Skip to content

David Aspinall

David Aspinall, Chief Operating Officer, Seven Network

Thanks very much Mark, and thank you for inviting me on behalf of the Seven Network to speak today. A very interesting topic: 'how do we pay for all this, and even make money?' But I think there is one further point that should go in the title and that is: how to pay for all this, or even make money or do we reduce our costs by embracing digital? I think that's one thing a lot of people in the industry have not really embraced, and something we may speak about and share with you today.

So where are the costs of free-to-air television broadcasters? Well, the cost of digital transition for the digital broadcaster is extremely high. Broadcasters are spending over $1 billion to go digital. I can assure you that every board meeting I attend and put up a paper for digital equipment is like any board meeting where you ask for capital expenditure. You get excruciatingly examined as to why and how and where the revenue will come from. Unfortunately in most instances there is no revenue, but in this case maybe there are cost reductions. As for any business, one of the biggest issues from the free-to-air broadcasters is how this expenditure is to be recouped; and we have had to do a number of things to actually get to where we are today.

We have had to upgrade all our transmitters. We have had to digitise our production studios, which includes our cameras and control rooms. We have centralised our presentation in the case of the Seven Network in Melbourne at the Melbourne Broadcast Centre. We have obviously had to re-equip all our news and current affairs operations, and in the case of the Seven Network we have in our operational areas become a tapeless operation and gone totally server-based. In January 2004 we won't even have any tapes in the field for our newsgathering, as we have embraced the digital optical disc option. The only tapes we will have in our operations will be archival material.

Additional costs include, for example, obtaining HDTV dubs from our overseas suppliers who seem to think high definition is different in some way from standard definition. We argue against that. At the same time we have invested in this state-of-the-art digital broadcast centre in Melbourne, and we have all the cost issues that go with it. Now we have been, I believe, fairly clever in planning our broadcast centre. Whilst there has been cost, if you excise the building from the cost and just look at the equipment for presentation for example, our costs savings are equivalent, or greater than, the depreciation costs of the new equipment. So it is in fact cost neutral in that particular case.

On top of this, free-to-air broadcasters continue to pay to the government licence fees over $200 million per year, calculated as a percentage of our gross revenue irrespective of profitability. Furthermore, the whole free-to-air industry spends $700 million per annum on Australian content, and we employ more than 5,000 Australians. This contradicts claims by some of other industry players that we are getting a 'free ride.' We are not getting a free ride. It is anything but that. Our shareholders are the people who are paying. This contradicts claims by some other industry players that we are somehow transmitting our service over thin air, free of charge. What is free, are the programs we provide to as many Australians as possible.

How do we pay for our digital transition, or will the consumers pay? Well, for some of the expenditure the answer is that we will not get any extra revenue in the immediate short term. It could be argued that in the long term (and Anne Parsons might have some views on this) there may be some additional revenue. But we do not see that in the medium to short term. Digital transition is no different in some respects from the change in technology for the television industry from colour or from film to tape. There was a blip when colour started, and Anne can probably tell you what sort of blip it was. There was a slight increase in revenue, but it also coincided with a very high inflation rate in this country which was fuelled by political instability at that time. We saw advertising budgets go through the roof, and we had a ball in the free-to-air television industry: we racked up 15 per cent every year, year on year. It was fun.

Unfortunately, it doesn't happen today; particularly in this low-inflation environment. However, digital broadcasting does offer opportunities for greater efficiencies, as I have just said, and some new revenue streams such as SMS and similar sorts of things, which have been floated and discussed in this seminar. The first challenge that we have as a free-to-air broadcaster is to get people to take up a large enough set top box population to support any revenue opportunities that may exist, from the clients or other streams of revenue. The value will be a critical issue here. The viewers must feel that the content or quality of what they are receiving justifies the price.

Putting my Seven Network hat on here, rather than free-to-air television industry hat, we really do have difficulty in accepting that the people are going to take up the purchase of set top boxes simply to get high definition television. We would argue very strongly that standard definition and high definition are very similar to the majority of viewers who buy that sort of equipment. I do not think that the price difference is justifiable to them. That's why we have argued at the Seven Network strongly that we do not mind transmitting 20 hours a week of HDTV, but we do believe that multichannelling is an option that will drive set top box sales, as opposed to simply relying upon better pictures. Unfortunately or fortunately, whichever side of the fence you sit on, the 4 x 3 analogue system we have is a very high quality system. Even to get people to move from the analogue to the digital is difficult when you go and have a look at what they have to pay to get that different technology. Sure widescreen will drive some people, but just pure picture quality is pretty difficult for the average consumer to really justify.

There will be some viewers, as I have said, who will be attracted to better picture quality and better sound quality. We are already seeing those people emerging with over 90,000 set top boxes, at the best we can estimate in the market place. However, this is not sufficient on its own. The digital set top box sales are currently tracking the early years of the DVD take-up. As with DVD, the combined factors needed to drive this whole thing are price and the content availability. We do not believe that just the pure free-to-air HDTV picture will be sufficient, other drivers have to be there. This is the primary reason we support the introduction of multichannelling.

