Humbler Days On Hobson St : TVNZ in Hard Times

An interview with Rick Ellis, CEO of Television New Zealand

by Gordon Campbell

On the first day of this month, television in New Zealand turned 50 years old. Hurrah. We’ve all had so many good times in front of the glowing blue rectangle. Let it also be noted however, that just one week before that happy milestone, TV1’s primetime news show on May 26 was asking us to consider whether having a “Hug A Ginga” day might damage our children, at the same time as its TV3 equivalent was carrying an item about whether a pastor should be prosecuted, for erecting in front of his church some Tui billboard look-alikes that carry a theological message. Love it or hate it, this is the television system we’ve now got.

Whether we’ve still got a state television broadcaster for very long after the next election remains to be seen. Right now, TVNZ is blinking its way back into daylight after a recession that tore a hole in its ability to earn revenue just when the Key government had made it perfectly clear that making money was to be its only job. What do you do with a money-making machine that wasn’t making money? You might consider getting rid of it.

Having sold it of course, we could well come around to feeling deep regrets about doing so. See Telecom, BNZ etc. (Selling TVNZ seems especially gratuitous given the fact that, according to the Budget, there is no pressing debt-driven reason for the state to start selling the silverware.) Meanwhile, it is the karmic lot of current TVNZ boss Rick Ellis to have been the CEO of state television during its golden years of excess in the 1990s – before returning to try and shore up the organization as things got increasingly bleak in the latter half of the 2000s, and in the wake of Ian Fraser’s less than illustrious period at the helm.

On Wednesday May 19, Werewolf editor Gordon Campbell spoke to Rick Ellis at the TVNZ Network Centre on Hobson St., about the current position and future prospects at TVNZ.

Campbell : TVNZ’s revenue was down 16.6 per cent for the six months to December By how much has the financial outlook for the company improved since then?

Ellis : Well, up to December 2009, we suffered five quarters of year on year decline. Then January/February we had basically zero decline. So [it was] flat, year on year. Then March, April, and May – the month we’re in now – we’ve had a very good lift. We’re not seeing a return to 2008 levels of revenue. We’re back to about 2003 levels but nevertheless it is growth, year to year.

Are you still predicting a loss for the full financial year?

We’re not predicting an operating loss now because of the improvement in the revenue position in March through June. So when I last discussed this it was back in the January timeframe, the market was still looking flat. but with the growth we’ve now got, I’m expecting an operating profit for the year.

So if the financial situation is improving, when can the government expect to receive more than just a token dividend?

Well, dividends are a percentage of net operating profit, and we’ve traditionally set that at 70 per cent. I would like to think that there would be an improvement in dividend this year over last year – that still remains to be seen. But as we look out over the next three years 2011, 2012, and 2013, we’re seeing a progressive improvement.

When might you hit that nine per cent return on investment that government ideally expects ?

Its probably in the order of around three years away.

With the revenue improvement that we’ve seen this year – and looking at it from the vantage point of the viewer – will that translate into anything different on screen, in terms of commissioning or programming ?

Clearly, the impact on our revenues – you’re talking about a $40 million dccline in revenues last year, over the prior year – had an impact on the level of local content that we were able to commission. So, we’re being very careful about not impacting the prime time schedule for local content commissioning, but there have been some reductions and there continue to be so, in off-peak local content.

There was a lot of publicity last year about job cuts, and that you’d paid 80 or more staff. Yet there has been a media report that your staff numbers have fallen by only 19. How come?

I don’t know where you get that 19 from.

It was a calculation done by Newstalk ZB..

Well, that’s not correct. I don’t have the exact numbers on me, but if you go back three years we were sitting at about 1,300 employees. Today we’re down below 1,000 in terms of full time equivalents. What has changed is that particularly in a number of operational areas of the business, we have moved to a casual and part-time construct in some areas. So we’re now reporting in terms of full-time equivalents which includes those sorts of positions as well…the labour costs are significantly lower. But at the end of the day, I’d much rather prefer to be in a growing business, where we were creating new jobs..

It must be dispiriting as CEO, to see that any revenue gains you make end up being paid to government and not re-invested say, in the digital arena where the future of the company will be decided ?

