Submission by Network Ten House of Representatives Standing Committee on Communications and the Arts Inquiry Into the Australian Film and Television Industry

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Submission by Network Ten House of Representatives Standing Committee on Communications and the Arts Inquiry into the Australian Film and Television Industry

10 April 2017

Executive summary • Network Ten welcomes this Inquiry because it is time to face the reality that the highly successful local television production ecosystem we have built over many years in Australia is facing unprecedented challenges and we can no longer sit back and hope for the best in the new competitive landscape. • Ten is committed to Australian content. We broadcast thousands of hours of Australian programming every year and we employ thousands of Australians directly and indirectly across the production sector. • We invest heavily in marketing and promotion of local programs, we build content brands, we train production professionals, and we launch local and international careers both on and off screen. Eighty percent of Ten’s publicity and marketing budget is spent on promoting Australian content. • Without strong, profitable local broadcasters, the Australian production sector faces a very uncertain future. We want to retain our commitment to Australian drama, our national news coverage, and our commitment around Australia but Network Ten’s commitment to local content and local news is in serious jeopardy. • Our competitive landscape has changed completely – Ten is now competing directly for advertising dollars, viewers, and content against some of the world’s largest and most valuable companies such as Google, Facebook, Netflix, Apple and Amazon. • These companies do not make local news, dramas, or children’s television. They do not employ local journalists or publicists and in some cases they do not have a single employee in Australia, but they are taking an increasing share of advertising revenue in this market. • At the same time programming costs are rising as more platforms and channels compete to buy scarce content. Changing advertiser and viewer behaviour has meant that Australian content, particularly drama, is increasingly difficult to monetise. • As Ten has been saying for many years, the first step to sustain the ecosystem and grow local production is clear: abolish the exorbitant commercial television licence fee. • Australian broadcasters pay the world’s highest television licence fee at 3.375% of gross revenue. This represents hundreds of millions of dollars being diverted directly from local production to the Government’s coffers. • In addition to the heavy licence fee, onerous and inflexible Australian content obligations erode returns and severely curtail Ten’s ability to respond to the new competitive landscape and permanent structural change. • With rising content costs and flat to declining revenue due to increased competition, commercial FTA broadcasters are no longer realising the economic return that underpins the current regulatory system and the quotas in their current form have become unsustainable. They must be urgently reviewed. • In particular, the Children’s (C) and Pre-school (P) quotas are no longer serving Australian children and should be abolished. Ten has a longstanding history of broadcasting a range of high quality children’ programs, but Australian children are no longer watching them and the highly restrictive rules around advertising in C and P programming ensure that this content is almost impossible to monetise.

Introduction

The media industry is a critical part of Australia’s economy and of its culture, and Network Ten is incredibly proud of the role it has played and continues to play within it. Indeed, Network Ten has become part of the national fabric. It has an enormous following, particularly among younger Australians who are traditionally hard to engage on a consistent basis due to our mix of distinctive, popular programming. Network Ten is an institution in this country proudly bringing Australians news, sport and entertainment for over 50 years. While our head office is located in Sydney with 462 employees, we have a strong presence and commitment outside of Sydney with 312 employees based in the other state capitals Melbourne, Brisbane, Adelaide and Perth. TEN broadcasts popular and iconic programs like MasterChef Australia , The Project , Offspring , Neighbours , The Bachelor Australia , Australian Survivor , The Living Room , Studio 10 , the Supercars Bathurst 1000 , and the Australia Day Concert . We reinvented 20/20 cricket through the Big Bash League and Women’s Big Bash League which both achieved strong ratings this summer: 14.6 million Australians watched some of the 2016/17 BBL. Ten welcomes the opportunity to make a submission to this Inquiry because it is time to face the reality that the highly successful local television production ecosystem we have built over many years in Australia is facing unprecedented challenges and we can no longer sit back and hope for the best in the new competitive landscape. Without urgent reform to the regulatory framework, the local production sector faces a very challenging future. As a member of Free TV Australia, Ten strongly supports the submission made by that body on behalf of the commercial free-to-air (FTA) television industry. This submission should be seen as supplementary to the positions outlined in the Free TV submission. The new media landscape - dominance of the global technology media giants

