KEY POINTS:
Chief executive Rick Ellis delivered Television New Zealand's worst financial result this week, reporting a $4.5 million loss - the only loss in the state broadcaster's history.
But he insisted the loss was the darkness before the dawn, telling a briefing of journalists and business analysts he expected that demand for television advertising time, which underpins the commercial success of the company, will be flat in the year to June 30, 2008.
The biggest barrier for returning to an even financial keel - a damaging loss of marketing focus for TV One - is under control, he says. The other more troublesome channel, TV2, is being lined up with some strong new shows, he claims.
Ellis might be right.
Certainly TV One - whose appalling marketing caused a virtual freefall in ratings in 2005 and 2006 - has improved and propped up its ratings with a big increase in spending such as on the blockbuster Dancing With The Stars.
TVNZ bosses insist that new shows and a marketing makeover for TV2 will also bring it into line.
But a question hangs over the mix of commercial and non-commercial business plan at TVNZ and it goes to the root of problems that brought the company close to implosion in 2005. TVNZ also answers to politicians who use it as a political football.
Government politicians champion the TVNZ Crown-owned company as a "hybrid", but the loss announced this week was a reality check. The result raises questions about a big commercial broadcaster using taxpayer subsidies to dig itself out of a commercial hole. And there is a risk "hybrid" mixing and muddling of commercial and non-commercial aims makes it hard to excel in either and allows management and politicians to fudge bad results.
Ellis was in an unusual position delivering TVNZ's worst-ever financial result. As chief executive from February 1998 to April 2002, he was eased out of the role by Labour politicians who thought he was too commercial for the new-look state broadcaster. The government appointed a weak board of directors to make the change it wanted and Ian Fraser was made chief executive from 2002 to 2005, when he resigned, alleging interference from the politically appointed board of directors and a broadcaster in turmoil with tumbling ratings.
A new business-focused board headed by Sir John Anderson reappointed Ellis to his old role, where he has pointed to what he says was a mess induced by overspending that reduced profit margins.
Ellis says he has loaded his restructuring and bad news into his first year's result. "It is best to nail it in one hit and get it behind you. That allows the staff to focus on the future," he says.
He said the $11 million restructuring, including a new flatter management structure with a focus on new media, and the sacking of more than 50 journalists, had been successful - saving the company around $17 million a year.
TVNZ was turning around and "with a fair wind" in the ad market - he expected it to return to profit next year, albeit to a modest $11.3 million surplus.
Ellis points out it is hard for any media company to estimate advertising spend with revolutionary changes to the sector but says it will be flat for the year to June 30.
Martin Gillman, managing director of media buying agency Total Media, says an estimate of flat growth might be conservative. As for TV One and TV2, there are other challenges ahead from Freeview - the new digital free-to-air service.
"TVNZ 6 and TVNZ 7, which start in March, are both advertising-free but they will still be taking the audience away from One and lifestyle channels on Sky will continue to do the same," he says.
"TV One has bottomed out and they insist on claiming that the news has recovered, but the fact is that One News is still going down."
In August audiences for TV2 were down by an astonishing 24 per cent compared to 8 per cent for the market as a whole, he said.
Beyond the fundamental issues about attracting an audience and damage to the TVNZ brands during the crises of 2002-2005, there have been other more prosaic factors in the $4.5 million loss. The first was the downstream effect from an ill-fated decision in 2005 to increase the advertising rates during a boom time by 20 per cent, at the same time as ratings were crashing for some shows.
The second was a delay to TVNZ dumping its archaic old-tech advertising booking computer system.
Ellis confirms that the 20 per cent rise alienated ad agencies who paid top dollar for shows and, when they did not rate, they were able to demand compensation. With a lot of TVNZ's advertising space used up on compensation, the revenue took a hit.
It is easier to estimate the commercial performance of the company with tangible results than it is the nebulous cultural obligations and the TVNZ charter.
At Monday's briefing Ellis skipped freely between the commercial and non-commercial requirements.
He told the Business Herald that this was inevitable since the two parts of the business were "clearly inseparable".
If that is correct it may explain why the future is so unclear for TVNZ. And why competitors such as MediaWorks question the disruption caused by direct government grants which amount to around $15.5 million a year on top of around $18 million of subsidies obtained last year from New Zealand On Air and Te Mangai Paho. The latter are available to all broadcasters, not just TVNZ.
The new Paul Holmes show Whatever Happened To ... ? is a case in point, with TVNZ receiving $1.2 million in government funding for a show that delivered a strong audience.
TVNZ competes on a commercial level with the commercial broadcasters but, as fulfilling part of the government's broadcasting policy, appears to have favoured status.
Behind the scenes people in the broadcasting sector mutter about the conflict of interest where Steve Maharey is the Minister of Broadcasting overseeing the regulation of the market while he is a TVNZ shareholding minister demanding the government-appointed board deliver a 9 per cent return. Said one industry leader who would not be named: "The arrangement assumes that the interests of TVNZ are the interests of the broadcasting sector - but clearly they are not."
Maharey predictably dismisses the complaint, but like Ellis, he acknowledges that the charter obligations - giving uncontestable grants for shows that make commercial returns - give it an advantage of more local content, which tends to rate.
Meantime, TVNZ is trying to ease its way into a new media world and trying to guess where the market will wind up. The difference is that it will have a commercial advantage courtesy of the taxpayer. It will be in a fortunate position when it announces the next annual results. If it performs below par for its commercial goals it will be able to point out that it has non-commercial obligations.
When it is questioned whether its commercial content is any different from TV3 and Prime, it can remind people that it is expected to make a profit.
Brightness control
The darkness
TVNZ'S worst-ever financial result - a loss
* TVNZ made an operating profit of $9.3 million in the financial year to June 30.
* One-off restructuring costs meant it ended up with a loss of $4.5 million.
* The biggest factor was a 6.5 per cent $30 million drop in advertising revenue to $312 million.
* Restructuring will save $17 million year.
* Government agencies gave TVNZ $33 million in subsidies and grants.
* After handing out a special dividend of $70 million last year, TVNZ issued no dividend for 2007.
The dawn
* What does the future hold for TVNZ?
* Advertisers dismiss speculation that free-to-air TV is dying and say they will keep buying 30-second TV commercial spots.
* Rick Ellis has established stable management systems at TVNZ and the company has not been careening from one crisis to the next.
* TVNZ is pushing ahead with new digital channels and competent new media initiatives such as TVNZ ondemand.
* But it won't be delivering significant profits anytime soon.
* After two regime changes there is a dangerous lack of institutional memory at the broadcaster.
* Overall New Zealanders are watching less television with audiences across all channels down 8 per cent on 2006.
* Despite TVNZ claims, One News has still not stemmed the loss of audiences that is damaging its revenue projections.
* Once set up, a new system for selling advertising time could increase revenue by 5-10 per cent, ad agencies say.
* Political meddling and crises of the 2002-2005 period are behind it.
* TVNZ is prone to being a political football and 2008 is an election year.
