Nine Entertainment Co. Submission House of Representatives Standing

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Nine Entertainment Co.

Submission

House of Representatives Standing Committee on Communications and the Arts

Inquiry into the Australian Film and Television Industry

Factors contributing to the growth and sustainability

of the Australian film and television industry.

April, 2017

1 1. Introduction

Thank you for the opportunity to make a submission to the House Standing Committee on Communications and the Arts inquiry into the Australian film and television industry.

In making this submission Nine would like to outline:

 The changing dynamics of the Australian television and film sector and the importance of television as the foundation and driver of the Australian production sector.  The reasons why reducing licence fees is the single most important factor that will drive sustainability and growth in the Australian television industry.  The significant transformation Nine is undergoing to ensure we engage with audiences across all platforms and continue to stay relevant to Australians.  The role public broadcasters play in the new media landscape and the risk they pose to the commercial sector.  The need for flexibility in accounting for Australian content to ensure high quality Australian stories are told and strong local voices and skills are retained.  Outdated regulations which constrain the ability of commercial free-to-air (FTA) broadcasters to adapt to the evolving media landscape.

This review is a timely reminder that the current regulatory framework is restricting growth and threatening the sustainability of the Australian film and television industry. The television industry is an interdependent ecosystem including audiences, broadcasters, production houses, advertisers, journalists, sporting codes, investors and creative talent which all rely on the health of the television industry for entertainment, information, income and employment.

It is imperative that Australia’s media regulatory framework drives growth and ensures the sustainability of the Australian television industry and Australian stories by taking into account the changing viewing habits of Australian audiences and the new sources of content enabled by new platforms. Inflexible regulation restricts media participants from adopting commercially rational strategies to meet audience demand and can result in distorted outcomes that do not benefit business operators or the Australian audiences.

2. About Nine Entertainment

Nine Entertainment Co. (ASX: NEC) is a leading Australian media and entertainment company with an objective to create great content, distribute it broadly and engage audiences and advertisers. We do this through our: Free To Air Television business; digital publishing including as 9news.com.au and 9Honey; on-demand services including 9Now and Stan; and television content production and distribution.

Nine Entertainment Co turns over $1.28B consisting of $1.1B in television revenue and $150M in digital revenue. We employ approximately 2300 employees across seven main sites.

Our main regional affiliate is Southern Cross Austereo for the broadcast of Nine’s metropolitan TV content into regional Queensland, Southern New South Wales and regional Victoria. This new partnership is currently rolling out 15 new news rooms across regional Australia.

Nine is a 50% joint venture partner in Stan a Subscription Video on Demand (SVOD) platform. Stan has over 700K active subscribers and is the leading local player in this growing sector.

Nine is also a majority stakeholder in PedestrianTV, a leading youth publishing business and a majority stakeholder in CarAdvice, a leading publisher of online automotive editorial content in Australia.

Nine continues to build new media businesses to ensure that its high quality content is distributed as broadly as possible and we continue to be on platforms where the audiences are.

3. Licence fees: an immediate capital injection into the Australian content and production market.

Nine supports the well-made case of Free TV for licence fee reduction. The Free TV submission outlines how out of step Australia is internationally in relation to the unfair taxes we are expected to pay in an increasingly competitive marketplace.

In addition to the Free TV submission Nine would like to make the following observations. While it is true to say that Nine and the other FTA networks are operating under, and responding to, a range of revenue challenges, the single most damaging regulatory impost impeding the industry is the continuation of an unjustified, and obsolete licence fee regime. Accordingly, the single most important factor which will drive immediate growth and underpin sustainability in the television industry is the reduction in television licence fees. Nine Entertainment Co. currently pays 3.375% of its television revenue as a broadcast tax on top of our corporate tax and payroll tax requirements. In FY16 Nine paid $34.6M in broadcast licence fees.

The commercial FTA industry is being challenged by multinational media companies including Facebook, Netflix and Google which are not required to pay an additional TV tax, are not constrained by regulatory requirements for Australian content and classification of content and carry fewer restrictions on advertising. This current market structure tips the market in favour of large multinationals which enjoy an ability to allocate their capital to the most audience responsive and efficient commercial use.