Commercial FTA broadcasters are the bedrock of local television production. We fund 60% of all Australian production. 1 We make thousands of hours of Australian content every year and we employ tens of thousands of Australians directly and indirectly across the production sector. We invest millions in marketing and promotion of local programs, we build content brands, we train production professionals, and we launch local and international careers both on and off screen. However, the new competitive landscape has placed an unprecedented strain on that investment and local production will be hit hard in the coming years. Australian media companies are under duress and many of them – due to tectonic changes in the global media marketplace – face a daunting future. Simply put, without significant reform to the regulatory framework the future is very bleak for local content. We are now operating in a competitive landscape for television content that has changed completely. Australia is experiencing a rapid shift in viewer and advertiser behaviour toward digital and asynchronous channels. The foreign technology companies Ten is now competing against dwarf

1 Free TV Australia media release, Australia Needs Free TV: Free TV Australia Celebrates 60 Years Of Television , 11 October 2016.

Australian media companies. Google is more than 2200 times the size of Ten based on market capitalisation. Facebook and Amazon are respectively more than 1500 the size of Ten. These companies do not make local news or Australian dramas or children’s television. They do not employ local journalists or publicists. In some cases they do not have a single employee in Australia. However, they are taking a rapidly growing share of advertising dollars out of the Australian market. These companies have balance sheets that dwarf the combined market capitalisation of the Australian media industry and their advertising revenue growth continues at a staggering rate: • In the full financial year ending 30 June 2016 online advertising increased $1.6 billion to reach $6.8 billion, which was a 29.7% increase over the previous year , the fastest growth rate in the past five years. 2 • According to Morgan Stanley: “Global tech players are taking all the ad market growth, and then some. In C2016E we estimate global media/ad tech players… will collectively extract A$4bn- A$5bn worth of ad revenue – representing 35-40% share of the total pool of ad revenues in Australia (A$13.9bn) . It’s a big number and critically, it’s growing fast...” 3 • PwC forecasts that by 2020, internet advertising will clearly dominate the advertising sector, reaching $10 billion or approximately 50 percent of the market .4

By contrast, for the period June to December 2016 advertising revenue for metropolitan commercial FTA television networks declined by 4.53% compared to the corresponding period in 2015. That equates to a decline of over $70m.

Unfortunately local content will not benefit from this aggressive growth in digital advertising with an estimated 70-80% of total Australian digital advertising revenue going overwhelmingly to two foreign technology companies, Google and Facebook 5, neither of which are contributing in any meaningful way to local production in Australia.

While Netflix may have a global commissioning budget of around US$6 billion, not one of their original new productions is Australian at this stage, although they have made a small investment in an existing ABC drama series. Hopefully that will change, but even if it does, the new players are unlikely to ever come close to matching the volume currently generated by Australia’s commercial broadcasters.

At the same time programming costs for all content providers continue to be bid-up as new entrants compete for the same (scarce) content. The cost of Australian content has escalated dramatically in recent years while FTA advertising

2 IAB Australia, Online advertising spend reaches record $6.8 billion in 2016 financial year , 23 August 2016, www.iabaustralia.com.au 3 Morgan Stanley Research, Australia Media, Internet and Technology, 27 January 2016, page 1 4 PwC Australian Media and Entertainment Outlook 2016-2020, https://outlook2016.ezimerchant.com/category41_1.htm 5 Morgan Stanley Research, Australia Media, Internet and Technology, 27 January 2016, page 10.

revenues remain flat. This is causing immense pressure on FTA broadcasters’ ability to make expensive Australian content and dedicate funds to innovation.

