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Is Ten the Biggest Loser?

Nine Entertainment boss David Gyngell says Australia can only support two profitable free-to-air commercial television networks, as costs rise and digital competition intensifies.

As we’ve suggested several times here at the Motley Fool, free-to-air TV networks are facing increased competition from other delivery channels such as pay TV, digital media and the internet. Advertisers, in the never ending quest to capture more eyeballs, are following where consumers are going, which is increasingly away from free-to-air television.

Online advertising is set to overtake television as the largest advertising category this year, as free-to-air advertising falling, with consumers faced with multiple choices for their entertainment time, including digital TV, pay TV – Foxtel, jointly owned by Telstra Corporation (ASX:TLS) and News Corporation (ASX:NNC) as well as online sources.

Mr Gyngell has told the Australian Financial Review that the rising cost of programming and the need for broadcasters to invest in local content made it much more difficult for the industry to sustain three free-to-air commercial stations. Seven West Media (ASX:SWM) holds the lion’s share of the advertising market with over 40%, closely followed by Nine with around 38%. Ten Network Holdings (ASX:TEN) significantly lags behind both with less than 20% of the advertising market.

In an effort to take market share from its rivals, Ten has been offering huge sums of cash to gain broadcasting rights to prime sports events such as cricket, but ended up with the just the domestic Big Bash League, while Nine continued its coverage of international cricket.

The problem with stumping up large bids for events is being able to generate a profitable return, mainly through sales of advertising. But as costs rise, and advertising revenues diminish, it makes it that much harder for the free-to-air broadcasters to generate a profitable return on their investment.

Foolish takeaway

Bigger economies like France and Germany have just two free-to-air networks, and Australia could be headed down the same path. Unless Ten can pull a rabbit out of its hat, Seven and Nine look set to continue their dominance, leaving Ten in a precarious position.

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Motley Fool writer/analyst Mike King owns shares in Telstra.

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