Three Blind Mice – caught in the Netflix trap

One day a rooster, the next day a feather duster!

By LAURIE PATTON | 19 April 2020

Australia’s commercial television networks are in trouble. Not simply because of the Coronavirus but because they failed to develop effective strategies to counter the arrival of Netflix and other ‘streaming’ platforms – something anticipated long before it happened.

Last week the federal government threw the struggling networks a financial lifeline. It includes subsidies and deferred or waived fees and it reflects savage advertising revenue declines. Sadly for the viewing public however, local drama, children’s and documentary content quotas have been suspended.

With the exception of the local content initiative they are all reasonable support measures easily justified. However, they will do nothing more than tide things over for the moment. Unless the networks start thinking more strategically they are on a collision course heading them towards irrelevance for a sizable proportion of their erstwhile loyal audiences.

The failure of the American television networks to anticipate the impact of the arrival of cable in the 1980’s has been chronicled in a seminal work entitled: “Three Blind Mice: How the TV Networks Lost Their Way”. It examines why a third of their audiences departed and more than half their annual profits disappeared. I recommend it as essential reading for the highly paid ‘carpet strollers’ currently running Seven, Nine and Ten.

As we moved into a new century two decades ago the free-to-air television landscape was changing dramatically with the introduction of digital transmission. We went from six analogue channels (including the community channels since killed-off by the communications department) to more than 20 digital channels.

Thus began a slow and inexorable decline for Foxtel, which has been exacerbated by the arrival of the streaming platforms. With so many more free viewing options why pay a monthly subscription fee – always high by global standards – for access to more than 200 channels when most of them are never watched? I remember warning then Telstra boss David Thodey, about five years ago, he should reconsider the value of his (then) 50 percent stake in Foxtel, which I described as a ”fast diminishing asset”.

As the commercial free-to-airs openly relished Foxtel’s discomfort they failed to adequately consider the existential threat on their own horizon. An opportunity to build a united defence against the streaming services was ignored. One proposal was to build a joint distribution platform, just as they’d decided years earlier to place all their individually owned transmission towers into a joint-venture company – TX Australia – to handle the digital transformation.

More recently, the belatedly created Freeview Australia (based on a UK equivalent) has been given a mission to promote the value of their collective wares. Frankly, it hasn’t helped very much so far.

The foundation to success for free-to-air television in Australia is, and always has been, the strength of local content. A year or so back, when I last checked, the top 100 rating programs were all locally produced.

Local content quotas were introduced by the Menzies Government back when television arrived on the basis that we needed to protect and foster our unique cultural identity on our screens. This is still a highly and widely valued concept I’d argue. Menzies should be acknowledged for his foresight. Perhaps most prescient right now was his accidental creation of the raft on which the commercial television sector has historically floated its profit-making vessels.

The perceived and actual superior quality of our broadcasters – including the ABC and SBS – is one of the main reasons why Pay-TV struggled to ever secure much more than 25 percent market penetration compared to more than 90 percent in the US.

Free TV, the lobbying vehicle for commercial television, has been fighting for more than a decade to rid the sector of its local content obligations. This not only ignores the fact that they have underpinned its long term success, it also fails to acknowledge that they come attached to some valuable territory – exclusive access to our limited broadcast spectrum. If they abandon local programming across a broad range of genres there will be limited justification for any future government support for the commercial free-to-airs.

Free TV argues its members cannot compete fairly with the streaming services, in part because they don’t have a local content requirement. Well, perhaps the solution is imposing local content obligations on overseas content providers too? An Australian Competition and Consumer Commission report on digital platforms last year recommended that the same media laws and regulations applying to Australian companies also apply to digital platforms like Google and Facebook. A range of proposals regarding local content are among suggestions in an options paper co-authored by ACMA and Screen Australia released last week.

Streaming television is delivered via the Internet, which for the most part means over our National Broadband Network. While you could argue the Internet is ubiquitous and owned by no-one it is equally reasonable to point out that without the publicly-owned NBN far fewer households would have the ability to stream. On that basis it is also reasonable to expect that global content companies making profits by accessing our distribution network are regulated like the local players.

Back when I was attempting to convince our free-to-air networks to start thinking about how to defend their position I suggested the commercials look at ‘AVOD’ – streaming content with advertising inserted as an alternative to charging subscription fees like Foxtel and Netflix, etc. Only relatively recently have they seen the wisdom of this proposition. I’m told by a senior executive at one network their so-called ‘catch-up’ platform is doing well.

Of course the ABC showed the way with iView, which has been so successful it’s created a financial headache for the broadcaster’s executives due to the incremental cost associated with its delivery. Success has come with a high price.

While AVOD has some potential to help stem the flow of bleeding commercial television revenue it is only one of the tactical moves the three blind mice failed to make back when they still dominated the viewing landscape. It’s hard to predict how they’ll fare during, much less after, the Coronavirus era. One thing is certain in my mind, the current preoccupation with proposed mergers and acquisitions is but a bandaid over a very deep cut. It’s not the market structure that’s the problem, it’s the product and how it’s marketed. Dumping local content right now would be a massive self-inflicted wound.

POSTSCRIPT.

1. In what is yet to be sufficiently analysed one impact of the Coronavirus lock-down is an across the board increase in free-to-air audiences – quite significant in some timeslots. Hardly the time to be dropping local programs you’d think and a great opportunity for the commercial free-to-airs to highlight their enduring value – while they still have some!

2. “Seven has moved quickly to yank Kid’s content off 7TWO after the government advised there would be no quota content for Drama, Children’s or Documentary for the rest of 2020″.

3. “Foxtel is hoping to launch its new entertainment streaming service in May”.

(Laurie Patton was a journalist at each of the three commercial networks before holding senior executive roles – including managing Seven Queensland, which he transformed from a perennial number two regional network into Seven’s most profitable division. He created the World Movies Pay-TV channel and was the founding CEO of community station Television Sydney.)