This was recognised in evidence to the Senate Environment and Communications Legislation Committee’s inquiry into the Broadcasting Legislation Amendment (Media Reform) Bill 2016 , on 29 April 2016, from Ms Megan Brownlow of PwC:

“That type of content is very expensive, whether it is creating a big reality TV show or whether it is sports rights. That is a very significant driver. And then there is diversifying your business model. This is a management requirement that also takes money and new types of people. Hiring people who have technological skills can be quite expensive. So there are a number of factors driving costs.” 6

Additional major revenue losses from further restrictions on already heavily regulated advertising further erode flat to declining advertising revenue. Without strong, profitable local broadcasters, the Australian production sector faces a very uncertain future. We want to retain our commitment to Australian drama, our national news coverage, and our commitment around Australia but Network Ten’s commitment to local content and local news is in serious jeopardy. TEN has continued to increase its market share in a declining advertising market, driven by the strategy of investing in prime time Australian content. However, as we recently advised in a Trading Update on 16 February 2017, as a result of the weak advertising market and increased content and other costs, TEN’s television earnings before interest, tax, depreciation and amortisation (“EBITDA”) for the half year are expected to be $10 million to $15 million lower than the $10.1 million EBITDA profit reported for the previous corresponding period, resulting in an EBITDA loss of up to $5 million. A rigorous cost reduction project is underway, however a continuing decline in television advertising markets, absent any relief in television licence fees, will result in an EBITDA loss for the full year of between $20 million and $30 million. The immense financial pressure we are under means without regulatory reform and a substantial reduction in licence fees this year, we will be forced to consider drastically reducing our commitments to local content. Commercial FTA broadcasters underpin the Australian production sector Commercial FTA television is by far the largest contributor to domestic content production in Australia and underpins the entire production sector. It is vitally important to local production therefore that regulation does not impede the broadcasters’ ability to transform their businesses in response to the structural challenges brought about by digital disruption.

6 Ms Megan Brownlow, PricewaterhouseCoopers, Committee Hansard , 29 April 2016, p. 17.

Commercial FTA television broadcasters:

• Spend over $1.5 billion annually on domestic programming; • Fund six in every 10 dollars of local production; • Employ over 15,000 people directly and indirectly around the country; • Provide a vital training ground for people in the industry both on and off-screen. Almost every one of the Australians succeeding in Hollywood and other markets today started out on FTA TV; • Provide year round employment for hundreds of production industry professionals both on and off-screen on long-running popular serial dramas such as Neighbours .

Ten alone broadcast:

• Over 166 hours of first release Australian drama in 2016; • Over 6,900 hours of Australian content (6am-midnight) in 2016; and • Over 54 hours of locally produced news and current affairs programming each week which equates to approximately 2800 hours of local news and current affairs programming each year. At the time of writing Ten has over 24 series in production or pre-production in addition to our ongoing extensive news and sports programming commitments. We are currently filming a remake of the iconic Australian story Wake In Fright on location in Broken Hill. The production is a modern retelling of a classic Australian story starring David Wenham and Sean Keenan and is filming with a crew of around 100 people. The people of Broken Hill have welcomed the production with local businesses taking advantage of the business opportunities offered by a visiting television production crew. Our dramas Offspring , The Wrong Girl , Neighbours and a new Australian drama Sisters are all in production each with a crew of around 100 people as well as many casual employees. Neighbours in particular provides year- round employment for many production professionals and acts as a training ground for talented professionals both on and off screen. Ten is the only commercial network to have invested in first release Australian drama on a digital channel with Neighbours broadcast on channel ELEVEN since 2011. More than 150 people are also currently working on the production of The Bachelor Australia with 80 crew required onset to film a cocktail party episode and 75 to film the romantic dates that feature in the show. We recently had 60 people on location in Tokyo filming a week’s worth of episodes of MasterChef Australia . When filming in Melbourne, MasterChef Australia will have around 110 people on set and 150 during post production. Ten’s popular lifestyle program The Living Room is employing around 43 staff working in the studio in addition to another 30 staff working on stories for the show such as researchers, producers, camera operators and sound recordists. If a story involves home renovation then we have designers, builder, plumbers, electrician, painters and landscapers working on the stories. Much-loved game show Family

Feud has a crew of around 67 as well as another 10 staff preparing and interviewing contestants and writing questions. We have numerous children’s programs and our regular news and current affairs programs including The Project .

