So much for assurances, phone prank is at the top of a long list

For the most part in recent history, Sandilands has served as a human lightning rod for the worst of Austereo's excesses. The ACMA investigation could result in the station losing its licence to broadcast. Questions are now being asked about the culture of a company that has built a reputation ... of allowing its DJs to push the boundaries in a quest for high ratings.

The fortunes of 2DayFM were already strained, but this could be the straw that breaks the station's back, write Adele Ferguson and Michael Idato.

'If this has worked, it is the easiest prank call ever made," Michael Christian whispered as nurse Jacintha Saldanha faithfully transferred an early morning call that she believed was made by the Queen and Prince Charles.

Christian's comments, and those of his co-host, Mel Greig, went to air during the prank call that led to the death of the nurse.

An inquest into her death held this week in London revealed she had left three suicide notes. One of the notes dealt with the 2DayFM hoax call, according to London's Guardian newspaper.

In the wash-up of the crisis and the social media frenzy that ensued, the radio show has been axed, the duo suspended and moved to a "safe house" following death threats, advertising withdrawn, the company's share price hit and the network now subject to an investigation by Scotland Yard and the Australian broadcasting regulator.

The scandal comes at a critical time for the media, particularly after Rupert Murdoch's News International was embroiled in phone hacking scandals in Britain, which culminated in calls for a tough new regulator to tackle unethical behaviour.

The stench spread to Australia with the federal government asking Ray Finkelstein, QC, to investigate the situation in this country. He released a report in March calling for a new government-funded regulator after finding that the Australian Press Council was conflicted and that processes at the broadcasting regulator - the Australian Communications and Media Authority (ACMA) - were "cumbersome and slow".

After a string of scandals at 2DayFM last year involving the station's top-rating breakfast presenter, Kyle Sandilands, the station's owner - listed media group Southern Cross Austereo - issued assurances that the worst was behind it.

In an interview with The Australian Financial Review earlier this year the Southern Cross chief executive, Rhys Holleran, said: "I think we did the best possible job of handling it [the Sandilands scandal] we could do. I don't think it will happen again. You can never be definitive but we think we've got everything in place to make sure."

Or not.

Questions are now being asked about the culture of a company that has built a reputation, particularly in the past few years, of allowing its DJs to push the boundaries in a quest for high ratings and a share of the dwindling advertising dollar, as radio's slice of the ad revenue pie is increasingly diverting to the internet.

Southern Cross Austereo remains relatively low-profile but it ranks as one of Australia's largest media companies, with a reach of more than 95 per cent of the population through its 80 radio stations, 21 TV licences and the largest share of the digital radio spectrum.

Following last year's $700 million-plus acquisition of 2Day's owner, Austereo, Southern Cross now has a radio network that attracts more than 5 million listeners including Fox FM in Melbourne and the MMM radio network.

But the media company today - like Austereo before it - is never far from controversy, most of which involves its 2DayFM operation, particularly Sandilands and his co-host, Jackie O, who in August 2009 hit headlines when they used a lie detector to quiz a 14-year-old girl who revealed she had been raped when she was 12.

Among other so-called highlights - almost all of which were excised from 2DayFM's website when the rape scandal erupted in 2009 - are Sandilands drinking breast milk on air, a contest in which he participated in a race to produce a sperm donation, and another to find Sydney's smallest penis.

For the most part in recent history, Sandilands has served as a human lightning rod for the worst of Austereo's excesses. What makes this latest prank significant is that, for the first time, Sandilands is sitting quietly on the sidelines and it is the company's wider culture that is under intense scrutiny.

Austereo's - more specifically 2Day's - culture of crass and debasing pranks is hardly new, but the breadth and depth of the humiliation on offer seems, when viewed as a whole, unusually grotesque.

In 1996 a 2Day night-time presenter, David Rymer, was suspended after a prank call in which he impersonated a school board official and told a student her top scoring grade was an error, reducing her to tears on air. In 2006 another presenter, Craig Lowe, was found to have breached the broadcasting code of practice by airing an explicit interview with a pornographic film actress.

In 2009 the station ran a promotion named the "Heartless Hotline", in which prizes were offered to disadvantaged people on the proviso no one else called the station to claim them. In one example, a parent of disabled children was offered tickets to the Easter Show, but was forced to argue on-air with another caller who had telephoned to claim them. Others targets included a boy with a development disorder offered a computer game and a woman needing money for gastric band surgery.

