Economic surplus

Economic surplus

Is free-to-air television obsolete? Ask the new Channel Ten CEO.

What is the future for Channel Ten? wikimedia

As Channel Ten hires its fifth CEO in two years, does free-to-air television have a future?

If we take the new CEO’s comments at face value, the answer appears to be ‘yes’! Channel Ten’s new CEO, Hamish McLennan told the Australian Financial Review that “the embattled free-to-air network is fixable”.

But if we look at the strategy that McLennan is adopting, the real answer appears to be a firm ‘no’.

McLennan has made it clear that Channel Ten is going to change its focus from a young to an older demographic. The culprit appears to the Internet. According to McLennan Channel Ten “had veered too far away from an older audience towards a generation that is increasingly not watching television on the free-to-air networks”.

But if McLennan is right, then the future for all free-to-air networks looks grim. If the Internet is a successful competitor, particularly for younger viewers, then the networks risk fighting over an ever smaller viewing audience.

It’s eyeballs that matter

Commentary on the change at Channel Ten has focused on ratings. These have been poor. As the AFR notes:

“Ten has been smashed in the ratings this year by rivals Seven and Nine, with its share of metropolitan ad revenue hovering just above the 20 per cent mark – a historically low level.”

This is backed up by recent ratings figures that show Channel Ten well down the list in terms of top rating programs.

But ratings, whether in viewer share or comparative viewer numbers on particular days, miss the point. What matters for the profitability of Channel Ten – and all other free-to-air television networks – is not their share of ratings but the number and ‘quality’ of eyeballs that they deliver to advertisers.

Free-to-air television makes its money by selling airtime to advertisers. The more viewers that a network delivers, the more it can charge advertisers.

But to paraphrase an old television ad, ‘eyeballs ain’t eyeballs’. Advertisers are trying to sell their wares and this depends not only on the number of viewers but the demographic. There is no point trying to sell European cruises to a young audience or street-wear to an audience of retirees.

So not only has Channel Ten failed to deliver absolute numbers of eyeballs, their focus on a younger demographic appears to have failed to deliver the types of eyeballs that advertisers value. As the Business Spectator notes:

“Ten’s share of the metropolitan TV advertising market has fallen from 27 per cent to about 21 per cent since … the start of 2012, while the network’s advertising revenue dropped 23 per cent in the six months to December, representing a $100 million drop in revenue.”

Put simply, the young demographic that Channel Ten has focused on generally are not watching television and those who are do not buy what the advertisers are selling.

This pressure is going to increase over time as more viewers migrate to the Internet, particularly as the NBN (or its alternative) allows the Internet to compete using high quality streamed video. And the problem is going to affect all networks.

How will the free-to-air networks respond?

So what do the free-to-air networks do? First, they can try and embrace the Internet and use it as an extra source of eyeballs. All the networks have done this to some degree. However, with the exception of the ABC’s iview, the networks’ Internet offerings are clunky and are likely to be overwhelmed by material gained over the Internet through ‘other sources’.

These other sources may be illegal (i.e. pirated video) or semi-legal (e.g. from overseas network sites using a virtual IP address to overcome geographic restrictions).

Over time, these other sources will expand. Indeed, in a decade, it is likely that we will get overseas programming directly from the source network. So an Internet-based model dooms the local networks to rely on local content and there is simply not enough of that to go around.

Alternatively, the networks, or at least some of them, can die. To the degree that free-to-air television becomes obsolete, the networks will fight out a war of attrition over an ever diminishing audience. In a decade the free-to-air networks may have gone the way of videocassettes. One network may survive, although this is likely to depend on government funding as a ‘free’ service to ‘older people’ or those who have a limited ability to use the Internet.

Third, the free-to-air networks can try to change their funding model and use government muscle to prop them up.

For example, in the UK, the BBC has been largely funded by a system of ‘television licenses’ since 1946. License systems are common in Europe and Australia had a system of television licenses until 1974. Expect the free-to-air television networks in Australia to dust off their history books and to argue for public funding as ‘essential services’ even as their audience diminishes.

The death of Australia’s free-to-air networks will not be pretty. No industry likes to become obsolete. However, if Channel Ten’s new CEO is correct, and if the networks cannot find a new business model, then that is the future.