Pay model the future for TVNZ digital

Eric Kearley head of TVNZ's Digital channels on set of the new channel U. Photo / Richard Robinson.

Television New Zealand head of digital services Eric Kearley says the division is "here to make money" and the future is with pay TV.

"There has been a lot of talk about media revolutions but the real revolution has been the move from ad-funded television to pay.

"As a broadcaster if we do not get into pay we are kind of stuffed," said Kearley.

Welcome to the New World Order of New Zealand broadcasting with the state broadcaster wholly focused on profit and hand-in-hand with Sky.

Once fiercely critical of Sky Television and its growing dominance, TVNZ now courts the firm 44 per cent owned by Rupert Murdoch's News Corporation.

This time last year TVNZ launched the Heartland Channel exclusive to Sky.

This week it announced a 24-hour channel for preschool kids on Sky from May.

Advertising is banned for young kids so it was not commercially viable for Freeview.

Under the deal Sky pays TVNZ a small portion of subscription revenue for Kidzone.

This covers the cost of programming and delivers a small margin.

Meantime TVNZ competes directly for ad revenue with Sky, Kearley says. "We call it a frenemy."

It's a different world to 2007 when the Labour government kick-started free-to-air digital television with $79 million taxpayer funding for TVNZ 6 and TVNZ 7.

It was a strategic move.

You boost the number of channels on the free-to-air digital platform Freeview - encouraging people to go digital - so hastening the switch-off of analogue signals.

The analogue switch-off is planned for 2013.

The payoff to the government was reaping the return selling on television frequencies for new video mobile phone technologies.

Economic benefits over 20 years are estimated at $1.1 billion to $2.4 billion.

Some viewed ad-free TVNZ 6 and TVNZ 7 as the foundation stone for public service non-commercial TV.

But Kearley's comments and developments show that if that was ever an option it is not now.

On Monday TVNZ 6 local shows shifted to 7 and 6 went off air.

From March 13 its frequency will re-emerge as "U" - an innovative commercial teen channel featuring reality shows and interactive content with direct links to Facebook.

From May preschool children's programming - once the highest calling of public television - will feature on the TVNZ Kidzone channel exclusive to Sky.

On Thursday, TVNZ chief executive Rick Ellis acted on widespread rumours that TVNZ 7 was also for the chop when funding runs out in June 2012.

The Government is widely expected to announce soon that TVNZ will have no role other than delivering a 9 per cent return on assets.

Kearley is clear the digital arm is part of the push for an even more commercial TVNZ, not an alternative to it. It is not clear yet if anybody else can maintain 7 as a viable channel.

Kearley, who grew up in Sweden and studied management in Britain, has a formidable CV in digital media working in several digital start-ups in Europe and working for MTV among others.

An intellectual at TVNZ - like a fish on a bicycle, quipped one TVNZ insider - after joining in 2006 he was initially removed from TVNZ's fervent chase for advertising dollars.

Not now. He is confident "U" will work where previous attempts at youth television have not.

Digital TV succeeds by low cost, low revenue and high margin businesses as part of a suite of channels that can boost profits.

There is an ad market for the "U" youth audience but Kearley says the state broadcaster's future is in pay.

TVNZ could leverage off the success of its ad-funded channels TV One and TV2.

How successful has TVNZ's digital arm been so far?

Kearley says there is no cross subsidisation from the rest of the business, but TVNZ accounts are opaque and it's impossible to tell.

Kearley's definition of success so far is about name recognition not ad revenue - much more nebulous than the "bums on seats" calculations for traditional media.

The TVNZ strategy is if you can't beat Sky TV join it, after realising that it could not convince the National Government to amend its Sky-friendly policies.

TVNZ once fought alongside MediaWorks against the growing influence of Sky TV.

TVNZ has largely walked away from TV3 owners MediaWorks and the free-TV lobbying body is now split.

MediaWorks TV chief executive Jason Paris was formerly an architect for TVNZ's digital strategy and agrees with much of it.

MediaWorks is showing its digital channels on Freeview only, and Paris argues TVNZ has been too quick getting close to Sky.

"They are right to do it, but they should have waited until the switch-off for analogue signals," he said.

TVNZ digital channels boosted Sky when the free-to-air sector should be encouraging people on to Freeview.

Freeview was once a free to air bulwark to slow Sky's growth.

But it has a secondary role in TVNZ's digital strategy.

Kearley says: "We still support Freeview - but we are not going to launch channels that we cannot make money from.

"We are a commercial organisation and shareholders have made that clear and we try to deliver dividends. That is non-negotiable.

"It has yet to be proven content would boost uptake for Freeview," he said.

Meanwhile, he says Sky is not waiting for TVNZ digital channels as it increases its basic package to retain customers.

"Sky gets 50 pitches a year for new channels internationally - if we are not successful someone else will be."

Which raises the question of why taxpayers own a broadcaster whose focus is increasingly on pay-TV and profits.

Broadcasting minister Jonathan Coleman says TVNZ is getting back to returning the Government a good dividend.

Kearley says again: "In the end we are here to make money."