Industry Analysis
The Seven Network Limited (SEV) operates within the ‘media’ industry group and is comprised of two main business segments; television and magazine (Business Week, August 2008). SEV is one of the three main free-to-air (FTA) commercial networks in Australia. Through Pacific Magazines, SEV publishes one in four magazines sold in Australia. Furthermore, SEV has made several investments and recently formed a joint venture with Yahoo! to penetrate the internet market.
According to the Australian Communications and Media Authority (ACMA, 2008), past trends show that Australian commercial television has achieved revenue growth well above the economy (Appendix A). Since 1979, real GDP grew on average 3.2% per annum, while commercial television revenues increased at a rate of 3.8%. Expenditure on advertising is directly influenced by corporate profits. During periods of economic expansion, television advertising revenue increases while in times of weak economic growth, companies often cut their marketing budgets, reducing television advertising revenue growth (ACMA, 2008). Hence, commercial television revenue is positively correlated with changes in GDP growth (Appendix B).
SEV’s main competitors are Networks Nine and Ten, all highly competitive in terms of widespread national coverage and program ratings, in order to increase advertising revenue, the primary source of income across all three media platforms. In accordance with ACMA (2008), rivalry amongst the 3 networks is evident through the acquisition of regional affiliates following the amendments of media ownership rules under the Broadcasting Services Act 1992. The now aggregated markets of the media industry allow the major networks to extend their audience reach to more than 90% of the Australian population, attracting 80% of all television advertising revenue. Of the eight different ownership groups (including the 3 major commercial networks) controlling more than one commercial television license, SEV has acquired the greatest national coverage (Appendix C).
Rivalry between the commercial channels also exists in the form of program ratings, where commercial spots can be sold during the breaks of the program. The larger the audience for that program, the higher the cost to advertisers to purchase a commercial spot (The Ratings War, 2005), thus igniting competitive bids for the rights to broadcast major international event programs e.g. the Olympic Games. Bidding for exclusive televising rights also acts as a form of product differentiation. A differentiating factor for SEV’s TV network lies in its ratings position in the 25-54 age demographic, investing in Australian drama, lifestyle programming and in-house reality series like Dancing with the Stars. After dominating in advertising revenue, the Nine network fell behind SEV in 2007, where, according to OzTAM figures, SEV had 29.9% of the prime time market, while Channel Nine had 26% (Collings, 2008). Other rivals competing for market share include broadcasters SBS and ABC, as well as Pay-TV carrier, Foxtel, increasingly competing for metropolitan TV audience share (InvestSMART, 2008), accounting for 13-15% of national TV viewing. The free-to-air networks still dominate with 85% of viewing (Peitz & Valletti, 2007).
SEV’s Pacific Magazines’ key competitors are ACP Magazines LTD and FPC Magazines, all of which publish an array of magazines in several categories including youth, women’s, lifestyle, gossip and fashion, circulating either weekly or monthly, endeavouring to increase their total share of readership. Their rivalry is intense, all competing for the best weekly/monthly/fashion/niche titles, as well as high circulation and advertising revenues of which Pacific Magazines hold 75% and 25% respectively (InvestSMART, 2008). The latest Roy Morgan Research conducted in 2007 shows that ACP leads the magazine market with 15 titles reaching number 1 in various categories based on readership. FPC had the best overall improved readership figures, while Pacific’s Marie Claire was the number 1 fashion title (Robertson, 2007).
SEV’s TV segment is part of a powerful oligopoly in Australian commercial television, as the TV industry requires high levels of capital investment and is highly regulated. Broadcasting is characterised by economies of scale and scope, thus making it financially unviable over the short term for potential new and smaller entrants (Adapted: Jones, 2003). Despite debate of whether a fourth commercial free-to-air television network should be introduced to Australian viewers, this was rejected as this would fragment TV audiences further, making it more difficult for advertisers to reach their full target market(Hinter, 2005).
