when did the fins fall off the surfboard and send the network crashing to shore?
Theories abound about what went wrong and who is to blame, but most agree the problems date back to the birth of the digital age when the free-to-air networks spawned new digital channels, which added costs and split up an already fragmenting audience.
In Ten's case, it launched One, a sports channel, and Eleven, a family-skewed channel. But the strategy came unstuck when Eleven, along with Nine's digital channel GO!, began to cannibalise Ten, and One, despite a strong start with Australian swimming (taken from Nine) and some AFL programming, struggled to hold top-tier sports.
With a falling share price and rising costs, a decision was made to sack the Ten boss Blackley and sign up Seven's rising sales department star Warburton. It prompted Seven's then boss, David Leckie, to make the prescient remark that Warburton wasn't ready to be a network CEO.
After a year in the job, Leckie's words rang loud. Within weeks of taking the job, concerns began to emerge about Warburton's leadership style and his inability to inspire staff. As time marched on, silos started to emerge - office politics, micro managing and an inability to make tough decisions. The stories reached the board.
But by the time of the first equity issue in June last year, Warburton's honeymoon with the board and investors was well and truly over. He had been given free rein to hire a new head of sport, digital, sales, marketing, communications and news, yet nothing seemed to work.
Two months later, the network's head of programming, David Mott, was out. His resignation, attributed largely to executive meddling, ripped open Ten's bandages, exposing for all to see the internal discord that was crippling the network. With Mott gone, however, Warburton was next in line to take the blame for expensive failures such as Everybody Dance Now and I Will Survive.
In many respects, the real problem was a lack of program development during 2011 after the failure of The Renovators.
That was compounded by a real misunderstanding of who the network's audience was. Warburton was focused on 18 to 49s, but in truth Ten's audience has historically been broader. Its marketing may have played up the younger audience, but older-skewed shows, from Murder, She Wrote, to the Law & Order franchise, had historically figured prominently in Ten's top 5.
"[Warburton] got too involved and double-guessed people's choices, which turned out to be a disaster," a well-placed source said.
As the failures mounted - The Shire, Being Lara Bingle and the expensive Breakfast show with $1 million sign-on Paul Henry were added to the pile - the blame game went into overdrive.
Some blame Murdoch for Ten's troubles, including its disastrous push into morning TV, letting Nine get The Voice and Big Brother - shows which sat in Ten's cultural heartland - and unwinding Ten's digital channel One.
Murdoch also passed on the AFL rights. (Seven bought all the rights for last year and 2016. It then tried to sell two games a week to Ten at a nose-bleeding high price. Ten said no. AFL was already a loss leader for Ten, as it was for Seven. The BBY analyst Mark McDonnell went so far as to write in a report that the December equity raising was a form of creeping privatisation by a few "insiders".
Packer, who holds 9 per cent of Ten, is clearly a supporter. While preferring not to speak about Ten, he said: "I rate Lachlan. Anyone who underestimates him is making a mistake."
Others say Murdoch made some good decisions in preparation for Warburton's arrival. These included taking a hit on its digital sports channel One, which is believed to have lost more than $20 million in its first year, and hiring Baker & McKenzie and KordaMentha to come in and investigate the sports contracts.
Excluding AFL and formula one, Ten had committed to $65 million of annual sports costs, much of which was second and third tier, or worse. Murdoch also slashed the workforce by 13 per cent, and retreated from the 6pm-7pm "serious news" costs, which included getting rid of George Negus, who was seen as an odd fit for a young TV audience.
Warburton started on January 1 last year with a war chest of funds for programming and the full backing of the board. A source close to the board said: "US content for Super Sunday had been held over with agency deals in place to deliver 28 per cent share ... those first few weeks in January and early February were fine [indeed Ten's Biggest Loser went head to head with Nine's Excess Baggage resulting in Nine shifting it to GO! after a week] and then it all started unravelling."
By April, Warburton had requested the board to approve an additional $50 million in expenditure for new shows. The board agreed. In total, he was given an extra $100 million to spend on programming. He had also made appointments without anyone's approval, including the sales chief Mike Morrison, who was out after six months, and the marketing chief Tony McMaster, who left Ten on Monday.