In addition to commissioning and funding local content, a critical contribution is the heavy investment we make in promoting and publicising Australian content. Ten’s publicity team devotes more than 40,000 hours a year to publicising Ten shows and talent. More than 80% of that time is devoted to local productions and local stars. Approximately 95% of our marketing budget is devoted to local content. We estimate that Ten’s publicity efforts generate $150 million worth of publicity a year for Ten’s local shows and talent. This contribution is critical to the ecosystem, because for local programming to be successful it must be widely available and visible. Publicity generates audiences for Australian content which makes it more sustainable overall. Removal of the world’s highest broadcasting licence fees is urgently needed to maintain a local production sector and a strong Australian voice onscreen

As Ten has been saying for many years, the first step to sustain and grow local production is clear: abolish the exorbitant commercial television licence fee. Even with the May 2016 reduction, commercial FTA broadcasters continue to pay 3.375% of gross revenue to the Government as an additional “broadcast tax” on top of normal corporate taxes and in addition to meeting onerous and increasingly expensive Australian content obligations. This remains by far the highest FTA television licence fee in the world .

It is increasingly difficult to explain why, in 2017, 3.37% of gross commercial FTA television revenue is still being diverted into government coffers and away from local production. That is over $100 million dollars that could be going into local production every year.

Australia is alone in gouging its commercial broadcasters at the expense of local production: licence fees in every comparable market globally were dramatically reduced or abolished years ago in order to drive local production and sustain threatened local content sectors.

This strange tax was introduced in the 1950s reflecting the fact that FTA spectrum granted exclusive access to TV sets across the country which allowed broadcasters to generate healthy profits. Clearly, that spectrum no longer provides any exclusive access to any screen and yet Ten must continue to pay this “super-profits tax” even when making a loss.

Today the extremely high cost of meeting onerous local content obligations is unique to commercial FTA networks and justifies the allocation of spectrum that is used to provide a free service to 24 million people.

The cost of Australian content has escalated dramatically in recent years while FTA advertising revenues remain flat. This is causing immense pressure on FTA broadcasters’ ability to make expensive Australian content and dedicate funds to innovation.

Removing the licence fee in addition to removing outdated ownership regulations would allow Ten to invest millions of additional dollars in local content which would, in turn, drive additional investment and jobs in the local production sector. This is evidenced byh the fact that Ten has reinvested all of the money saved through licence fee cuts since 2010 into local content and production. “…it is possible that there may be a financial benefit for some players as a result of this legislative change. If we judge it on the history of, in particular, FTA television, what do they do when they get a financial windfall? They spend it on content”. 7

It is for this reason that the heads of Australia’s major television production companies, such as Mark and Carl Fennessy, brothers and co-chief executives of Endemol Shine Australia, have expressed their support to abolish or cut licence fees.

Carl Fennessy recently said: “You only have to look at the recent financial results for the broadcasters to see they are under financial duress.

7 Ms Megan Brownlow, PricewaterhouseCoopers, Committee Hansard , 29 April 2016, p. 17

“In 2015 and 2016, the 50 top-rating shows on Australian TV were locally produced. If Australians want that to continue we need a healthy broadcast sector, which flows through to a healthy production and creative sector.

“We’re in favour of the government either further reducing or abolishing commercial TV licence fees.

