Will this year's budget prove to be a lifeline for TEN?

Will this year's budget prove to be a lifeline for TEN?

The proliferation of online streaming services is placing significant strain on the business model of the traditional broadcast TV networks and TEN’s recent half year results reflect this.

Although revenue was slightly higher than the prior corresponding half, net loss for the period was -$232.2m. The result highlights the difficulties facing the sector.

The decline in the free-to-air advertising market was 5.6% for the period, surely as a result of consumers switching to online services in place of free-to-air.

This statistic alone indicates that the free-to-air networks are facing strong headwinds.

The net loss for TEN for the half includes an impairment charge of $214.5m for its TV broadcast licence. Although this is a non-cash charge (which means that TEN has simply reduced the value of the licence as held on its balance sheet), the impairment indicates that the cost of these licences is now too high.

TV licences are administered through the Australian Communications and Media Authority (ACMA) and a levied as a percentage of the TV networks revenues.

Although the licence fee was reduced to 3.375% in 2016 (from 4.5%) this amount appears to still be too high with TEN predicting a loss of $30-40m for the 2017 full year absent any further reduction to TV licence fees.

Considering that online services don’t have to pay any licence fees, they have a significant advantage over the broadcast networks in this regard. With the Federal Budget due to be released tomorrow (8 May), there are rumours that the broadcasting licence fee will be abolished in its entirety.

This would provide significant cost savings to TEN and may allow it to regain profitability although it would incur a write-down of the remaining value of the licence (again, this wouldn’t represent a cash outlay but rather just an accounting adjustment).  

TEN intends to increase its spending in new content as the competition for high quality TV series heats up with television costs expected to increase by mid-single digits for FY 2017.

TEN’s latest series of ‘The Biggest Loser’ was a flop, which was somewhat of a surprise considering the past success of the show.

Pressure to generate new content is fierce as many of the online streaming services are now producing and marketing their own content, some of which is proving to be very successful. This model gives them freedom to show their content worldwide without worrying about licencing restrictions, and they have significantly larger budgets for their own original content.

There is little doubt that TEN is facing an uphill battle but the company still has a fighting chance.

A further cut to the broadcast licence fee (which is likely to occur at some point in the future as it becomes clearer to ACMA and the government that the market value of broadcast licences are dropping) should help TEN return to profitability.

TEN has strong brand recognition and already has an online presence (through Tenplay) which it will need to further leverage to generate future growth.

Having said that, the company remains solvent purely at the discretion of its largest shareholders in James Packer, Lachlan Murdoch and Bruce Gordon so it remains no sure bet to continue as a going concern if the confidence of these three is lost.

The TEN share price is up approximately 20% today on the rumour of the abolishment of the broadcasting licence fee.

Ready to chat about your portfolio? Get in touch today via email: william.oloughlin@rivkin.com.au or by phoning +612 8302 3633.

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