With regards to SEV as an advertising medium, the threat of new entrants is strong, notably with the rising popularity of subscription TV, and even more so, the internet. Fusion Strategy’s Steve Allen predicts a 40% growth of online advertising in 2008, however, according to PricewaterhouseCoopers; the figure is 20% down from an average annual growth of 60% in online advertising held over the past 3 years (Lee, 2007). In the magazine division, many new titles enter the market, creating an overall competitive marketplace for Pacific Magazines. The threat of new entrants is large, the latest being the launch of the first issue of women’s fashion magazine "Grazia" last month, published by ACP Magazines (Mediaweek, 2008).
The threat of substitutes for SEV’s TV segment are Networks Nine and Ten as they broadcast program genres not offered by SEV, such as music and sporting programs which may attract certain advertisers. Viewers are willing to switch between the networks to suit their preferences since there are no switching costs. As advertisers perceive all networks as performing the same function, the threat of substitution is high for SEV.Additionally, while SEV is restricted by licenses to provide their services to only selected designated markets, ABC and SBS, being national broadcasters, have the authority to provide their services throughout Australia (Peters, 2007). Peitz (2004), also highlights that viewers who dislike advertising will make the switch to subscription TV as advertising intensity is greater under FTA networks. Thus the growing popularity of subscription television impacts SEV’s ratings and influence advertisers’ strategies.
Furthermore, there has been a “proliferation of new media and communication platforms and devices”, providing consumers’ alternative means of accessing information and entertainment (Peters, 2007). A study conducted by ACMA conveyed that other devices including DVD players, MP3 players, mobile phones, etc which had negligible penetration in 1995 were widespread in 2007 (Appendix D). Consequently, advertisers are increasingly utilising these other mediums to effectively communicate with their target market.
The bargaining power of SEV’s direct customers, the advertising and media agencies, is highly dependent on the programs SEV broadcasts. During SEV’s most popular programs and prime-time period (6 to 10:30pm), SEV has high bargaining power as this is the highest-viewed television time, and advertisers fiercely compete for commercial slots. Additionally, as suggested by ACMA (2008), there are constraints on the amount of advertising time due to limits on the “supply of services and industry codes of practice”. Currently, commercial networks have approximately 15 minutes of advertising per hour. This constraint on supply suggests that not all demand will be met, giving SEV bargaining power to sell commercial slots at a premium to advertisers who require higher frequency. SEV has also broadcasted some of Australia’s biggest events such as the Melbourne Cup and the Australian Open tournaments, as well as some of the world’s biggest events such as the Olympic Games, during which its bargaining power skyrockets. As illustrated in Appendix E, during 1999-2000 and 2000-01, SEV’s broadcasting of the 2000 Sydney Olympic Games boosted its revenue to more than $1,400million per annum (ACMA, 2008).
SEV’s indirect customers, its audience, on the other hand, have a high bargaining power over SEV. It is the viewers that dictate what programs SEV broadcasts and when. SEV must ensure its programs appeal to the tastes of the Australian public in order to attract advertising and media agencies. SEV’s magazine segment also has low customer bargaining power. The cost of magazines is insignificant to consumers’ cost structures. However, there is severe price competition within the magazine industry, ensuring that prices for competing magazines are similar. Advertisers/media agencies also have low bargaining power in the magazine industry as they have to pay a premium for having a publication in the highest selling magazines to gain the highest exposure e.g. Men’s Health is the number one premium men’s magazine.
Business Strategy Analysis
As per our industry analysis, SEV has its core business in broadcast television which constitutes its main portion of revenue, primarily through advertising. However, the advent of accelerating technological change has diluted the television audience market into a more multi-faceted media and entertainment hungry consumer while also amplifying the number of platforms from which advertisers can market their product. Additionally, the devaluation of intangible assets such as commercial television licences coupled with declining revenues when compared to the 1970’s and 1980’s (See Appendix F) due to the limited growth potential of audience bases and advertising slots alike have impacted on the value of SEV (ACMA, 2008). This has forced SEV to seek alternative methods of generating value for their shareholders, thus the implementation of its business strategy – primarily through diversification by investing in core non-television undertakings and then incorporating them to create “a fully integrated media company” (SEV Annual Report, 2007). SEV’s foray into substitute and alternative ventures has enabled it to infiltrate other segments within the media spectrum inline with shifting consumer and advertising demands and technological change.