The case for licence fee relief is overwhelming. Licence fees for the commercial television industry were originally introduced with the Television Licence Fees Act 1964 and set at 9% of broadcasters’ gross advertising revenue1. The original fee was set at a time when commercial television licences afforded certain privileges, and a near monopoly on audio-visual media in the home. The fee reflected access to a scarce and profitable delivery platform, at a time when the right to use spectrum was the basis for above-average profits which justified an additional levy.

1 Television Licence Fees Act 1964, section 6.

The media landscape has completely changed since that time, and viewing habits continue to fragment. Substantial shifts in advertising revenue from traditional media to digital have occurred. There is no longer any reason for the asymmetry that has been created by a tax which was imposed at a time where broadcast television was the only source of television for Australian audiences.

Furthermore, representatives of the production sector have recognised the direct relationship between licence fee relief and the vital injections made by the Australian broadcast sector. Mark and Carl Fennessy, co-chief executives of production house Endemol Shine have referred to the “heavy regulatory burden” carried by the FTA broadcasters, and said it is “totally unsustainable”.2

The previous licence fee relief obtained by Nine has been reinvested into high quality Australian productions including Doctor Doctor, House of Bond, This Time Next Year, Travel Guides, Married at First Sight, The Voice and Australian Ninja Warrior. Further licence fee relief for the FTA networks would also be funnelled into Australian production, and translate to an immediate capital injection into the Australian content and production market.

Reduction in Television Licence Fees is the single most important factor which will underpin the immediate health of the Australian TV industry

4. Business Transformation: Reimagining TV in a digital era a. The evolving media landscape

Consumers today have more choice, in what they watch, where they watch it, and when they watch it. As a result Australian television audiences are demanding high quality content, on their terms, regardless of platform. It’s this change which is driving innovations including Nine’s streaming and catch up service 9Now. Viewers want their choice of platform whether that be on a broadcast or IP network and they want to access it on the device of their choosing: television; computer, tablet; or mobile. Nine is working hard to meet the evolving viewing habits of its audiences.

Australian commercial FTA continues to remain relevant by offering high quality drama, entertainment, news, current affairs and sports. It is TV which underpins the Australian production sector. For the Australian TV and feature film industry to be sustainable it needs a foundation of skills and production facilities to draw upon when films and big event TV such as Howzat and House of Bond (2017) are commissioned. It is the Australian TV sector that provides this foundation. It provides the certainty of revenue for Australian production houses and the base employment for important production skills including editing, costume design, visual effect, cinematography, set design, writers, directors and performers.

2 2017, 03, 20, Darren Davidson, Australian story of unfair television licence fees, http://www.theaustralian.com.au/business/media/australian-story-of-unfair-television-licence-fees/news- story/1955696076de30b7fc19a52268112aec

The reliance of the Australian production sector on the FTA networks is well documented. The inability of FTA networks to fund or commission new production has a direct impact on the prosperity of the production sector. Commercial free-to-air television industry generates $3.2 billion per annum of economic surplus across viewers, advertisers and broadcasters3. Without this strong foundation the whole industry will suffer.

Nine is transforming its business to deliver highly engaging content distributed across various platforms to all devices. Transforming our business this way ensures we are responding to how people are consuming their news, sports and entertainment.

Digital platforms are becoming increasingly important destinations. Nine recognises the value of our brand. An important factor that will contribute to the growth and sustainability of our business is the ability for Nine’s brands to transition onto other platforms. Success in a multi-platform environment will see Nine’s brands become platform agnostic.

Married at First Sight has been a popular series for Nine with an average audience of 1.18M4 viewers, however what is notable with this series as opposed to past series is the changing consumption patterns of the audience. In catch up television Married at First Sight remains the number one program on the OzTAM VPM ratings, with many of the episodes averaging between 120,000-150,000 viewers. This is a prime example of changing audience behaviour and is driving Nine to deliver content audiences want to see on the platform that suits them. .