“We’re very confident those dollars will go back into Australian content, which will be good for the future of everyone in this community.” 8

David Mott, CEO of ITV Studios Australia said: “In a society that prides itself on being fair, this is extraordinary in not giving Australian companies and consumers a fair go. We’re one of the most regulated countries in the world, pay the highest licence fees in the world and yet look at the needs and wants of consumers. They want to watch Australian content and you meet with all the broadcasters now and they want Australian content.” 9

Ian Hogg, CEO of FremantleMedia Australia & Asia-Pacific, wrote: “If we are to ensure that the industry is to compete effectively in this changing landscape, and that the commissioning of local stories thrives for generations, significant, broad media reform is essential. Piecemeal, cosmetic change might be convenient in Canberra but it won’t be for an industry whose very existence depends on a level playing field, on a fair go. And such reform needs to include a material review of the licence fee paid by commercial broadcasters resulting in significant, if not total, financial relief.”10

Addressing licence fees is the single most effective way to achieve growth and sustainability in local television production in the short term. Australian content quota obligations must be urgently reviewed

All Australian content quotas including the overall 55% transmission quota and the drama and documentary sub-quotas must be urgently reviewed. The Broadcasting Services (Australian Content) Standard 2016 must be overhauled to allow increased flexibility for broadcasters in commissioning and distributing content including in partnership with a range of content players including pay television operators.

8 Davidson, Darren. “Australian story of unfair licence fees”, The Australian , 20 March 2017; See http://www.theaustralian.com.au/business/media/australian-story-of-unfair-television-licence-fees/news- story/1955696076de30b7fc19a52268112aec 9 Bodey, Michael. “Producers back push to abolish TV licence fees”, The Australian , 28 March 2016. See http://www.theaustralian.com.au/business/media/producers-back-push-to-abolish-commercial-tv-licence- fees/news-story/6c8055f99844530f1c37bd99032689c0 10 Hogg, Ian. “Local content vital in schedules of healthy broadcasters”, The Australian , 4 April 2016. See http://www.theaustralian.com.au/business/media/local-content-vital-in-schedules-of-healthy-broadcasters/news- story/04bbdfbe4c33241421527dffbac7b432

These heavy and prescriptive quotas on commercial FTA broadcasters were originally introduced as part of a quid pro quo for access to scarce spectrum that provided exclusive access to every lounge room in Australia. In combination with regulatory limits on market entry this system enabled broadcasters to attract sufficiently large audiences to fund the production of expensive local content through advertising revenue alone while still running profitable businesses.

However, online content distribution, fragmenting audiences, and competition for advertising dollars from unregulated global content players has eroded the foundation on which local content regulation is based. These onerous and inflexible local content quotas erode returns and severely curtail Ten’s ability to transform our businesses in any real sense because they force Ten to commission and broadcast expensive content that is increasingly difficult to monetise. They also have a disproportionately heavy impact on Ten being the third commercial player, as we must meet the same level of obligation despite a significantly lower revenue base. Neither the ABC or SBS are constrained in their programming or budgeting decisions by any content quotas and the limited obligation on pay TV is a very flexible spend requirement that does not mandate any content actually be broadcast. Online content providers are not required to meet any local content requirements.

With rising content costs and flat to declining revenue due to increased competition, commercial FTA broadcasters are no longer realising the economic return that underpins the current regulatory system and therefore, the quotas in their current form have become unsustainable. They must be urgently reviewed.

Children’s and Pre-School quotas are no longer serving children and must be repealed

Network Ten has always been a strong supporter of quality children’s television. Each year the Network produces 230 hours of children’s content in house at its studios in Brisbane. Ten also has a proud history of commissioning a number of quality children’s dramas from the independent production community that have gone on to be BAFTA, International Emmy and Logie recipients such as H2O: Just Add Water , Mako: Island of Secrets , Sam Fox: Extreme Adventures , SheZow and Get Ace .

Network Ten’s award -winning children’s programs

Scope : Named ‘Best Children’s Television Program’ at the 2013 Australian Teachers Of Media (ATOM) Awards and was awarded The Maeda Prize for ‘Best Production, TV Series Division’ at the 2008 Japan Prize. This children’s science show is produced in association with the CSIRO with appearances from guest experts including Professor Brian Schmidt, Professor Brian Cox, Dr Fiona Wood and Professor Ian Frazer.

Get Ace : won first prize for Best Animation at the 2014 Australian Writers Guild Awards, Best Music for Children’s Television at the 2014 Screen Music Awards and nominated for Best Children’s Television Series at the 2014 Australian Academy of Cinema and Television Arts (AACTA) Awards.