Additionally, SEV entered into joint venture agreement with Yahoo!7 Australia in 2006. The venture combined the search and communication capabilities of Yahoo with the media and entertainment content of SEV and has been the primary vehicle for its online interests. According to Lemay (2005) the venture also mirrored SEV’s main rival Publishing & Broadcasting Limited’s (PBL) merger with Microsoft that resulted in the creation of NineMSN in 1997. Thus, the venture was a two pronged attack; firstly to diversify its revenue base and secondly, to pose a threat to its main competitor by giving consumers and advertisers more choice with online search and advertising content. Also in 2006, SEV entered into a joint venture agreement with Kohlberg Kravis Roberts & Co (KKR) creating the Seven Media Group which has its sights set on the Australian and New Zealand market. Similar to the Yahoo!7 venture, the KKR joint venture has been viewed as a mirror to PBL’s joint venture with CVC Pacific Partners, (The Age, 2006). This strategic move with KKR saw a gain of $3.2billion in cash proceeds and placed SEV in an attractive position for further expansion and acquisitions. The Seven Media Group also includes the magazine segment Pacific Magazines.
SEV has also moved aggressively and rapidly into the broadband and digital video recorder market through affiliations with Engin, Unwired and TiVo. The 33.4% stake in Engin in 2006 saw SEV attain a presence in the Internet telephony company that effectively “heralded the convergence of telecommunications and media assets Down Under”, (LeMay, 2006). The $127 million deal to acquire the wireless broadband provider Unwired in late 2007 was also a critical precursor to SEV’s 2008 plans to introduce its TiVo product; although it had the rights to distribute the digital video recording system, it needed bandwidth to deliver the service (Foo, Woodhead, 2007). These acquisitions give SEV underlying security and the essential resources required to implement and market the end product. The partnership with TiVo is a strategic move to undermine Pay TV operator Foxtel which has launched its own digital recorder. However, SEV has stated it would charge lower fees than Foxtel thereby penetrating the market through cost leadership and thus seeking to attract market share in the short term (Murray, 2007).
Key Success Factors
As discussed in our industry analysis, the 2000 Sydney Olympics Games saw revenue skyrocket; further, the 2004 Athens Olympic Games saw revenue increase by an additional $40 million (BNET Australia, 2005) and the 2008 Beijing Olympic Games has surpassed Athens 2004 viewer ratings by 38 percent (SEV, 2008). This provided perfect conditions for SEV to leverage its mutually exclusive broadcasting rights into charging high premiums to advertising and marketing companies. The same concept can be applied to other contracts SEV has negotiated including the broadcasting rights to the Australian Football League 2007-2011, V8 Supercars Championship, Australian Open Tennis, Bathurst 1000, the Melbourne Cup etc. The 2008 Beijing Olympic Games was one of the first major events for SEV whereby the recent integration of its newly acquired assets highlighted the growing convergence of media and communication in a positive manner. The Beijing Games scored 32 million page views on Yahoo!7 Olympics and more than 4 million live and on-demand videos were streamed, (SEV, 2008).
In terms of the timing of joint ventures, SEV appears to keep competitors under watchful surveillance and follow its competitors’ strategy should that particular strategy be successful or value-adding, e.g. SEV’s joint venture with KKR in response to PBL’s venture with CVC Asia Pacific. Indeed, according to Shaw Stockbroking media analyst Greg Fraser “Seven appears to have received a higher price for its assets than had PBL”, (The Age, 2006). Here, SEV has evaluated the success of PBL’s venture and has gone on to capitalise on it by receiving more for its assets than its competitor achieved. Similarly, it was only after waiting for Foxtel to establish itself in a high risk new industry did SEV decide to enter it itself. Assessing the risk of a potential industry by evaluating the success or failure of a competitor and then capitalising on it is seen clearly here through SEV’s choice of market entry. According to TiVo’s general manager Mark Hughes, SEV’s investment in TiVo is insignificant relative to the costs of business in setting up an entire Pay-TV operation as was the case with Foxtel (Schulze, 2008).