But some believe it wasn't all beer and skittles when Warburton arrived, including some problems with contracts with media buyers. Towards the end of each year, networks meet with media buyers to negotiate commitments as to how much of their business will be allocated to each network. The money is locked in and held for that year. At the end of 2011, the deals done at Ten for last year were not firm enough and systems weren't in place to monitor them. This cost Ten dearly.
At the same time, Ten was suffering from a dearth of forward programming after The Renovators failed, which left big holes in its scheduling. Failure piled on failure, in particular shows such as The Shire and Being Lara Bingle, which were too narrow in focus. As a result, Ten's audience shrank further.
By the time of the second equity issue, Ten's reputation was in tatters and the politics inside the organisation was at a low point. Warburton had been appointed to lead the organisation, build teams, make tough decisions and inspire his staff. What the board was hearing was the opposite: silos had sprouted up, there was too much politics, inspiration was low and some of his hires hadn't worked out.
Since Warburton's appointment, the share price had more than halved, and by October when the company released its full-year results, the headlines read, "Ten Network profit plunges 90.5 per cent".
By December, it was clear Warburton had to go and his replacement had to start within one or two months. To that end, a list of 30 names was put in and out the box. The candidates were then vetted by a head hunter with a remit to find a replacement with strong leadership skills.
The urgency automatically ruled out candidates from the Australian media industry because they would have a six to nine-month non-compete clause or, God forbid, end up in a legal battle as had happened when Warburton was hired from Seven Network in 2011.
As chairman, Murdoch led the recruitment process. He included McLennan, who he had known for 15 years and who had been working for his father, Rupert, for the past year.
McLennan had been global chairman and CEO of Young & Rubican, based in New York where he had 7000 staff under him globally, and had a reputation for making tough decisions and a laser-like focus.
He left the ad agency in 2011 and started working for Rupert Murdoch, reporting directly to him to oversee $15 billion worth of revenue the empire earns through advertising. He worked with heads of News Corp's television, pay TV, film and publishing units. He was also responsible for renegotiating News' $2 billion worth of media buying contracts globally.
Throughout the Christmas and January period, there were many board discussions about the various candidates, followed by a meeting with each of the directors. McLennan was the standout.
But his appointment has been controversial, not just because Warburton had been axed after a year but also because it fuelled concerns that News and Ten were already too close. It prompted speculation that this was a precursor to a News takeover of Ten, which News denied in a press statement.
It also caused a political furore as the Greens asked the Australian Communications and Media Authority to investigate the relationship of News and Ten for any breaches, and it raised speculation the federal cabinet was leaking the news that it was considering introducing new rules that would prevent News Corporation from acquiring free-to-air television. A package of media reforms will be released in the next couple of weeks.
McLennan denies the closeness and says he is committed to his new job at Ten, which is where his reputation will now be judged. In the meantime, he darted back to New York on Wednesday after a pit stop at Ten's offices on Monday and Tuesday. During his short visit, he met some key staff and held a meeting to rah-rah the troops. He then bought 1 million shares as a gesture of his belief in the company. "It went down well," a source said.
In an interview, McLennan said his goal was to return the network to being "fun and irreverent", and that the aim was to broaden the demographic because the young demographic of 18-24 was where the market was fragmenting most. But he said that did not mean Ten would be in lockstep with Nine and Seven, but would differentiate itself by being more youthful than them. "Sixteen to 39 is the core but I think when you become too tightly focused it can lead to shows such as The Shire and Lara Bingle," he said.
Ten has also announced the signing of the Seven executive Adam Boland, who will focus on morning TV. In his new role, he will increase Ten's coverage of sport. The first cab off the rank is cricket, which is up for grabs after Nine's contract expired in December. Nine has topping rights on the last bid but if a bidding war breaks out between Seven and Ten, it could force Nine to spend more than it wants. Cricket Australia is hoping to fetch $100 million a year over five years for the new contract.
Despite McLennan's loud play for sports rights, a broad assessment of the landscape in Australia suggests he may have his work cut out for him. AFL, NRL and A-League are tied to other networks (Seven, Nine and SBS, respectively) leaving cricket and the Australian Open tennis in play. And in real terms, the chances of Nine allowing another network to take a sport it sees as its birthright, at any price, are slim.
