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Three gets Discovered

TV viewers who love animals, adore Oprah Winfrey and can’t get enough of home renovation shows might be in for a treat as MediaWorks sells its struggling TV arm to reality TV giant, Discovery. Mark Jennings looks at what the long-awaited sale will mean for New Zealand's television market.

When MediaWorks CEO Michael Anderson announced his resignation a few weeks ago he gave the strongest hint yet that the company’s TV arm had finally been sold. It has been Anderson’s top priority to sell the loss-making TV arm. Job done, by the sound of it.

“Things are also looking positive for the sale of TV, and we hope to make an announcement in the coming weeks,” Anderson was quoted as saying in a media release.

If the sale was in doubt, Anderson would be staying mum. MediaWorks has said almost nothing about the sale process since it began nine months ago.

Another clue lies in the decision to reverse the salary cuts it asked staff to take when Covid-19 started hammering advertising revenues. It's unlikely the advertising market has gone back to pre-Covid-19 levels and MediaWorks has always taken a parsimonious approach to employees' salaries. Someone else is clearly about to inherit the TV wage bill.

MediaWorks let it be known that there was a "lot of interest" in the channel but really there has been only one outfit prepared to go the distance – Discovery Inc. The NASDAQ-listed company has a market capitalisation of US$10 billion.

Local buyers, if there were any apart from SKY, have been frightened off by Three’s ongoing losses and TVNZ’s market dominance.

For all but short periods in its 30-year history, TV3 has been foreign-owned. The attraction of Three for international media companies is hard to fathom as only one has made any real money and the others probably wish they’d chosen different investments.

NBC, the big American broadcaster, was an initial shareholder before baling out. When TV3 went bust in 1991, the Australian banks ended up owning it before selling it on to Canadian media company, CanWest. Cunningly, the Canadians sold out at the top of the market, just before the GFC, to Australian private equity company, Ironbridge. High levels of debt sank Ironbridge, and the current owners, US vulture fund Oaktree, took over. Now, after years of trying, Oaktree is offloading the albatross around its neck to New York-based Discovery Inc.

The question is: Why would Discovery want to take over a free-to-air (FTA) TV station, in a very small market, which has lost its previous owners lots of money?

One reason might be that Discovery has essentially missed the boat in launching a paid streaming service. While on-demand platforms like Netflix, Amazon-Prime and Disney+ surged during Covid lockdowns, Discovery has been late to the party.

Instead, it seems to be pursuing an alternative multi-platform strategy across as many markets as it can get into.

It has been busy picking up channels in Norway, Sweden, Denmark, Finland, Poland, Germany, Italy, UK, and Ireland.

Alongside these channels it has launched, or is launching, an AVOD service (advertising supported video on demand) called Dplay. TVNZ has also gone down this route with TVNZ on-demand. The streamed content is free but you pay by having to watch advertisements.

Discovery has been quietly expanding in this part of the world as well. It arrived in New Zealand 26 years ago with a single channel on Sky TV. It now has an eight channel portfolio - six pay-TV channels on Sky (Discovery, TLC, Discovery Turbo, The Living Channel, Food Network, Animal Planet) and two FTA channels in Choice and HGTV which it bought late last year.

In Australia it has nine brands across pay-TV platforms Foxtel and Fetch (Discovery, TLC, Investigation Discovery, Animal Planet, Discovery Turbo, HGTV, Food Network, Travel Channel, Eurosport), and FTA channel 9Rush, a partnership with Nine Entertainment Co.

Buying free-to-air channels, especially if it can get them at rock bottom prices, makes quite a bit of sense for Discovery. It has an endless supply of cheaply produced ‘unscripted’ shows (reality TV) that can be consumed across the English-speaking world.

Discovery says it commissions 8000 hours of original programming annually and has a library of 300,000 hours. It has the rights to Oprah Winfrey content through OWN – a joint venture with the talk show phenomenon. Food and home improvement shows are staples and it is producing close to 100 hours of programming annually in Australia with shows such as Aussie Gold Hunters and Outback Opal hunters.

Discovery also has a lot of cash. Last year its free cashflow from operations was $3.3 billion. In contrast, Netflix had a negative cashflow of the same amount.

The FTA channels can be used to promote the AVOD service and, eventually, a subscription service (SVOD) when the time comes. Discovery says it will launch a streaming service in the US this year which will include all the BBC’s natural history programmes along with its own natural history and documentary programming.

Discovery’s plans for Three will be influenced by the type of deal it has done with MediaWorks. The news operation, Newshub, is likely to stay, at least in the short term as neither the seller or the buyer will want to give the politicians or audiences a reason to turn against them.

After all, Oaktree appears keen to hold onto the profitable parts of MediaWorks - the radio stations and outdoor advertising business QMS. It will probably offer Discovery a decent contract to supply the radio arm with news content. Discovery might also want the sales team at MediaWorks to continue selling television commercials for Three.

The management and programming ranks are likely to be winnowed as Discovery takes over these functions and reduces the cost base.

There will be impacts on the wider television market with Discovery expanding here.

Discovery, together with one of its shareholders, owns All3Media, which in turn owns South Pacific Pictures – New Zealand’s largest TV production company.

SPP produces Shortland Street and it is possible, although not very likely, that Discovery might want the soap to screen on Three.

Then there is Discovery’s relationship with SKY. It is likely that both sides will want to get along and might look to cooperate on programming deals and possibly sports rights. The former has a golf streaming service, GOLFTV, and a pan European sports channel Eurosport (which has the Olympic rights for Europe). It might look to enter the sports market here, which it could do by buying Spark Sports off the telco.

Sky will probably be keen to ensure that doesn’t happen. So will TVNZ’s CEO Kevin Kenrick, who has proved adroit at picking up the FTA rights from both Spark and Sky.

Kenrick has made life tough for his MediaWorks counterpart Anderson on a number of fronts over the last four years but the Discovery deal might give Anderson the last laugh.

Discovery has shown that it knows how to operate FTA channels and if it launches its AVOD service Dplay here, its very deep pockets will worry TVNZ.

Anderson will also walk away with the satisfaction of knowing he has done a job for Oaktree. He sold the decrepit MediaWorks building in Eden Terrace for $26 million, bought the New Zealand arm of outdoor advertising company QMS in an equity deal and developed a new purpose-built studios for the radio stations which were scattered around Auckland.

Radio and outdoor, shorn of the loss-making TV business, will now be better placed to deliver what Oaktree has always wanted – a big, fat dividend cheque.

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