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TVNZ full-year profit drops 89% on Disney contract writedown

TVNZ full-year profit drops 89% on Disney contract writedown, weaker sales

By Pattrick Smellie

Aug. 31 (BusinessDesk) - State-owned Television New Zealand posted an 89 percent drop in full-year profit after taking a $12.4 million writedown on the value of an "onerous" contract for content from the Disney studio and some $4.5 million of restructuring costs.

Profit fell to $1.39 million in the year ended June 30 from $12.7 million a year earlier, the Auckland-based broadcaster said. Sales fell 2.5 to $316.5 million while operating expenses, excluding the Disney cost, were little changed at $286.7 million.

Advertising revenue fell to $299 million compared with $303.8 million the previous year, although chief executive Kevin Kenrick told BusinessDesk that a falling trend in ad revenues had reversed in the second half of the year.

"What we've had is a year of restructuring and renegotiating content agreements and setting things up for what we think is a more sustainable future," he said. The TVNZ board has yet to conclude discussions with shareholding ministers about what level of dividend, if any, the broadcaster should pay to the government.

"TVNZ, from an operating cash flow point of view, is in really good health. We don't carry debt. But we also need the ability to hang onto resources to invest in growing our future," he said.

The Disney contract has two years to run, so TVNZ decided to take projected losses up-front. Shorn of that cost, annual programming costs were about $180 million, or 63 percent of TVNZ's total annual operating expenses last year.

Earnings before interest, tax, depreciation, amortisation and changes in the value of financial instruments fell to $17.4 million, compared with $36.9 million in the previous financial year.

"With improved revenue and cost trajectories, TVNZ is on track to grow ebitdaf in the year ahead," said TVNZ chair Therese Walsh in a statement.

While the Disney contract was a loss-maker, Kenrick said key content contracts with ITV and Warner Brothers were in better shape. The ITV contract was renegotiated "to a sustainable position" during the year and TVNZ was "very pleased with the yield" on its Warner deal.

"We're working together to migrate the focus towards paying more for digital (rights) and less for linear (scheduled free-to-air TV), as audiences migrate," he said. "The big shift occurring globally is that the construct used to be output deals, so you would commit to a studio and you would take their total output."

Those contracts also tended to be based on geographic exclusivity, which video-on-demand services and widespread content piracy had eroded.

"Content negotiation is moving from backing studios to more of a spot market buy on individual programmes and yet there's also opportunity to have preferential deals with studios that you back," Kenrick said. "We're really pleased that we've been able to shift this shift in industry dynamics without incurring losses and doing it in a way that sets us up for a sustainable future."

In the year ahead, TVNZ would be investing "aggressively" in its TVNZ on Demand offering. Changes would include a shift away from 'catch-up' viewing rights on popular series to carrying series in their entirety.

Investment in local long form video content would also increase, as this was TVNZ's greatest point of difference with global video on demand services and was also proving more capable of attracting advertising revenue than short form video, where YouTube dominates and advertisers struggle to gain audience attention. There were no plans for a subscription-based video on demand service because small local players like TVNZ could not compete against deep-pocketed competitors such as Netflix, which are "incurring massive cash losses" to build global audience share.

TVNZ's news operation remained expensive to produce but a "very strong contributor for us at a yield level".

Kenrick said there appeared to be growing skepticism among advertisers about the value of digital media measurements of value and a growing belief that TV remained an important channel for brand-building.

"The truth is that video-on-demand and linear TV are complementary," he said. "They play very different roles and I think people are starting to see that TV is very, very good at building brands."

With TVNZ on Demand showing cash positive results, TVNZ would also be placing more bets on online offerings, including recently starting to offer products on the Chromecast platform, talking to Apple TV, and looking to simplify viewers' ability to search for TVNZ's online content.

Kenrick said the proposed review of copyright law next year was "overdue and really critical to the future of the industry. The question is whether it's still considered to be a priority (after the election)," he said.



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