TVNZ’s FY2017 results: Kevin Kenrick explains the onerous output deal

TVNZ’s financial results this week showed that net profit after tax was down $11.3 million from the previous year, leaving the broadcaster with $1.4 million.

While revenue showed a decline of 2.5 percent ($8.1 million) to $316.5 million due to reduced advertising spend, the lion’s share of the drop has been attributed to an onerous content contract that the broadcaster is tied to.    

The figures show TVNZ’s operating expenses at $299 million, well up on the $287 million recorded last year. However, if the contract were to be excluded operating expenses would actually be down $1 million on last year’s figures.   

The onerous contract referred to is TVNZ’s content output agreement with Disney, which has become loss making. To overcome this, TVNZ has booked a $12.4 million provision in FY2017 to forecast future losses of the contract that has two more years on it.

The broadcaster has also taken action in recent months around its other output deals, renewing and extending its commitment to ITV and working with Warner Brothers around the rights it will get in terms of TV and online broadcasting. 

But how did TVNZ get tied to these contracts in the first place? And, perhaps more importantly, what’s being done to ensure it doesn’t happen again?

TVNZ chief executive Kenrick explains that historically when networks committed to long-term output deals with the studios, there was less content being produced than there is now so a deal was a way to secure it exclusively in the face of competing networks.

It sounds like an appealing way to rope in the audiences, however, making a commitment to content before its value is seen is risky and even more so is not being able to predict the changes in the media.

Fast-forward to the current media environment and content is less exclusive due to piracy and studios selling libraries of TV series to SVODs. The online services may have provided a new revenue opportunity for studios but they’ve also reduced the value of the content meaning the existing output deals with networks are being renegotiated.

“I think the studios have all been really excited about new money by selling to these new opportunities and now what’s happening is the previous agreements we’ve got are worth less than what they were and they are being renegotiated,” says Kenrick.

He explains it’s not an issue of the content being good enough; it’s about what it’s worth in today’s market.

“So what we’re doing in accounting terms is adjusting for what it’s worth. We still think it’s got some great shows – we would just like to pay less for them.”

And TVNZ isn’t the only one that thinks so, as media companies around the globe are reevaluating their output content deals.

Across the ditch, Australia’s Seven West Media renegotiated its programme supply deal with Disney last year after the agreement cost the network more than $50 million a year. According to The Australian, it was seeking an arrangement that would allow it to choose programmes on a show-by-show basis.

And this year, Australia’s Nine Entertainment was forced to pay an A$86 million provision to exit its obligations with Warner Brothers.

It was followed by Australia’s Ten, that went into voluntary administration after failing to secure a $250 million loan that would no doubt have been used to help its onerous output contracts with 21st Century Fox and CBS that had the network paying for programmes that were not delivering on the required ratings. This week, the network was bought by CBS.

And in the local market, MediaWorks’ situation in 2013 shows the trend to re-evaluate output deals is nothing new. The media company went into receivership in 2013 and at the time, a source told Stuff: “The Fox deal is what drove them into bankruptcy. It was a terrible deal.”

While MediaWorks wanted to pursue a spot-buying deal in which it would get to cherry-pick shows, Fox insisted on a deal that would see MediaWorks pay for shows they didn’t want.

Being in receivership allowed MediaWorks to get around the onerous conditions by breaking the deal and in late 2013 it lost all rights to Fox shows. It was, however, able to strike deals with NBC Universal and Sony CBS.

“It’s a brave new world and we have embraced the need for more flexible commercial arrangements with studios,” said Rod McGeoch, the chair of the company at the time.

“In our view, full output agreements for the television business are outdated and don’t make commercial sense in the New Zealand market.”

When considering the above examples in light TVNZ’s decision to take the projected losses of its Disney deal up front, Kenrick says the company prides itself in managing to write off the agreements without going into a loss and instead be able to set itself up for the future.

To do that, he explains it’s re-baselined the financial costs of the business according to its predicted structure and design and how it can be cost efficient.

“When you are in an industry which is changing as dramatically as this one, you need to do two things,” he says. “You have to take steps the that are required to ensure the business survives and you have to place some bets for the future that will enable you to thrive.”

Some of those bets include tilting its content investment increasingly towards local content, as it sees that as a sustainable point of difference when competing with global players, as well as significantly up-weighing its investment in its OnDemand platform. That includes content, features and functionality.

There are also bets being made to produce content aimed at audiences that aren’t watching TV, an example of that being its New Blood initiative and Re:. The former is a web series competition made in support of NZ On Air, while the latter is a socially-driven alternative news brand that creates video content covering issues facing young New Zealanders.

“We’ve got a renewed sense of confidence and momentum that we can put our focus on what do we need to do to thrive because we’ve actually pretty much ticked the box about what do we need to do to survive,” says Kenrick.

Reiterating that, he says it’s already exceeded its goal of engaging two million New Zealanders per day with peak audience TV share reaching a multi-year high and TVNZ OnDemand delivering double-digit growth in audience reach.

Other highlights include TVNZ.co.nz upgrades to bring together live stream TV channels and OnDemand viewing, a refresh of TVNZ branding, and the 25-year anniversary of New Zealand’s most watched local entertainment series, Shortland Street

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