The Freeview experience in the UK, with over 1 million new boxes in the market within the 12 months since the launch, speaks for itself. Consumers are prepared to pay to go digital if they can see the value proposition for their money. So to spend $5,000 or $6,000 to simply receive what you are currently receiving doesn't really attract people to rush out and run their visa card through the machine; although the Reserve Bank thinks we are doing too much of that anyway.

Multi-channelling is an obvious strategy to drive the digital take-up; and that's something that acknowledged by the ACCC in its recent report on emerging market structures. Currently we can't provide multi-channelling services, but Seven is backing up our views on content as a driver for the take-up of our forthcoming Rugby World Cup coverage. In addition to our top-quality widescreen coverage, we will provide at least two additional channels of enhanced content, not multichannelling, but enhanced content during the event as well as interactive content, primarily using SMS as a backchannel. Manufacturers and retailers are pretty excited about it, we have talked to a number of them.

The experience with interactivity also provides lessons on how consumers perceive value in the television environment. They are prepared to pay for greater involvement provided that the interactive content enhances and does not take away from their television experience. This is something that the free-to-air broadcasters must be very mindful of. We should not encourage people to turn off free-to-air and go to something else. So we have got to be very careful how we get that mixture right.

The revenue implications? Well, free-to-air will remain the primary vehicle for advertisers for the foreseeable future. The primary digital service is the same as the analogue service during the current simulcast period, and will replace it after analogue is switched off. Obviously there will be some debate as 2008 gets nearer about the switch-off of analogue. I think it would be a pretty game government to turn it off if there wasn't in excess of 90 per cent of the audience that had taken up the digital experience. I think that that would be a difficult thing for any government to do.

Experience in the US and the UK shows that free-to-air networks have retained their positions as the dominant advertising medium. In the US after 24 years and with the audience share the same size as FTA, pay TV channels combined generate only 10 per cent of the total advertising revenue available in the main media. This is to be compared with 30 per cent to network television, a figure that has remained basically unchanged since pay tv started in the US.

The growth rate of FTA advertising remains strong in those markets. We do not believe that enhancements and interactivity will cannibalise primary viewer revenue streams. . Current thinking around these services is to use them as a viewer retention strategy. On this basis, revenues derived from them are expected to be incremental, and I stress that word incremental, and not competitive with the primary service.

Multichannelling will be the same. Some have argued that there may be some revenue impact if this is introduced, but we do not agree. We are already in a multi-channel environment. We cannot ignore this, and must develop strategies to retain viewers and revenue in the face of this development.

In the same way that fragmenting audiences in the US have not reduced the position of network television, we do not believe free-to-air multi-channelling will be any different in Australia. The ACCC expressed some support for this proposition in its recent report to government, noting that the free-to-air advertising share has remained steady despite increasing pay television penetration in Australia.

Multi-channelling gives free-to-air broadcasters a means of keeping viewers in the free-to-air space as they increasingly demand additional content choices. It gives free-to-air broadcasters a mechanism to address the potential viewer erosion that will result from increasing pay TV channels. An analogy of free-to-air multichannelling is the growth of newspaper inserts. Every day there are more and more newspaper inserts being put into newspapers. Newspapers have been very successful in arresting readership decline by targeting specific groups through magazine-style inserts in colour; in a run-of-paper in some instances but some newspapers actually have them as separate inserts. They can be lifted out and last two or three days in the home, and they are not competitive with their main book. Free-to-air broadcasters can do the same.

How will production be affected? An interesting question. There have been some fundamental operational shifts in moving to digital, like learning to shoot widescreen, keeping key content in a safe area, new lighting and make-up techniques for high definition productions. However, the longer-term digital production and transmission should deliver greater efficiencies in production distribution. For example, it will be easier to re-purpose content into multiple formats.

Here is an interesting point. As you know, as of 1 July we ll have to start free-to-air with 20 hours a week of high definition. Well, if you talked to production people in December last year the world was flat and they were all going to walk off the edge unless they had an extra $30,000 an episode to produce in high definition. I can assure you that it didn't happen; they didn't fall off the edge. We are on the air with high definition programming, it is being shot in the same studios, in the same sets. Yes, they had to sort of fix a few of the sets up because they had some cracks and a few things like that, but basically they are shooting in the same place, with the same people, with essentially the same lighting as for standard definition. And I think that's where we have been lucky that we went to standard definition for a couple of years and then made the next change.

The primary source of funding for TV networks is advertising. It will become increasingly fragmented, and we recognise that. In response, as TV content producers we look forward to new co-financing opportunities and new revenue streams to support program production. We are also seeing some interesting new developments such as the NBC mini-movie initiative designed to be interspersed with advertising content in order to retain viewers during advertising breaks. This is not specifically a digital strategy, but a response to the changing environment digital has made possible. Initiatives such as these and major shifts such as multichanelling will be the keys to enabling broadcasters to pay for their digital transition and possibly even to make money in the future.

«  Back

^  Top of page

Network Insight sponsors include:

Click here for full sponsors list.