Sam Fox – Extreme Adventures : nominated for Best Children’s Television Series at the 2014 AACTA Awards.

Mako: Islands of Secrets : 2015 ATOM Awards win for Best Children’s Television Program, finalist in 2016 ATOM Awards and 2016 Screen Producers Australia Awards.

Many of these programs such as H2O: Just Add Water and Mako: Island of Secrets are now enjoying great success on alternative platforms internationally which demonstrate their quality and appeal to children.

However, the C and P quotas are no longer serving the needs of Australian children. Despite the availability of these high quality Australian children’s programs at times that suit children and on free, easily accessible platforms, Australian children are no longer watching Australian C or P programs on commercial television. As demonstrated below, child audiences can be as low as 2000 children.

Audience C Program 0 to 4 5 to 12 18+ Total Mako: Island of Secrets Series 3 (2016) 1,000 2,000 14,000 18,000 Sam Fox: Extreme Adventures (2015) 1,000 8,000 16,000 25,000 Scope (2016) 1,000 2,000 10,000 15,000 Totally Wild (2016) 2,000 2,000 6,000 11,000

In addition, these programs are almost impossible to monetise due to the extremely restrictive advertising rules surrounding C and P content. No advertisements can be shown during P-classified programs. There are strict advertising rules regarding promotions and endorsements by popular characters and personalities, disclaimers and premium offers, competitions, food and beverage products. The maximum amount of advertising time and repetition of advertisements is also restricted.

With children not watching these programs, and advertising dollars not available to fund them, production and distribution of children’s programming whether broadcast or online, should be the remit of the government funded national broadcasters ABC and SBS. In particular, the ABC already has a fully government funded children’s channel which can serve as a platform for C and P content.

Definition of first release in the Australian Content Standard

One area that requires urgent attention in the Australian Content Standard (ACS) is the definition of ‘first release’. Under section 8 of the ACS, Australian drama series or mini-series must be ‘first release’ in order to qualify for drama points.

While this excludes content that has already been broadcast by a licensed subscription television broadcasting service, it does not exclude content that has been premiered by an online provider. Therefore, drama and mini- series that have premiered on Stan or Netflix can count toward the drama quota if subsequently broadcast on a FTA network. In contrast, drama and mini-series that have already appeared on any Foxtel or Fetch channel delivered by cable or satellite, cannot.

This is yet another example of outdated, platform-specific regulation that has been overtaken by technology and is resulting in similar services being regulated very differently due to the delivery platform. This is resulting in a competitive advantage for those services with an investment in a subscription video on demand (SVOD) service and should be amended urgently to provide a level playing field for all commercial FTA broadcasters and content providers.

There are strong policy reasons why FTA broadcasters should be permitted to collaborate with pay TV licensees on Australian drama productions. Allowing co-productions could deliver a more diverse slate overall with broadcasters able to commit more resources to higher-quality and edgier content due to the different commercial considerations. It could also bring high quality pay TV dramas to a wider audience on FTA TV. These collaborative arrangements already exist for non-drama content, for example with the new Australian production, Gogglebox Australia , jointly commissioned for The LifeStyle Channel and TEN.

The ACS should therefore be amended urgently to address this anomaly and allow all content players to compete on a level playing field. Sections 8(2) and 8(3) of the ACS already allow telemovies and feature films first broadcast by a subscription service to count as first-release drama for a commercial broadcaster. This should be extended to cover all Australian content as soon as possible.

About Ten Network

Ten owns and operates FTA broadcasting licences in Australia’s five largest metropolitan capitals: Sydney, Melbourne, Brisbane, Adelaide and Perth. In these markets Ten broadcasts a primary channel, TEN (simulcast in high definition and standard definition), as well as channels ELEVEN and ONE. Ten also offers a wide range of freely-available content across numerous platforms including catch-up programming and live streaming through our online catch-up and streaming service, tenplay.