KEY POINTS:
The Government's decision to give TVNZ $79 million for its new free-to-air digital services was called a "bail-out" by CanWest chief executive Brent Impey.
Impey is not far from the truth as CanWest MediaWorks and Sky Network Television have given TVNZ a hiding in recent years in terms of ratings, revenue and profitability.
Most investors believe the rout of TVNZ will continue, particularly as far as Sky is concerned.
Rugby has played a major role in Sky's success and the pay-TV operator looks more like the All Blacks in Lyon last weekend while TVNZ resembles the French.
The company is superbly managed and has more television channels than All Black squad members whereas TVNZ has a number of high-profile individuals but is not putting it together as a team.
Meanwhile TV3, which had a dreadful start, is winning more and more games each season under Impey's stewardship.
The three major television groups have published their 2006 annual reports and the financial data in the accompanying table gives a clear indication of their relative performance.
The first point to note is that Sky is the country's biggest television company with revenue of $549 million compared with $409.8 million for TVNZ and $254.3 million for CanWest (CanWest had television revenue of $143.6 million).
This development is relatively new as TVNZ's television revenue exceeded that of Sky TV until 2003.
The second point to note is that the two free-to-air stations, CanWest (TV3 and C4) and TVNZ (TV One and TV2) generate most of their revenue from advertising whereas Sky is heavily reliant on subscriptions.
TVNZ is losing ground in terms of advertising as it suffered a 2.7 per cent decline in revenue from this source in the June 2006 year whereas CanWest's television revenue increased slightly.
TVNZ's major problem is that its costs are growing far more quickly than its revenue. Since 2003 advertising revenue has increased only 9.8 per cent or $30.0 million whereas programme costs, its biggest expense, have risen 25.4 per cent or $47.5 million (TVNZ received $29.4 million of government funding in 2006, mainly for programmes).
Sky has a relatively low level of advertising revenue with Prime Television (acquired on February 8, 2006) contributing $7.1 million to the June 2006 year figure of $47.3 million. The backbone to Sky is its subscription revenue, which has risen by 38.4 per cent or $129.9 million since 2003.
Over the same three-year period the group's programme costs have increased by only 5.7 per cent or $9.6 million.
Chief executive John Fellet is confident that subscriber numbers will continue to grow and he told the recent annual meeting that Sky is installed in 42 per cent of New Zealand homes whereas the pay-per-view penetration rate in the United States is nearly 90 per cent.
Fellet often jokes that rugby is a major key to Sky TV's success and the best outcome for his company would be a 52-week season.
Sky had operating earnings or earnings before interest, tax, depreciation and amortisation (ebitda) of $246.5 million for the June 2006 year, substantially ahead of both CanWest and TVNZ. The pay-per-view company had an ebitda margin of 44.9 per cent compared with 25.8 per cent for CanWest and a mere 8.3 per cent for TVNZ. CanWest's television margin was 24.9 per cent and 30 per cent for radio.
Sky's operating margin has steadily increased over the past few years while TVNZ's has declined. CanWest's ebitda margin expanded in 2004 and 2005 but fell in the latest year because of the difficult advertising market.
TVNZ is in a difficult situation because it is caught between two conflicting objectives, namely the need to achieve a commercial return and its charter requirements. This makes it extremely difficult to compete with a powerful pay-per-view operator and a lean and mean CanWest.
RTE, the Irish national broadcaster with a similar conflict between commerciality and a charter, is in a similar situation. In the December 2005 year it had an ebitda of €22.4 million, giving it a margin of just 6.1 per cent.
The other important Sky figures in the accompanying table are depreciation/amortisation and interest costs.
Sky owns the decoders, aerials and satellite dishes and depreciates these over a five-year period. The group's depreciation charge peaked in 2004 and will steadily decline in future years as new subscribers represent a smaller percentage of its total subscriber base.
This will have a positive impact on the company's net earnings after tax.
Sky incurred interest costs of $50.4 million in the 2006 year because it borrowed most of the money to fund last year's capital repayment. As the group generates huge positive cash flow its borrowings and interest costs will decline over the next few years.
This will also have a positive impact on group net earnings.
The only potential negative for Sky is the 2007 Rugby World Cup, which will be broadcast by TV3. The 2007 domestic rugby season will end early to facilitate the World Cup and the long gap between the end of the 2007 season and the beginning of the 2008 could encourage some subscribers to ditch Sky.
Undoubtedly the company will have an aggressive marketing campaign to ensure that its churn rate is kept to a minimum during the September 2007 to February 2008 period.
The launch of the free-to-air digital service, called Freeview, is an attempt by TVNZ and CanWest to compete with Sky TV. This is probably too little and too late.
Overseas experience indicates that the migration from the traditional free-to-air network stations (TV One, TV2 and TV3) to pay-per-view is continuing and new digital platforms accelerate this trend.
The Government will give TVNZ $79 million over the next six years and the national broadcaster will establish two free-to-air digital channels. These are News24, a 24-hour news and sports channel, and Home, an 18-hour channel for children and families.
Digital television is not new to New Zealand as Sky already has nearly 600,000 subscribers on its digital platform.
Sky owns the decoder, aerial and satellite dish and charges an installation fee whereas TVNZ digital subscribers will have to buy their own decoder and aerial and pay for the installation. The standard decoder will cost $200 and the aerial $100 although the Sky UHF aerial can be used.
How many Sky subscribers will switch to the Freeview digital platform? How many non-Sky subscribers will take up Freeview?
Overseas experience indicates that content is king and viewers switch to a new platform only when its programmes are superior to the existing platform.
If this is the case then Sky has nothing to fear from Freeview. The new Government-funded digital platform could further fragment television viewing and encourage more households to switch to digital and they may chose Sky ahead of Freeview.
Whatever way you look at it, Sky has an excellent business model and faces the future with a great deal of confidence.
CanWest is in a more difficult position because it competes against the government-subsidised TVNZ and a powerful Sky.
CanWest shareholders will be hoping that the outcome of its current ownership review will enhance its ability to compete with TVNZ and Sky in the years ahead.