Well, we’re a commercial business at the end of the day, and we don’t expect the taxpayer to subsidise us, per se. We have access to contestable funding from New Zealand on Air, as other broadcasters do. But the taxpayer has $185 million of equity invested in this business, so they should expect a return from it.

Reportedly, your savings target this year was $25 million. At this current point, how much have you managed to save?

We set ourselves a target over a two year period of around $25 million at the beginning of [calendar year] 2009. Then the recession really started to impact on us. Its fair to say at this time in May, we’re pretty much on track. That’s a run rate. I’m hoping that with the growth rate we’re seeing now, we can start to invest back in the business. As any businessman will tell you, the business environment is still pretty fluid.

For some years while it still had charter obligations, TVNZ’s cost structure used to be unfavourably compared to that of TV3 or of Maori Television. Since you no longer have charter obligations, is that now a fair yardstick ?

I’m not aware of any comparisons between the TVNZ cost structure and the TV3 cost structure, and the MTS cost structure.

Ian Fraser talked about them

Well, I’m not Ian Fraser. We tend to benchmark ourselves against commercial broadcasters in other markets – such as Australia – and if you start to benchmark on DAR- EBIT or return on equity comparators, that tends to be what we compare ourselves with. We’re fundamentally a different beast, if you like, than TV3.

That’s what I’m trying to get you to express. What different functions do you perform compared to TV3, that makes a like cost structure inappropriate?

Oh gee. There’s a substantial number of functions we perform. If you think about remote transmission here in New Zealand, transmission of programmes into the Pacific, our captioning service…If you think about our Maori programmes, Te Karere, Marae, Te Huia ..and then you think about the digital service TVNZ6 and TVNZ7 – versus a TV3 plus one [free to air channel] model. Its just so bloody obvious.

Yet since you don’t have charter obligations, it must mean that you are now reading the ratings somewhat differently – in that those 5 to 18 year olds and over 50s that were important to your charter role are not of much interest to many advertisers. Does TVNZ dominate TV3 News in the 18-49 segment in Auckland that advertisers value the most?

Let me just make a general comment about ratings per se. Clearly we’re very focussed about getting the maximum performance, particularly out of our prime time schedule. Although interestingly, the morning schedule – globally – is starting to show some real growth and growth of interest from advertisers also. But what we’re focused on is the yield from those ratings, because at the end of the day we’re a bottom line business. At the end of the day, it’s the profit that matters.

Exactly. And it looks like, in the segment of most interest to advertisers, you are much more level pegging with TV3 than when you were simply measuring those 5 + ratings which were more relevant in a charter context, but not so important in a purely commercial arena.

The demographics we are focused on is 25-54 for TV1 and 18-39 for TV2. The 18-49 demographic is the one for TV3. We’re very happy with the level of demand, and with audience levels in both of our key commercial demographics.

The question was, though – how are you faring in 18-49 ?

Well, I’m not focussed on 18-49. When we go into the marketplace the key demographic we’re selling is the value of that 18-39 [for TV2] is the primary demographic that we’re selling. An advertiser looking for a broader demographic will go [on TV1] to 25-54…

And in that way, do you use TV1 and TV2 together, in something of a flanking manoeuvre against TV3?

Flanking ? I’ve not thought of it in those terms. We’ve been in those demographics for a long, long time.

Overall then, are you happy right now with where your TV1 news sits in relation to TV3, in terms of the commercial value of that bulletin?

Absolutely.

You talked about local content before. We know that local content tends to rate well, and advertisers like that. Yet since it also costs more to make local content than it does to buy foreign programmes, is local content cost efficient, overall ?

Well, I’m not sure about the term ‘cost efficient’ per se. New Zealand local content on a cost per episode basis [compared to] other markets is very, very cost efficient. By the way, New Zealanders love their local content- routinely, you’ve got 15, 16 of the top twenty programmes are local programmes.

But are they a loss leader?

They cost on average – depending on what genre you look at – six to twelve times on average more than an equivalent programme in an equivalent genre of internationally procured programming. But as long as we’ve got the right content in the right slots in the schedule on ONE and TWO, particularly in peak time, they do yield positive.

Right. So prime time local content pays its way?

Pays its way, mostly. Its generally the big events – like a Dancing With the Stars for instance, that don’t make money. So when your business is going through challenging times, as it was during the recession of 2009 then – unfortunately – those big shows that don’t make money are the first to go.