Table 1. – Top ten online streamed shows (06/03/17- 02/04/17)- Number of Days: 28)

The ability to invest in new technology platforms is a factor that will underpin and lead to sustainability and growth of the television sector. b. Australian content.

The viewing habits of Australians have fundamentally changed. The proliferation of digital platforms has led to the fragmentation of audiences. In response to this we have to reshape our business.

The explosion of content from the United States on subscription platforms and the improved user experience has had a direct impact on broadcast linear viewing.

Output deals which deliver a raft of non-targeted, rights restrictive content do not make financial sense in the new non-linear broadcast world and as such Nine has exited the unprofitable elements of its significant output deal with US production house Warner Bros. Local and relevant, cross

3 Venture Consulting, The Value of FreeTV, The contribution of commercial free-to-air television to the Australian economy, May 2015 May 2015 4 OzTAM, Consolidated 28 Episodes 30th Jan – 7th March, Consolidated 7 Episodes 12th March – 28th March, Overnight Episodes 2nd – 3rd April

5 platform content with the ability for integrations is where Nine’s future lies. In 2016 nine of the top ten (non-sport) programs on Nine (see Table 2.) were Australian productions and in CY17, Nine expects to broadcast around 50 per cent more premium Australian content than CY16.

Nine continues to carve out its alternative service offerings by providing strip reality programming, trusted news and current affairs, high quality Australian drama, and marquee sports coverage. These key formats are its point of differentiation to the US – content based alternatives. However, these Australian shows are expensive to produce with high quality dramas costing more than $1 million per episode, as opposed to one off international series acquisitions that attract sound ratings which can cost as little as ten per cent of an Australian drama.

Table 2. Channel Nine-Top 10 non-sport - 2016

Source: OzTam Consolidated, 5 City Metro, Channel Nine

Differentiation through high quality Australian content is a factor to sustainability and growth for our sector. c. Cost base

Over recent years, not only have the FTA networks faced increased competition for a share of the Australian media advertising revenue pool, competition for sports rights has increased the cost of acquiring major sport contracts. Additional costs have also been incurred to provide increased FTA content through multi-channels. As a result, Nine Network has maintained a strong focus on cost control across its business.

Significant investment has been made in technology and automation of functions and processes to reduce ongoing operational costs. Core headcount (excluding business acquisition) has been reduced and employment cost growth closely managed. Synergies across Nine’s Television and Digital businesses have also been implemented.

As part of the program to manage and reduce costs, Nine has looked to operational areas of the business that are duplicated across the FTA networks. Nine and Seven have already entered into an agreement to share helicopter operations in the five metropolitan capital cities and we continue to engage within the industry to identify other operational functions that are not competitive in nature to further reduce costs. Nine expects a 1.5 per cent cost decline for FY17 and a further $50m reduction in FY18 and FY19.

Managing the cost base of the business is a key factor to sustainability.

5. Public broadcasters should serve a unique role and not erode commercial revenues and audiences

Public broadcasters play an important role in media public policy. Services including NITV, ABC 24 and ABC Kids are very important public services. However a comprehensive understanding of what will drive growth and sustainability for the TV sector cannot be conducted without a review of the role of the public broadcasters, ABC and SBS and their charters.

Public broadcasters must be relevant to achieving their public policy outcomes and not erode commercial TV’s programming and revenue sources. Further, as more competition and cost pressures are mounting, Nine is responding by delivering more services on tighter budgets. The public broadcasters should not be unfairly protected from this new market reality.

The public broadcasters were conceived in the days of one channel per service where it was easier to program under their respective charters. Increased spectrum efficiency has led to multiple channels, however the additional channels should not lead to programming with no demonstrable public benefit just because they are available and need to be filled.

The ABC has a significant operating budget yet it does not deliver, and is not required to deliver any regional television news bulletins. It delivers a nightly 7pm news bulletin for Canberra and Darwin and all capital cities. This responsibility is placed on the commercial FTA broadcasters through additional local content requirements in regional broadcast areas. We commend the ABC’s recent commitment to driving more cost efficiencies and new regional jobs. We encourage the public broadcaster to keep a focus on cost management and delivering more services to regional Australia. These new regional services should not invite more Government funding but the ABC should focus on the efficient delivery of these services within their current generous operating budgets.

