Jaws of the jungle await free-to-air TV channels

There is an old joke about three men lost in a jungle. They stagger through intense heat and dense, tropical bush until they finally chance upon a clearing. Pausing to take breath, they realise that an enormous jaguar is now standing at the other side of the clearing. It looks hungry.

The men stand transfixed. Suddenly one of them takes off his rucksack and furiously rummages around inside. He pulls out a pair of running shoes, takes off his hiking boots and slips on the sneakers.

His companions looks across at him. “Don’t be stupid,” one of them whispers. “You can’t outrun a jaguar, no matter what you’ve got on your feet.” The man in the running shoes nods. “I agree,” he replies. “But all I have to do is outrun you two.”

It’s a bad joke, but a perfect one to encapsulate the current strategic conundrum facing Australia’s three commercial free-to-air TV channels: Seven, Nine and Ten. The media jungle they inhabit grows ever more inhospitable, with free-to-air TV revenues falling 6 per cent in the last six months.

The jungle is also becoming an increasingly perilous place too with more powerful, apex predators entering from all directions. And to make matters even worse our three men are not exactly fit and athletic specimens either. Each is middle aged, flabby and spent the last 30 years living it up in the glory era of TV. Like the news media titans that preceded them into the 21st Century media jungle, decades of high living have deprived them of the survival skills and killer instinct their suddenly parlous existence now demands.

The only good news for our imperilled jungle trio is that their fellow inhabitants are finding life just as tough. If one of them falls victim to the jaguar first, it should provide room and respite for the remaining two. So, who can run fastest?

The short answer is Nine. In most categories a 9 per cent decline in profits would lead to an immediate sell-off on the ASX. But in the gloom and doom of TV land, investors took these results as a signal that Nine is the one wearing the Nikes.

Nine’s current roster of programming is performing well. It won every demographic during 2019. It also enjoys a 50 per cent share of BVoD audiences (the online streaming of TV content) thanks to its 9Now service. As streaming replaces linear viewing across many Australian homes, this significant share of the audience is becoming increasingly important. Owning Stan, which continues to perform surprisingly well, provides even more profit, potential and protection against the inevitable decline in linear TV.

Clearly Nine is still facing a tougher future in an ever more hostile jungle. Its share price is down 10 per cent this year. But it has already put enough distance between itself and the other jungle inhabitants to ensure that the jaguar, for now, is not to be feared.

In contrast, Seven is inches from the jaws of the beast. Parent company Seven West Media reported a $67m loss from revenues of $773m for the first half of the year. While Seven is dealing slightly better with the declines in free-to-air linear audiences, it simply does not have the digital diversification of Nine. To return to our jungle metaphor, there are no running shoes in Seven’s rucksack.

Flagship shows like My Kitchen Rules are losing in their time slots. The focus on Big Brother as the hot new show that will restore ratings seems more like an announcement from 2002 rather than 2020. Salvation from Seven’s upcoming coverage of the Tokyo Olympics also appears unlikely too. The July event simply won’t happen if coronavirus continues its pandemic path across the planet. Seven’s BVoD business is growing but it makes a much smaller contribution compared to Nine and there is no Stan equivalent to bolster declining linear audience revenues.

And then there is debt, so much debt, to service. Seven owes $683m. That’s a troubling figure by any estimation but put it in context and it becomes an existentially dangerous amount of money.

It’s a $30m increase on what Seven said it owed back in September when it told the market that it was about to reduce its debt pile and then subsequently made it bigger. It’s also more than double the amount that Seven West is currently worth. You read that right.

Remember that moving scene in the Christmas classic, It’s A Wonderful Life? Jimmy Stewart stands on a bridge and contemplates suicide because his insurance policy means he is worth more dead than alive? That’s Seven West. They owe twice what they are worth and that makes its situation increasingly untenable. The jaguar approaches. Indeed, at this point Seven probably welcomes the approach.

That’s because the third jungle dweller, Channel 10, appears to be benefiting from its acquisition by ViacomCBS.

To stretch our metaphor, Ten fell behind the others three years ago and was eaten whole by the jaguar. Current estimates suggest Ten is faring relatively well as part of the global giant with recent growth in both audience share and revenues, albeit from a distant third place in the current TV market.

Anyone with even a basic understanding of media dynamics knows that this current market is likely to change enormously. The halcyon days of five free-to-air channels — once we add ABC and SBS into the jungle — is surely unsustainable. The arrival of Apple, Netflix and Disney at the bottom of your TV screen means the viewing options for Australian households have never been as diverse or enticing.

But there is always a brutal symmetry to be found in market forces. For every entrant there is usually an exit. With creation comes death.

It is very unlikely that we will end the decade with five free-to-air channels still in existence. Ten — at least as an Australian entity — has already been consumed. Is Seven the next to fall behind and into the jaws of the jaguar?