So if New Zealand on Air funds get flat-lined or pared back, will the same levels of local content that we’ve seen of late on TVNZ still be affordable?

We greatly value the funding that we’re able to compete for from New Zealand on Air. Clearly, if there was a reduction in funding..then there would be an impact on local content hours. No doubt about that.

Given the degree of funding uncertainty, does the government need to set an obligation on TVNZ to screen local content?

The National government hasn’t imposed local content quotas or levels on us. But at the end of the day – going back to my earlier comment about the number of local programmes that are typically in the top 20 – if we’re focused on our audience and what our audience loves and wants and therefore what sells to an advertiser, then that drives a natural level of local content.

Obviously – which is why I asked you before about whether it is a loss leader. Yet conversely, if a particular form of local content is on the financial cusp and isn’t clearly paying its way –

Then its at risk.

Market logic ?

Absolutely. [Ellis then explains at length how PVRs and video on demand have greatly expanded the ways and times that local content is consumed, and can generate revenue.]

Presumably that was the logic behind TVNZ’s investment in TiVo last year?

Absolutely.

Because there were those who felt you’d overpaid for technology that is arguably in its sunset phase. What’s your answer to that?

Well, PVR’s are just at the start of their accessibility in the New Zealand market place. So its hardly in the sunset.

I meant TiVo as an example of that technology.

We believe that TiVo is the world-leading PVR device. If you take the Australian market which is a year ahead of us in terms of coming to market, it is consistently the No.1 PVR seller. We’ve every confidence in the future of it.

Is the sale and leaseback of TVNZ head office in Hobson St still a live option?

Sale and leaseback….? .(pauses) It hasn’t been discussed on my watch. The previous CEO, maybe.

It was still being mooted as a possibility during the depths of the recession, when it seemed there might be a need to sell the furniture. Are you still in talks with TV3 as to whether TV3 might shift into the TVNZ premises?

There has been market speculation around talks between TVNZ and TV3. Neither company has made any comment on them. And I’m not about to.

So the answer is “ No Comment” ?

That’s a “No Comment.”

At what point in future might we be able to shed daylight on this?

If I can make a general statement, I am a strong proponent of industry collaboration in non-competitive areas of the business, where it makes sense. If you look at the United Kingdom, the Red Bee playout platform has the likes of BBC, ITV, Channel Four , Virgin Media …a number of competitors effectively on the same playout platform. If you take services like captioning or audio description for example, it makes sense for there to be an industry service for that kind of benefit to the New Zealand public where there’s no competitive advantage as such. You’ll see it in industries all over the world, basically at the back office end.You’ve got companies that are collaborating because it is much more cost efficient to do that than it is to do it on your own.

Sure. And you’ve got the space, and they’ve got the need.

Well, we’ve designed our new digital playout centre, and its world class. Its being implemented at the moment. It will go live in October, and we’ve designed it so that most other TV broadcasters could use it

Exactly. When I first heard those rumours, I thought it must mean there’s capacity looking for a client.

Well, its not much that we’ve got a paid-for capacity that we’re not using. Its a plug and play, basically. The incremental cost of just plugging in another channel – whether it be a Mediaworks channel or an MTS channel- is a a lot lower than it is for potentially that TV company to build their own. So its up-gradable.

Is it reliant on Jason Paris getting his feet under the table [as the new network chief at TV3] before you continue with this idea?

Ahh..(laughs) Well again, I’ve got no comment on whether there’s been any discussions between us.

In the course of the next 18 months will TVNZ be moving to a half hour news bulletin?

We have no plans to move to a half hour news bulletin. None.

Not even talking about it, weighing the feasibility ?

No.

Isn’t it entirely self defeating, just as you need ad agencies to work harder to help lift TVNZ’s revenues out of the recessionary trough, that you’re planning to cut their commissions for doing so in half ?

At the end of the day, the commission system began effectively as a reward for representation. What’s happened over the years is that the gap between price in the marketplace – what we call the rate card – and the net price that is paid by the advertiser has grown to a level where its difficult to see where the comparison is. So we need to address the optics of that over time, so that an advertiser has a clearer perspective on what the actual price of television is. The second thing is that it has become common practice for the commission that we pay to ad agencies, to be effectively passed back to the client. And again, this clouds the optics of what the actual price is that the advertiser is paying. So, we believe that by reducing the commissions – the benefit of which by the way, goes to the client in terms of a reduced price – the improvement in the optics is going to improve the demand of television. In other words, it will have quite the opposite effect of what you might have thought.

