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The Media Shakeout: Can CBS keep the Wolves off Radio

So, those long-anticipated media ‘reforms’ have got the final tick and are now etched in law.

Given their new-found freedom to scoop up additional media within their existing markets, the big boys will soon be up for the hunt.

The wolves will be starting to circle, looking for likely prey.

Darwin’s Law, hard at work, I guess.

Still, it never ceases to amaze me why major changes invariably bring with them unintended consequences.

Take the recent entry of CBS into the Australian media mix.

None of the incumbent operators saw that threat on the horizon; seems they were completely blindsided.

Most of the big players were too busy looking to these media amendments to buffer them from those troublesome digital interlopers, like Netflix, and, to ponder how they could monopolise more of Australia’s traditional media.

Gosh! It was nearly a perfect plan too. What went wrong?

Now, those same players have been jarred out of their comfort zones and have a real threat to contend with.

The unexpected arrival of CBS, is about to signal ‘game on’ for Australian television, and chances are, it won’t be a pretty sight.

While many TV executives are still shaking their heads asking “how could this ever have happened?”, the fallout may, in fact, be good news for the commercial radio industry.

To understand why, you need to look back over the past twelve months.

The recent legislative changes are another once-a-decade gift to the money men of media from our pandering politicians, who will, no doubt, be looking for payback when the next election comes around.

If that was their primary motivation, I think Malcolm and his pals are still living in a bygone era.

Today, there is no loyalty or obligation to repay favors in the minds of major media owners or executives; only expectations that their bidding will be done.

With a highly fragmented Senate, getting the numbers together for these amendments was no easy task for the coalition this time around, particularly as the major media players kept increasing the pressure and tightening the thumbscrews.

Two amendments were always high on their agenda.

Tossing out the rule restricting ownership to 2 out of 3 forms of traditional media in any single market, and, removing the limitations that stopped a network covering more than 75% of the population.

While all this was being negotiated in hushed tones in huddled groups in the halls of Canberra, a new threat to media stability was about to fester; the parlous state of the TEN Network and its finances.

Bringing this weeping sore to a head, two of TEN’s biggest shareholders, Lachlan Murdoch and Bruce Gordon, withdrew their guarantees underpinning the network’s borrowing facility.

This standoff looked to be a game changer.

TEN’s directors were obligated to put the network into administration to avoid insolvent trading.

Enormous pressure descended on the government – the threat of a high-profile disaster was looming.

As shareholders, both Murdoch and Gordon had lost a significant amount of money in TEN; reportedly in excess of $100-million each.

Clearly, neither was prepared to take this situation lying down; they were looking for ways to salvage whatever they could.

Within a few days, Murdoch and Gordon announced a plan to rescue TEN.

Not surprisingly, they would come out of it as the new owners, but it was all predicated on the media amendments passing the Senate.

For the dynamic duo, this was a high-risk play, and having shown their hand, it left them vulnerable.

The rest of the industry looked on in anticipation of a potential breakthrough.

Surely, TEN’s dilemma would push the ‘undecided’ senators across the line, but the hold-outs …. Pauline Hansen and Nick Xenophon … were unmoved; they wanted more concessions.

TEN was seen as ‘too big to fail’ and a Murdoch-Gordon buyout appeared the only option as the horse-trading in the Senate dragged on.

Both of these men have exceptional track-records in the media business.

As savvy businessmen, they know that most profits in media are made in the buying, and, if their offer was accepted, they’d be picking up TEN, in comparable media terms, for little more than the price of a hotdog.

Lachlan Murdoch had previously bought what is now Nova Entertainment from the UK-based Daily Mail Group reportedly for just a fraction of its book value at the time.

With Cathy O’Connor at the helm of his radio operations, the network has become incredibly successful and is an industry leader with its Nova and Smooth brands.

As the days turned to weeks with the media reforms in limbo, the Murdoch-Gordon buyout plan was viewed as ‘a given’ by just about everyone; everyone, that is, but TEN’s receivers, KordaMentha.

In business, timing is everything.

Without those political amendments safely in the bag, it now appears that Lachlan Murdoch and Bruce Gordon played their hand a little too early.

The protracted delays in the Senate gave KordaMentha time to go out and look for other potential buyers.

They found that the US media giant, CBS, was not only interested, but ready to make a serious offer, and most importantly, that offer didn’t need any changes in the media laws for the deal to go ahead.