In an extraordinary reflection on the industry at large, the "Heartless Hotline" segment was nominated for an award in the best station promotion award category of the Australian Commercial Radio Awards in 2009 (it did not win).

In another "promotion" in 2009, 2DayFM ran a campaign which raised $150,000 for the parents of a disabled child. When the family contacted the station they were given the details of callers who had pledged and told to collect the money themselves. It was later reported the family had been able to collect only $50,000 of the total.

There are scores of other examples which run the gamut from crass, such as several women behind a panel "flashing" a man who had to identify his girlfriend via her genitalia, to inhumane, such as one in which a woman was flown to Australia from the US to compete to "win" being reunited with a relative she had never met. She was eventually reduced to tears and and left to beg for the "prize".

Austereo is now facing questions from advertisers, investors and the public about its risk management systems and procedures. Management at 2DayFM claims five attempts were made to get permission from the nurses involved in the royal prank which triggered the media storm, but have not released phone records as proof of this. "It is absolutely true to say that we did attempt to contact those people," Holleran told media.

Irrespective of the claim, it is clear the station did not get their permission and elected - with managerial approval - to proceed with the broadcast anyway.

The hospital, London's King Edward VII's, says it has no record of any communication from Austereo or its representatives.

In their only interviews, with two current affairs TV programs, the presenters Christian and Greig attempted to normalise the "prank" process as an everyday part of radio shtick, without addressing what checks, if any, were in place preceding the decision to broadcast.

"These prank calls are made every day, on every radio station, in every country around the world and they have been for a long time," Christian said.

One source accused the DJs of "playing dumb" over the approval process for such pranks, pointing out that 2DayFM is required to put its presenters, producers and content managers through "decency and standards" training every six months, in compliance with an earlier ACMA ruling. The training includes advice "not to air any prank calls without permission".

The BBY media analyst Mark McDonnell says the latest scandal indicates there is a bigger cultural problem with the company. "It will be viewed as such by ACMA in any inquiry," McDonnell says, pointing out that regulatory compliance and falling revenue bring bigger cost pressures to bear. Reputational damage is also a threat to ratings.

The various Sandilands scandals have certainly delivered on that front. The latest Nielsen Media Research for September 16 to December 1 reveals that the 2DayFM breakfast show hosted by Sandilands and Jackie O fell significantly, down 1.8 per cent to a 10.3 per cent share. As a result, 2DayFM's overall share slipped to 8.4 per cent, the lowest rating it has recorded this year.

Southern Cross Media itself has had a chequered history. It was spawned out of a mishmash of radio and regional television assets that were thrust together, each with different cultures, management styles and values, and listed on the ASX.

The radio side of the business, which mostly came from Austereo, has two metropolitan networks, 2DayFM and Triple M. Austereo was spun out of the highly secretive Village Roadshow after it bought Triple M from receivers when the Fink family's entertainment empire hit troubled times more than two decades ago.

The regional TV assets, which make up an affiliate of the ailing Ten Network, came from Southern Cross Broadcasting, while the regional radio assets came from Reg Grundy's RG Capital Radio.

The latest iteration of the company rose out of the ashes of Macquarie Media Group, which was one of many satellites set up by Macquarie Group with a key benefit of generating fat fees to Macquarie for services rendered. The model collapsed during the global financial crisis.

The management of Macquarie Media Group previously provided by Macquarie Group for an annual fee was taken internal for a one-off payment of $41 million. The business was then recapitalised and thus began its new life.

A year later it launched a $714 million takeover bid for Austereo at a hefty $2 a share. Today Southern Cross trades at just over $1 a share.

Macquarie Group still owns 25 per cent of the company and Macquarie's chief executive, Nicholas Moore, is believed to be one of the biggest retail shareholders with 0.5 per cent of the company.

With a market capitalisation of $724 million - down $40 million since news of the apparent suicide of the nurse at the centre of the royal hoax call - the big question is what next for Southern Cross, which has two big shareholders sitting on its register: Macquarie and Allan Gray, which holds just under 10 per cent.