Of more concern are the recent activities of SBS. SBS will receive $814.2 million over the next three years from 2016-17 in government funding. Nine consistently finds itself in a competitive bidding process with SBS for programming. SBS’s content acquisitions appear to be based on chasing commercial ratings and revenue while not servicing its charter or target audience. This alone is a significant factor in driving up the cost of commercially attractive content while eating into commercial TV revenues.

Recently Nine found itself outbid for commercially significant content by SBS for its 9Life channel. Late in Nine’s negotiations with US based content distributor Scripps for their lifestyle programming, Nine was advised SBS had put a significant commercial offer to them for the food component of the content package. As a result the Food Network component of the Scripps package was withdrawn and sold to SBS.

SBS now has a channel dedicated to food programming. SBS’s Food Network predominantly runs commercial US food programs, a sample of which is outlined below (see Table 3.). It is hard to argue that this type of programming sits anywhere within their charter yet Nine as a commercial

7 broadcaster was unable to compete when acquiring the content. Nine would have delivered this programming to the Australian public for free, not subsidised by the Australian taxpayer.

Table 3. Sample Food Network Programs run on SBS as described on their website foodnetwork.com and Facebook pages.

Cut throat kitchen (US) Cutthroat Kitchen hands four chefs each $25,000 and the opportunity to spend that money on helping themselves or sabotaging their competitors. Ingredients will be thieved, utensils destroyed and valuable time on the clock lost when the chefs compete to cook delicious dishes while also having to outplot the competition. With Alton Brown as the devilish provocateur, nothing is out of bounds when money changes hands and we see just how far chefs will go to ensure they have the winning dish.

Rachel Ray’s Kids Cook Host Rachael Ray is on the hunt for the best rising chefs in the country, who also happen to off (US) be extraordinarily talented kids. All-star chefs and surprise celebrity guests join Rachael in this special six-episode series as they mentor and guide these young competitors through tough cooking challenges and high-pressure obstacles. The junior chef who makes the cut will win his or her very own series on FoodNetwork.com and the title of Kids Cook-Off Champion.

Chopped is a cooking competition show that's all about skill, speed and ingenuity where four Chopped (US) up-and-coming chefs compete before a panel of three expert judges and take everyday items and turn them into an extraordinary three-course meal. Course by course, the chefs will be "chopped" from the competition until only one winner remains. The challenge? They have seconds to plan and 30 minutes to cook .

The Australian market is well served by food programs on commercial networks and it is not a domain appropriate to Australia’s multicultural broadcaster.

Another example was the acquisition of The Night Manager, a big budget mainstream BBC1 series with internationally popular actors including Hugh Lawrie and Tom Hiddleston. This series has all the facets of commercial programming and was purchased by SBS as a pre-buy based on a script. Given the increasing commercial pressures on commercial TV, we are unable to take the risk on acquiring content based on an advance script without viewing the final product. This is apparently not a constraint faced by the SBS with its commercial revenue heavily subsidised by Government funds. Therefore decisions are neither driven purely by rational commercial factors or by the constraints of its charter.

Furthermore, the list of commercial movies (Table 4.) SBS has recently aired provides another example of the public broadcaster pursuing commercial ratings and not fulfilling its charter.

Table 4. Feature Films aired by SBS 2016/17

The commercial FTA model has worked well and continues to work well albeit under increasing commercial pressure. However as public broadcasters continue to encroach on the already well- serviced space of commercial TV, it undermines the commercial FTA model and directly threatens the growth of commercial FTA networks who must compete for audience and revenue against a government subsidised broadcaster. In particular, the existence of advertising on the SBS drives commercial behaviour with SBS chasing ratings as opposed to fulfilling its charter.

The charters of the ABC and SBS need re-setting for the contemporary media landscape. The proliferation of media alternatives is eroding the traditional arguments for generously funded public broadcasters. Market failures in diversity and the production of multi-cultural content are no longer as self-evident or requiring market correction, as they once were.

