Switching the channel

Hamish McLennan has a plan to transform the Ten Network, gradually, writes Colin Kruger.

Hamish McLennan has a plan to transform the Ten Network, gradually, writes Colin Kruger.

Hamish McLennan's first month as Ten's chief executive will have left the former adman with no doubts about the scale of the challenge he faces trying to turn around a broadcaster that ranks third in the ratings behind its commercial rivals.

In his first day on the job last month, with Ten's advertising revenue share falling to record lows, McLennan had to focus instead on a parliamentary inquiry in Canberra in an attempt to stymie media law changes that would allow Ten's regional affiliate, Southern Cross, to defect and merge with Nine.

With the company already bleeding dollars from its television business, the last thing it needed was upheaval from the affiliate deal, which is a huge revenue contributor for each commercial network.

At the public hearing, opposition communications spokesman Malcolm Turnbull asked McLennan about the consequences for Ten of a Nine merger with Southern Cross.

"The main issue is that we will need to find another affiliate partner, ultimately. We will lose the revenue we get from Southern Cross, but then we will have to make it up with another partner," McLennan said.

Turnbull: So that would be very disruptive to your business?

McLennan: I think it would be disruptive for the whole industry.

This week the focus was on Ten's internal business disruption.

The broadcaster reported a $243 million loss for the six months to the end of February. This included restructuring costs and a $292 million write-down to the value of its television licence.

Ten said the write-down on its licence reflected the fact that the "advertising market and Ten's performance are at the low marks in their cycle". Revenue from continuing operations was down 15.6 per cent to $302 million, while cost cuts reduced expenses by 11.5 per cent to $266.8 million. Underlying net profit was just $6.8 million for the six months.

"Ten took a complete drubbing," says media consultants Fusion Strategy on Ten's recent dismal run.

Ten's revenue share was just 21.6 per cent in the December half year, compared to 27 per cent for the previous December period, according to industry data.

"This is the lowest commercial share by any TV broadcaster in Australia in recent times. [It is] below the previous low set by Ten in 2002," says a Citi media analyst, Justin Diddams.

It doesn't just reflect Ten's lower ratings over the past year.

The network has been hit with a double blow of ratings decline and pricing compression for its advertising, meaning revenue share dropped below audience share for the first time in a decade.

The damage doesn't faze McLennan, who nailed his colours to the mast with the purchase of more than 3 million shares soon after his appointment was announced. "I think we [have] got short-term brand damage, but the great thing with all solid brands is that they can rebound," he said. "I've spent the vast majority of my working life in the branding and marketing industry, and I feel there's an enormous future for Channel Ten. I feel very confident about the opportunity there."

He has no doubt there is space for Ten to survive in a $3 billion commercial television market, or the future of free-to-air television in general.

"If you're a marketer, and you're trying to target consumers en masse, there's still no better medium than free-to-air television," McLennan says.

As for Ten's individual road to redemption, while McLennan is still clarifying the details the big picture remains similar to what his longtime friend and Ten chairman Lachlan Murdoch outlined last year. Cost-cutting, programming execution, and a slightly older audience focus are the key.

"We chopped and changed too much last year, so we're really going back to basics, which is making sure that we stabilise the business, and making sure that we have a more predictable schedule, and define what our audience should be," McLennan says.

"We're not looking for any radical shifts in terms of strategy."

Broadening the audience focus away from the 18-39 year old demographic that had once made the network the most profitable in Australia, with an alchemy of cheap programming and premium advertising rates, recognises the fact that the free-to-air television market has changed irrevocably since those golden days.

Chairman Murdoch made it clear to investors at the company's annual general meeting in December last year that this magic cannot be repeated in the age of multi-channelling.

This has effectively produced nine commercial channels and enabled much more sophisticated programming strategies from the broadcasters, and brought an end to what Murdoch called "wallpaper programming".

He says viewers have too many choices now, "where you have low-cost programming that's the least objectionable".

Shareholders had been asked to cough up another $230 million at the December meeting, which allowed Ten to wipe out its debt. But it still leaves the new chief executive with no easy route to clawing back audiences from its commercial rivals, as well as the ABC and SBS.

"We're absolutely focused on growing our share, and getting programs that stick, and that just takes time," McLennan said.

The problem is Ten can't afford to pay over the odds for a major sport, or programming in general, while the advertising outlook for television remains so uncertain.

Cost-cutting and prudence have to remain remain Ten's mantra while its revenues continue to fall.

This is unlikely to help its turnaround efforts, although McLennan was still positive on Ten's prospects.

"The success of the network is not predicated on having a major sport," he says, but adds that there is "real value there at the right price".

Analysts are not so sure it can't afford to be left out of major sports, which come at a heavy price but guarantee an audience that can be used as a platform to build audiences for other shows.

"A sustained ratings and revenue turnaround would require both content investment and time," UBS analyst Richard Eary says.

Morningstar Equity analyst Tim Montague-Jones said a top grade weekly sport is a key competitive requirement for a free-to-air channel.

"Without a key weekly sporting attraction, we expect Ten to remain marginalised by advertisers as a viable alternative in allocating expenditure," he says.

While McLennan was able to report that Ten had clawed back some audience share in recent weeks, analysts are not sure if that will hold now that the major winter codes have kicked off and blockbuster franchises from Seven and Nine - The Voice, Australia's Got Talent, and The X Factor - are waiting in the wings.

"Ten's ratings have started the year weak and we expect this to continue, given the strong programming slate on competitor channels," RBS Morgans said.

While McLennan famously referred to the promiscuity of the youth audience being an issue for the broadcaster this week, he does not see it as an example of the web-led fragmentation that many see as a peril for broadcasters.

"What I have seen in my previous role is that as people get older, their viewing habits start to stabilise," he says.

The blunted impact of shows such as Homeland last year may reflect Ten's marketing execution as much as downloading habits, he says.

"There are some genres like reality, and news, that fit well for where the market's at. But I in no way would say that the Homelands of this world are redundant, because I'm more concerned about the way that we promoted those shows."

While illegal downloading and file sharing are issues that need to be addressed, McLennan points to US shows such as Elementary that are still doing well, with an average of 1.1 million in total viewers.

"The most insightful thing that I could say is that as an industry, the free-to-air market is one of the few very powerful media that can deliver large audiences and effective brand communication ... the reality is, if you are a marketer, free-to-air becomes critically important."

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