SEV’s continued focus on continuing investment into major magazine brands across major categories is appropriate considering the highly competitive structure of this market. Pacific Magazines posted an EBITDA of $61 million with readership at 30%, up 6% from the previous year (The Sydney Morning Herald, 2008). The growing readership and ownership of the major magazine titles provides SEV with greater bargaining power towards its advertisers in the prices it charges and hence, continue to generate revenue from a non-television based source.
SEV’s efforts in the broadband and digital video recorder market, is a crucial move is taken to capitalise on the gains made thus far. It is their first concrete step into the digital television market and as Professor Joshua Gans from the Melbourne University comments, “if it wasn’t for them, it would be someone else and this way Seven had the opportunity to have a stake in the company (TiVo) that’s earning money from skipping ads, so that’s an insurance policy” (Murray, 2007).
Key Risks
The strategy SEV has in place of combining various aspects of its media and communication assets into a highly integrated and interactive offering is both a strength and weakness. As alluded to above, the Yahoo!7 venture benefited tremendously during the Olympic Games in terms of website “hits” and consequently drawing advertisers to the online market. However, SEV has lost the broadcasting rights to the 2010 Vancouver Winter Olympics and 2012 London Olympics (Knox, 2007) and will most likely suffer in two ways; in the amount of viewers and advertising they receive for television, and for the first time in advertising revenue and “hits” in their online venture, Yahoo!7. Hence, whilst diversifying and then integrating various media platforms heightens the returns during times of broadcasting major events, it also multiplies the magnitude of losses during times of competitors broadcasting similar events.
Additionally, despite the potential profitability of TiVo, the risk of introducing a new product to a market will always entail some level of risk. Rob Leach, head of MCN’s interactive television division believes TiVo will fail in Australia due to set-top box costs and also the fact that it had failed in Britain, a market just like Australia’s where TiVo is a competitor to Pay-TV’s own digital recording video platforms (Sinclair, 2007). The risk of TiVo is therefore something that SEV needs to assess very carefully especially considering a number of its other ventures i.e. Engin and Unwired are interlinked, having major implications upon the future value of SEV.
Another risk is the ongoing attempts by Microsoft to acquire Yahoo!. If the bid were successful, then the online arms of SEV and Nine would be owned by the one company and this would leave both competitors in an untenable position (Moses, 2008), wielding power over both the competitors and place each in an uncomfortable situation. This introduces complications to SEV’s business strategy of incorporating its media platforms as it will lose power over its online portal, affecting its ability to pursue further projects as there will be an underlying uncertainty over one of its core assets.
Sustainability of Profits
As per our industry analysis, in view of SEV’s move into the leading ratings position of the three commercial FTA networks and the diverse business and asset acquisitions it has made, we believe that there are sufficient indicators to suggest that SEV will sustain its current level of operation profitability in the short run, if not increase, according to network revenue patterns reflected in the past 5 years (Appendix E). The development of TiVo could also see a major growth in profits, though this would be more of a long-term benefit, though failure could see losses similar to SEV’s previous foray into the cable television market with its failed venture with C7.
However, there are a number of issues which may see profitability decrease in the long run. Firstly, as outlined in the industry analysis, television advertising revenue is directly tied to economic growth – hence the current recession in Australia may see a direct impact on the advertising revenue generated, though this would be an industry-wide effect as opposed to corporation specific (ACMA. 2008). However, its investment in Yahoo! may mitigate such an impact as advertisers turn to cheaper sources of advertising online, allowing SEV to offset its losses with gains in this area.
Another major threat to SEV’s profit sustainability lies in the loss of broadcasting rights of the 2010 and 2012 Olympics to Channel 9. As noted in our industry analysis, a large proportion of revenue was generated through advertisements during the 2000, 2004 and 2008 Olympics. Hence as noted in our key risks, the loss of broadcasting rights could be greatly detrimental to the profit sustainability of the corporation, due to the impact on all of its investments, notably it joint venture with Yahoo!7. With this in mind, SEV’s needs to incorporate into its business strategy the need to take on greater responsibility and bid even more aggressively for future big ticket events considering the increased potential of revenue loss.