Public broadcasters need to be reviewed to ensure they are filling a unique place in the media ecosystem and not eroding the commercial (FTA) business model.

6. Flexibility required for growth and sustainability

There is no question that the regulatory settings must be recalibrated to fit the current media landscape. The challenge is formulating the appropriate regulatory settings that are flexible enough to cater for the continually changing media landscape. There is a delicate balance to be struck between achieving public policy objectives and to ensure that regulation is not unnecessarily commercially burdensome.

Nine believes that flexibility is a key requirement of the regulatory landscape to cope with the rapidly changing environment, and should be a guiding principle in the formulation of regulation. Inflexible regulation constrains market participants from adopting audience responsive commercially rational strategies and can result in distorted market outcomes that do not benefit business operators or consumers.

It is uncontroversial to say that FTA broadcasters are subject to the most onerous set of regulations of any media participant. The following table provides a comparison of regulatory obligations currently in operation.

Table 5. Broadcasting Regulation and Investment.

Note: lighter green indicates a lower level of investment or regulation.

The regulations that apply to Nine are a direct operating cost which affect its ability to compete with other market participants. While Nine does not suggest that all regulation should be abolished, any regulation imposed must have a strong policy purpose balanced with the commercial realities of a changing market.

For example, Nine currently makes a loss-making investments in children’s content in order to meet the obligations set out in the Children’s Television Standard (and supplemented by provisions in the Australian Content Standard), which require the following:

Table 6. Children’s Regulatory Obligations

Preschool programs 130 hours of Australian P programs per annum in a P Clause 8(1)(b) CTS period

Children’s programs 260 hours of C Programs per annum of which 50% must be Clause 8(1)(a) CTS first release Australian C programs and clause 14(1) ACS

Annual first release 25 hours of ‘first run’ C drama annually in C periods Clause 12(2) ACS Children’s Drama

Triennial first 96 hours of 'first run' C drama in every 3 year period, in Clause 12(1) ACS release Children’s Drama

Repeat C Australian 8 hours of repeat Australian C Drama each year Clause 13(1) ACS drama programs

Based on the existing quota requirements, Nine allocates roughly one hour per day to C (Children’s) and P (Preschool) programming. C and P programs are, however, subject to restrictions on the type and amount of advertising that can be broadcast. Only advertisements that comply with the stringent requirements set out in the Children’s Television Standards may be broadcast during Nine’s C programs, and the maximum time for those advertisements are capped at amounts less than ordinarily permitted under the Commercial Television Industry Code of Practice.5 During any 30 minutes of C programming, a broadcaster may not broadcast the same advertisement more than twice. No advertisements at all may be broadcast during P programs.

In this context, it is difficult for Nine to recoup the investment made on C and P programs. Ratings data for Nine’s C and P programs demonstrates that it is flagging. (see Figure 1.) While not disputing the importance of meeting viewer demand for Australian children’s content, it is difficult to understand the continuing role of the children’s quota obligations where the ABC already provides highly successful Australian children’s offerings on its ABC2 and ABC3 channels, along with its digital platform iView and the plethora of new digital destinations for children’s programming.

Nine continues to make investments in C and P content in circumstances where a more commercially rational approach would see it invest in other types of content that see better return on investment. These children’s quotas highlight the difficulties in applying rigid rules to a continually evolving industry.

Figure 1. Children’s P audience 2010 – 2017

In making these comments, Nine believes the required approach must recognise the converged landscape, and must not unfairly impose regulation on commercial FTA television or the creative industry. The existing regulatory framework harbours a number of legacy issues that are based on the previously prominent position of the FTA networks. Under existing regulatory settings the commercial FTA services are treated similar to that of an essential service or public utility. This is evidenced by the disproportionate regulatory framework as set out in Table 5 that places an unreasonable regulatory impost on FTA television operators vis a vis other domestic operators (both broadcast and digital), and overseas competitors.

5 Except during a C period in which an Australian C Drama is broadcast, the maximum is 5 minutes of advertisements per 30 minutes. During a C period in which any Australian C Drama is broadcast, the maximum amount of advertisements, program promotions, station IDs and CSA is 6 minutes and 30 seconds per 30 minutes, or 7 minutes at other times.