Well, only if it isn’t the equivalent of a Philippines call centre. Don’t the ad agencies bring an expertise to the table that TVNZ might not have when it tries to strike these one-to-one deals with clients?

Well, they do. The common practice around the world now is for agencies to represent that value by way of a fee that the client pays for the value that they’re receiving.

So it becomes more like a tip for services rendered?

Well, they’re a service industry at the end of the day – and so the client should pay for the service that they get.

TVNZ has been seen in the past as aggressively pursuing intellectual property rights both here and overseas and across a variety of delivery platforms – what, besides a lot of ill will within the independent production sector, has TVNZ earned from this exercise?

Gee, I’m not aware of TVNZ pursuing IP that has seen to be the purview of third party producers. And I’m also not aware of any ill will. The relationship that we have today with independent producers is probably the best that I’ve seen it, in the many, many years I’ve been in this industry. The rights by the way that we are engaging with beyond just free to air television are providing additional revenue back to the independents. So when we put the Heartland Channel together, independent producers are getting paid for the rights that they own. When we’re in international markets we’re there to support the sale of New Zealand content to external broadcasters. When we put our local content up on TVNZ On Demand for example, or on the PS [Play Station]3, we pay for those rights back to the independent producers. The independent producers like what we’re doing, and support what we’re doing, because they’re earning more revenue.

So you’re saying that in this rights exercise, initial suspicion has turned into a bunch of happy campers?

As far as I’m aware.

Now that you don’t have to meet a social charter and don’t have an obligation to screen local content to help fulfil that charter, what in theory is the purpose of a state broadcaster?

Well you know, it’s a bit like a question of what is the purpose of a substantially state owned airline. We believe – this is me, and my executives and the board of TVNZ – that we have a very, very important role as New Zealand‘s national broadcaster within the whole democratic process. We are here to serve the needs and interests of New Zealanders. And I’d like to think we also serve the New Zealand interest – beyond our shores in the Pacific in particular – with the programming that we provide up there on a daily basis. So whilst that belief system stays deeply embedded inside the company then I think we will remain in state ownership.

So are you saying there’s still a kind of Reithian half-life still present at TVNZ?

Reithian half life? I’m not quite sure. (laughs) You can describe it as that. At the end of the day, our strategy is inspiring New Zealanders on every screen. So everything that we do starts and finishes with – is this relevant to, and meaningful to, and will it be enjoyed by New Zealanders? So off the back of meeting the needs of New Zealanders, we expect to run a profitable business that will enable us to continue to invest in providing New Zealanders with what they want and expect from us. It becomes a sort of virtuous circle.

Except that outcome is only a bonus now, where and when you can afford it with the revenue available. Before, with the charter, it was supposed to be an imperative.

Well, it always comes down to money. This month in fact, we celebrate 50 years of New Zealand television. We only had a charter for eight of those 50 years. Since the television system began in this country,TVNZ has been expected to make a profit. We don’t have a BBC/ABC fully funded public broadcaster in this country. We have a long, long history of serving the needs of New Zealanders – and making money.

I wonder though, whether the lights are not going out on that kind of mission statement.

I don’t think so.. If you look at the incredible value we have provided in taking advantage of digital broadband technology, New Zealanders are getting more and more access to more and more local content in particular, than they’ve ever had. So that’s building a very strong loyalty to the brand of TVNZ.. My sense is that in fact, the sense of public ownership around TVNZ is growing over time, not declining.

In simple terms though, if your official purpose now is to be just a commercial broadcaster – ie, to generate revenue – and you’re not generating much of it, then couldn’t the government be feeling that it might as well sell it ?

I’m not even going to go there. We’re state owned, and we don’t discuss, debate or even think about ownership other than we’re Crown-owned, and get on with it.

Right now though, how has not having a social charter changed how TVNZ operates?

TVNZ still has its own Act of Parliament…Which has a proposed amendment to it that prescribe a set of guiding principles for the company. Those are about to be referred to select committee for public submissions – and I take it that what that will reveal is that is still a very strong commitment, through that Act, and even through the amendments, to TVNZ still serving the needs and interests of New Zealand viewers.