In a twist by the stockmarket, the drop in capitalisation of Southern Cross is roughly equivalent to the loss of 2Day's annual revenue if the station were forced to suspend operations.

The talk around the industry is that if these two shareholders get together, they could pressure the board to do something radical to extract value for shareholders. The company's return on invested capital is 6.4 per cent - less than its cost of capital.

This could include making a bid for the troubled Ten Network, which has a market capitalisation of less than $400 million, or breaking the company up and selling it off once media ownership rules relating to audience reach are scrapped next year.

Either option makes sense. Southern Cross is the regional affiliate for Ten Network, which means it pays Ten an annual fee to broadcast its content outside the five capital city markets. That contract expires in June and sources estimate that Southern Cross pays Ten 30 per cent of its revenue for the content, which translates to about $80 million a year.

Ten declined to comment on the fee arrangement. Macquarie also declined to comment and Allan Gray's Simon Marais did not return Fairfax Media's calls.

The Southern Cross radio and regional TV empire is worth more broken up than as a whole. When the various businesses were put together, the pitch to investors was that it would be able to find synergies by cross-selling advertising on its regional and metro radio platforms and its regional TV network, though for the most part that has not materialised.

"This has been the worst end of the year for Rhys [Holleran]: Austereo's ratings are tanking, there has been the Kyle backlash, Ten's ratings have been appalling and now this," a source said.

Holleran is also still trying to bed down the acquisition of Austereo, which has a vastly different culture to the regional TV and radio stations, which are run on the smell of an oily rag, according to another source.

Holleran declined a request to be interviewed.

One analyst said changes to the archaic ownership and audience reach laws would provide opportunities for Southern Cross. Legislation limits the number of metro radio stations anyone can hold to two.

"If there is an industry that is crying out for scale, it is radio," the analyst said.

The legislation also applies to TV station owners who cannot own a network that broadcasts to more than 75 per cent of the population. The existence of this law created the regional affiliate structure that consists of Prime broadcasting Seven content to regional areas, Southern Cross broadcasting Ten and WIN broadcasting Nine's content.

The Gillard government recently announced the removal of the 75 per cent audience reach rule, which, if it passes through Parliament, will trigger consolidation in the sector.

In the meantime, Southern Cross has to clean house, under both the scrutiny of ACMA and mounting international outrage, over the prank itself and the failure of the station's management to take personal responsibility.

So far the show's two presenters have been wheeled out for two heavily coached TV interviews, but there is growing pressure to hold more senior staff, including station content director Derek Bargwanna, station manager Jeremy Simpson, national content director Craig Bruce, metropolitan radio chief Guy Dobson and the show's two producers, Emily Mills and Ben Harlum, to account.

Some sources say it may even go higher, to Holleran, or the chairman, Max Moore-Wilton.

At the company's latest annual meeting Moore-Wilton, who has been a consultant of Macquarie Group and remains a director of another former Macquarie satellite, managed to get re-elected, but only with Macquarie's support. (Macquarie owns 25 per cent of the company.)

Moore-Wilton received 279 million votes for him and 214 million against.

This week Moore-Wilton sent a letter to the chairman of King Edward VII's Hospital, saying that Southern Cross was reviewing the station's broadcast policies.

"I can assure you we are taking immediate action and reviewing the broadcast and processes involved," Moore-Wilton said in the letter, which was also released publicly.

"As we have said in our own statements on the matter, the outcome was unforeseeable and very regrettable."

The ACMA investigation, meanwhile, could result in the station losing its licence to broadcast, if the regulator finds that the breaches are serious enough. Or it could, as it has been in the past, be forced to work under tighter restrictions or face hefty fines.

ACMA usually waits until a voluntary complaint process is completed between a broadcaster and complainant. In this case, it is using its discretionary powers to start the investigation of its own accord.

ACMA said it would "be seeking to expedite this investigation and does not propose making any further statement while its investigation is under way".

The result would almost certainly be tighter regulation, warned Wendy Harmer in a piece written for the online opinion site The Hoopla. Harmer is a radio veteran whose career includes a stint on 2DayFM during what must, in comparison, be remembered as a far gentler era.

"No one wants to shut down humour and satire but I do believe that with compliance and respect for this one rule - that you should not have your voice aired on radio without your explicit permission - a lot of heartache, humiliation, and worse, can be avoided," Harmer said.

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