McLennan believes the fixes at Ten are not big ones. "We must be nimble in a tough environment and we have the opportunity to reinvigorate every tent pole," he said. The tent poles include MasterChef, which has been hit hard by Seven's My Kitchen Rules.
He refused to be drawn on how Ten would fund the new programming, except to say the board and shareholders were "supportive of the rebuilding of our schedule".
After the second capital raising in December, which brought in $230 million in fresh equity, Ten's balance sheet is the best it has been for years. It has net cash of $45 million, compared with net debt of $450 million in 2011. It has also taken the knife to costs, and revenue is between $700 million and $800 million a year, leaving better programming as the main issue. If the network can find high rating shows, it will boost audience numbers and ad revenue.
But there are big challenges. Ten's position as the third-ranked channel on Australia's free-to-air landscape has been seriously challenged since the middle of last year by ABC1. At its peak, 7Two isn't far behind.
Warburton's decision to put MasterChef: The Professionals against Seven's ratings juggernaut My Kitchen Rules at the launch of ratings this year was a monumental stuff-up. Its weeknight performance is flatlining, and on Sunday nights, despite a strong start, it is taking heat from Nine's The Block.
As Gordon, the Ten shareholder and director, and a TV billionaire, said recently: "Channel Ten was in a mess when it first started. Then a producer came up with a legendary soapie Number 96 and it put Ten on the map. That's all it took. Before that, we said 'God help those buggers'. It only takes one show."
The free-to-air market is worth about $3 billion in the capital cities. This is slowly declining as audiences fragment but there is still a lot of money slushing around. Whether Ten can recover some audience is a question on everyone's lips. It has prompted some to argue it would be best for the government to allow Seven or Nine to buy it out and end its misery. But that will never happen. No government or regulator will allow it and the media buyers will fight tooth and nail to make sure the competitive tension between the three networks remains robust to keep Seven and Nine honest.
Daniel Petre, the chairman of netus and former head of ecorp, says it is unlikely Ten will ever get to having a 30 per cent-plus share but it can theoretically get to the high 20s.
"Remember each share point is worth nationally [roughly] $50 million and in the capital cities around $35 million, so you do not need to get many share points back to get a material uplift in revenue and earnings ... so Ten has room to perform better than it has in the recent past."
What the station needs is a few good shows.
Channel Ten faces the same challenges that every media business faces in the digital age: shrinking revenue, technological evolution and cultural rebirth. But as other media businesses make that painful transformation with a mixture of strategy and stability, Ten is a textbook case of how not to do it.
Politics and finger-pointing aside, at the heart of Ten's problems is a failure to establish one of the basic building blocks of modern business: a set of unique corporate values, consistently applied and upheld.
Ten's historical branding - a younger-skewed network cast against its two older-skewed rivals - was a perfect illustration of how core values can define a business.
Since the change of management in 2011, Ten's corporate values have see-sawed. Initially there was a push to broaden the network's audience, which failed spectacularly. Then, once Warburton arrived, he tried to refocus Ten on its "youth" identity.
Ten's biggest stumble was not losing focus on its core demographic. It was the failure of management to truly understand what the network's demographic actually was.
In historical terms, Ten may have skewed towards the young and made a lot of noise about it, but the median age of its audience was about 41 and its younger-skewed programs, such as The Simpsons and The X Files, were balanced with older-skewed content, such as the Law & Order franchises.
McLennan's early interviews suggest he gets that and will stick to the network's core demographic, albeit loosely. In truth, the "old" Ten was well serviced by a broad audience.
Seven and Nine are at a crossroads with their digital multi-channel strategy. Both have launched solid brands with clear strategies and both will begin to invest in content for those channels, particularly GO! and 7Two.
Seven's digital channel 7two is the bigger threat of the two to the status quo. If Ten slips out of third place, ABC1 would take its position in pure audience terms, but 7Two poses the greater risk in revenue terms.
Ten Network is 48 years, 7 months and 1 day old on Saturday. Ten isn't as young as it used to be. And if this is a midlife crisis, it's a corker.
He was the global chairman and chief executive of ad agency Young & Rubican, based in New York. He started working for Rupert Murdoch in 2011, reporting directly to Murdoch to oversee $15 billion worth of advertising revenue. His appointment has fuelled concerns that News and Ten are too close.
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