What will happen to TVNZ6 and TVNZ7 when the public money for them runs out?

That’s the subject of a lot of work at the moment. The government has asked TVNZ to look to options for the funding of TVNZ6 and TVNZ7 beyond the current funding round. Funding will be no longer be available for these channels beyond the end of 2011, or the early part of 2012. What options can you see – are you able to present us with a means of continuance of those channels ? And so we’re working those options through now – and we haven’t come to any final positions yet.

OK they’ve asked you to do your best. But if you can’t find a sponsor?

I would like to think – particularly in the context of the digital switch-on / analogue switch-off agenda – that the public and therefore the government will see value in the continuance of the channels beyond the current funding round.

And if you can’t come up with a sponsorship package, are these channels too good to be left to die?

Again, we are quite ..what am I trying to say ? We love these channels.

Sometimes though, don’t you have to kill your babies?

They were funded for a particular purpose. At the end of the day if the money is no longer there, money doesn’t grow on trees, and then you know, they wouldn’t be able to continue. But its way too early to start speculating on that.

Do you expect to have to meet any possible costs associated with the analogue switch-off, from within current budgets?

The industry collaboration with government sees government basically funding the parallel digital distribution of our channels until the point of analogue switch-off. Again, that’s common practice throughout the world because there is this so called ‘digital dividend’ – consisting of the yield from frequencies that are released from analogue switch-off and that can be sold for other purposes. So in fact, once we get to analogue switch-off, our distribution costs drop – so in fact when we get [there] our distribution costs reduce by several million dollars a year. So there’s a big upside for us as well, once we get there.

Well, one wider cost I had in mind was that there will still be a small but significant part of the free to air audience who won’t be able to afford to invest in the transition to digital television. Can and should TVNZ pick up the tab for getting those people across the digital divide?

Government – and again this is consistent with international practice – has a vested interest in ensuring that the nation is a digital nation. And that every household has access to digital television services of one sort or another. So there will be a pro-active plan in action, once the analogue switch-off date is announced, which it has yet to be. The government will also announce, we expect, a plan to get all of New Zealand there. In parallel though reflect on the fact that every television that you buy today has DTT ability built into it. So it is already a digital capable television, so long as you’ve got a UHF aerial…its a tiny percentage we’re talking about… Its not even ten per cent.

Vector are planning to build their own fibre network around Auckland and perhaps further. There is talk of the structural separation of Telecom – which has its own copper and fibre network – into a lines company and a retail/trading company, and $1.5 billion has been earmarked by government for broadband. What opportunities does this landscape offer for TVNZ?

I’m a great proponent of fast broadband in this country. I think for us to participate in the global economy we need a fat pipe to the country and a fat pipe within the country. But what I also believe is that for households to basically take up these fibre-to the home services, that just fast broadband is not going to be enough. There is going to have to be a demand side of the equation that is addressed.

So the provision of content in services is going to be critical to the uptake of fast broadband – fibre, for example, such as Vector is bidding for here in Auckland. So we’re already participating in trials in Tasmania through our association with Hybrid Television [the company behind TiVo in Australia] where a combination of different packages of government and local government and health and education services – along with your traditional entertainment content of movies and television and music and games – is being packaged up to test what households value, and are therefore prepared to pay for. We’d like to think that similar trials might in time, be conducted here in New Zealand, and we think we have a major role to play in supporting the content and demand side of fibre to the home.

Do you have a preference either way whether it is on a Vector or Telecom network ?

No. We would prefer to see a non-exclusive platform where we can basically deal with all of them.

Sky has a pay for view monopoly, and has moved into free to air. Does the new fibre network landscape offer TVNZ any fresh opportunities to claw some ground from Sky – and how does TVNZ plan to exploit that chance ?

Sky are, if you like, the only for pay –TV business in the country. But they’re not the only pay for view, or pay per view operator.

Surely though, they’re the elephant in the room if you’re wanting to move into delivery via fibre.

Yes, they’re already there. But I can demonstrate this to you on my TiVo box. The CASPA platform – that’s the content and services platform, Asia is how we’ve branded it – is already available to all TiVo users in this country. So, you have a rich offering of movies, television and music and that will expand beyond those three categories. Delivered by broadband to that box, on a pay-per-view basis. Its not necessarily vis-a-vis Sky. We see the growth in pay-for-view type services over broadband as being a major opportunity for us in the future. ..So, we’ve already built a platform with Channel 7 Australia, we contacted that to Ericcson Tandberg and that single platform is now serving up content to both the Australian and New Zealand market.