You see, back in 2007, again pressured by major television interests to provide yet another ‘vitally-needed rescue package’, the coalition rammed through media law amendments to allow greater foreign investment in Australian media.

This cleared the way for the commercial networks to generate buckets of cash by attracting international investors, like KKR.

Ironically, those previous amendments of 10 years ago, jammed the door wide-open, giving CBS a free-pass to play in the local media arena at any time.

The Australian TV networks have now been left with nobody to blame, but themselves.

As it turned out, the offer, from the international media giant, was warmly welcomed by most of TEN creditors, including the staff of the ailing network.

Having operated under financial austerity for several years, staff members were worried that the network’s future under any local buyer may simply be a case of ‘business as usual’, without any substantial cash injection or innovation.

‘Business as usual’ would have been the ideal situation for TEN’s two commercial competitors.

They could have simply sat back thinking about which radio assets they would gooble up first, once they had those pesky amendments neatly tucked away.

Without any real competition from TEN, the other networks could have happily sat on their hands offering nothing more than mediocre programming.

But, not now – that horse has bolted!

With the threat of CBS, a world-class media competitor, the future is far less certain.

So, how does Australian commercial radio stand to benefit from CBS taking over TEN?

Well, as it stands with the newly-passed media amendments, the future of Australian television, radio and newspapers is inter-dependent; anything could be up for grabs, from anyone.

What it will come down to is, who’s going to start the ball rolling and who’s got the most money.

However, should CBS come in with all guns blazing, treating Australia as a highly competitive, first-world television market, and not as some back-water, then higher quality programming on the TEN Network could well be the order of the day, and this could dramatically ‘raise the bar’ industry-wide.

TEN could become a benchmark and a truly competitive force.

To try to secure their respective market shares, both Nine and Seven would have to invest heavily in the types of programming Australian viewers really want to watch and top quality programming costs money.

Today’s culture of slashing costs across television networks to satisfy demanding shareholders, would have to take second place behind the funding of programs designed to attract viewers and retain advertisers.

Whinging about Netflix and Foxtel will no longer get the job done.

Getting free-to-air production standards up and remaining competitive will be expensive and ongoing.

As a result, commercial television networks may no longer have the free cashflow they were planning on for those post-amendment radio acquisitions.

Scooping up the nation’s commercial radio networks, simply because they can, may no longer be a viable option, and given CBS’s presence, the networks will, no doubt, be more than aware of this.

I have said in previous articles that Australian radio networks will be the poorer if television stations or newspapers buy them up, then start to ‘rationalise’ large numbers of radio professionals, so the accountants can justify the acquisition costs.

Concern within other networks of what they may need to do to counter CBS, could well see the commercial radio sector being left alone, free to continue growing, and, could liberate radio staff from the constant threat of a corporate takeover and the unpleasantness that goes with it.

It occurs to me that, over recent years, Australian free-to-air television has devolved along two ideological lines, neither of which is great news for people working in that industry nor their viewers.

One of those beliefs is that media businesses can grow simply by continuously cutting costs.

The other is that program standards don’t matter much because the great unwashed, you and me, will accept anything served up to us as long as there’s no real competition.

Both of these strategies are flawed; yet some Australian television networks appear to be continuing to work that way.

My assessment is that this approach is diametrically opposed to the way radio has evolved over the past decade.

Almost all radio networks are highly competitive and conscious of their program standards, continuously striving to improve themselves; the results are evident in the way radio has come to prominence in recent years.

The two media cultures are not aligned, and, it doesn’t take a genius to understand, that these two cultures could never harmoniously co-exist.

Now, through its entry into Australian television, CBS could, albeit unintentionally, turn out to be the savior that commercial radio needs, simply by keeping the wolves at bay.

While I’m sure that Lachlan Murdoch and Bruce Gordon are, at present, less than thrilled with the outcome of their bid for TEN, in the end, they may have saved themselves many sleepless nights.

Both have established radio interests, which right now, are regarded as ‘Christmas in Paris’ when it comes to the traditional form of media you’d most want to own.

Relatively low acquisition costs, lower operating costs and a higher EBITDA percentage on turnover than any other traditional media; who could ask for more?

Sometimes, you’ve just gotta be satisfied with the hand you’ve been dealt, until the next opportunity comes along.

In a business as volatile as media, it inevitably does.

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