In a similar way, the commercial FTAs currently operate pursuant to detailed obligations set out in its Code of Practice which is registered and approved by the ACMA. Those Code provisions codify community standards, and provide a framework for regulation of the content that appears on FTA broadcasting services. Nine is committed to the Code of Practice, and believes that the codification of community standards is important and assists audiences relying on Nine as a trusted platform with content of integrity, and a safe environment for people to consume content and a brand safe environment for our advertisers. However, different rules apply to different players. Both the SBS and ABC can simply submit their codes of practice to the ACMA – and do not require an intensive registration process and community consultation. The ACMA also has no power to make standards that apply to the national broadcasters (such as the Australian Content Standard or Children’s Television Standard). And yet, as outlined above, both the ABC and SBS appear to divert from their respective charters without any accountability.

In making these comments, Nine is not proposing an approach that means that Foxtel, the national broadcasters, or indeed, SVOD or AVOD services should be subject to the same regulations or even the same level of regulation. But the public policy objectives of media regulation should not be borne by the FTA networks alone.

Other regulatory disparities should be corrected to accommodate the new media landscape. Other areas that may be relevant for review include:

 The provisions in the Broadcasting Services Act 1992 which allow the retransmission of FTA signals by subscription television operators without any form of equitable remuneration, and constrain the ability of the FTA broadcasters to obtain fair value for the valuable content they produce.  The obligations in the Local Content Broadcasting Service (Additional Television Licence Condition) Notice 2014 which requires commercial television broadcasting licences in certain regional areas to meet local content quota requirements.  Classification requirements for all content broadcast on free to air broadcasting services and the obligations to schedule all program material and advertising into applicable time zones, in comparison to digital platforms that have no equivalent scheduling obligations.  Digital television regulation and the restrictions placed on datacasting and narrowcasting which constrain innovative uses of broadcaster spectrum.  Political advertising is required to carry an authorisation tag, but is not required to have any such authorisation on digital platforms. Broadcasters are also prohibited from broadcasting political advertising for a period that extends from three days prior to an election through to Election Day. There is no justification for this measure, there is nothing to stop advertising moving from television to other platforms to avoid the television blackout.

Inflexible regulations compromise the ability of broadcasters to be agile, and adapt to the changing landscape so they can maintain high quality services that meet audience demand. Nine is in favour of a whole of environment scan to assess the efficacy and utility of current regulatory settings. The regulatory framework needs to be flexible and future-proofed to ensure that broadcasting policies can respond quickly and appropriately to the changing environment, without affecting broadcasters’ ability to maintain quality Australian services.

An evidenced based review of Australian media regulation is needed to ensure it is keeping up with the new media landscape and treat all participants’ fairly.

7. Conclusion

Nine believes a successful regulatory regime allows industry participants to meet their audience’s expectations in a commercially rational manner. This necessitates flexible regulations that permit broadcaster’s investments that both serve public policy and still achieve commercially rational outcomes.

It is vital that there is a recognition of the contribution already made by the FTA commercial television broadcasters to the creative and production industries, and to meeting the demands of its audience for high quality, free content. While not an essential service or public utility, there is an expectation that television services are provided for free and without interruption. Australian audiences already currently demand high quality services from the commercial television broadcasters. Success should be about maintaining the high levels of high quality content currently provided to Australian audiences by the industry, rather than an increase (or imposing more onerous quotas).

Nine would like to see obsolete regulation removed in favour of a regime that allows media companies to transform and grow their platforms. A healthy and profitable TV sector underpins the viability of the Australian film and television industry. In the short term licence fee relief is the most significant factor to stimulate the sector. In the long term getting the regulatory settings right is the priority including flexibility in the Australian content quotas and a forensic review of the role of the public broadcasters. High quality Australian content and strong local voices are key to differentiating Australian TV businesses from multinational media companies. It is imperative that these businesses have the right regulatory settings which will allow us to fairly compete and find a strong position in the new media landscape.