That may be the optimum growth path. But the likes of Paul Norris have painted a more pessimistic future – where the worst case reality for state broadcasting where it may, in a few years time, consjst of only one of those digital channels, plus RNZ and Maori Television all sharing the same tent, – and tasked with rebuilding the whole notion of state broadcasting again from the ground up. I’d imagine you would regard that as a nightmare outcome.

It is not something that I’ve given a moment’s thought. Mr Norris might have, but I haven’t. I’m not sure how realistic it is, thinking of it for a split second.

Apart from it looking like Custer’s Last Stand for state broadcasting, what wouldn’t be feasible about it?

For starters, if you take TVNZ7 for example as a news and factual channel – that operates effectively as an integrated service from inside the newsroom at TV1. So extracting it out of there is going to cost a lot of money. So that might be the first impediment.

At the heart of the recession or even now, do you think there was an argument for you and some of your top executives to take a pay cut to save jobs – given that the current levels of executive remuneration at TVNZ were set in relation to a bygone era of presenter salaries?

Well, I don’t know about any relationship to presenters.

Those relativities were in play when the TVNZ salary levels were established, and were cited to that effect in parliamentary select committee testimony in 2001. [a href=”http://www.listener.co.nz/issue/3340/features/1934/big-noters.html” target=”_blank”>For a full account, see this story]

No, I’m not aware that there’s been any comparisons in the way that compensation is set at TVNZ. Comparisons between executives and presenters. And I assure you its not part of the logic today. 2001 was nine years ago, and I wasn’t here then,

No, you’d just left the building.

Yes, I’d left the building…Back to your question though. Look, the executives at TVNZ including myself, haven’t had a pay increase in two years. I felt it was important to demonstrate leadership in that regard. So I, and the executives, announced first that there would be no pay review, going back to the 08/09 period and through to the current fiscal year. Because I wanted the rest of the staff to follow. And I think it would have been unreasonable to have expected the staff to take pay cuts. So its about fairness, equity and leadership.

Does that also mean there won’t be a pay catch-up when the better days return?

Well, I wouldn’t assume that. At the end of the day I’ve got pay to keep good people. And the market keeps moving so once the market starts moving, we will address what we need to in terms of competitive compensation..We’re budgeting for the return of salary increases across out entire work force in the next year, given the improvement in the market. The recession is over.

Great. So can the work force be assured that, as things stand, there won’t be any further need for job cuts at TVNZ over the next 12 to 18 months?

Well, you can’t provide that re-assurance at all.

But what I’m getting at is – given the financial situation, there’s isn’t an imperative for another round of job cuts?

Well, we’re going through a period of significant transformational change in this organization. Where new technology, digital technology is basically obsoleting a number of jobs that exist in an analogue world. Our staff are on that journey with us. And there will be, as I’ve shared with staff already, some jobs that no longer exist. And there will be a number of new jobs that don’t exist today, but will exist in the future.

Its in the natural order of things?

It is the natural order of things. [Ellis goes on to make a distinction between the restructuring job losses announced in the early 2009 that were a specific and necessary response to the recession, and the “transformational” job losses that are being triggered by new technology.]

Finally, between the six years when Chris Anderson was in this job and the end of your first tenure the salary for the CEO at TVNZ almost doubled. Isn’t there an argument for saying that the only area where you’ve added value to TVNZ has been in the level of your own salary?

(Laughs) I have no idea where you got the doubling of salaries between Chris Anderson and me. You’re going way, way back in history. 1997,1998. This is 2010. My understanding is that my salary was significantly lower than Mr Anderson’s.

Judging by the annual reports, his was about $360,00 – $370,000. When you left it[the CEO salary] looked to be about $750,000.

Right.

So that was the genesis of the question.

Well, I don’t have in front of me the substance of what you’re talking about. So I’m not even going to go there. In other words, I’m not going to rely on what you’re just saying.

Put it this way then : what have you done for TVNZ ?

Well, I guess I must have done something right, in that they invited me back.

ENDS