For an industry struggling with debt burden, poor management and flat revenue, Friday afternoon’s announcement by Stephen Conroy of new content, licence fee and ownership rules is the best possible Christmas present. With one announcement, the government has significantly boosted the value of commercial television licences and paved the way for a last major media industry consolidation.

The package, which constitutes the first and least problematic stage of the government’s response to its Convergence Review, makes permanent the current commercial television licence fee rebate first announced ahead of the 2010 election, imposes an Australian content requirement on multi-channels, continues the ban on a fourth TV network and will remove the “75% rule” that prevents networks from reaching more than 75% of the population.

The ban on the fourth network was, for decades, the ne plus ultra of the commercial TV cartel’s political power, an outright prohibition on competition that preserved their massive profits at the expense of advertisers and consumers. But its inclusion now is more a reminder of the Good Old Days before the internet came along and inconveniently empowered the people formerly known as audiences. There are now myriad alternative sources of content, from that US TV show you downloaded in HD to the Call of Duty online multiplayer game your 16-year-old spends half the day playing; the concept of a fourth network is now rather quaint when there are, in effect, unlimited networks.

The net cost of the licence fee rebate to taxpayers this financial year was estimated to be $65 million, back in 2010. We suggested at the time that this was an underestimate given the likely recovery in the advertising market, but that recovery was short lived. Either way, it’s a substantial boost to the bottom lines of commercial television networks. Moreover, it won’t be offset by any additional costs relating to the new Australian content requirements of 730 hours next calendar year, 1095 hours in 2014 and 1460 thereafter. They don’t include any requirement for new Australian drama content on multi-channels, only a two-for-one incentive for first-release drama, so the requirement can be filled with news, current affairs and sport, NZ programs and repeats from what, at least for now, we know as the “main channel”, a concept that post-analog switch-off will disappear.

The production sector is unhappy with the requirements, and even pushing the line that the new requirement is somehow a “reduction” because the networks are already screening levels of Australian content higher than those that will be mandated by the government, which misses the point that there haven’t been Australian content requirements on multi-channels before.

What the requirements do is walk a line between the sort of blatant protectionism that the production sector has long demanded and both the commercial interests of the TV cartel and the reality that it is more poorly placed than ever to fund Australian drama, which is hugely expensive for a medium with a shrinking market share.

The removal of the 75% reach rule — assuming the government can secure passage through Parliament — will be mourned by no one; it has long been a peculiar historical addendum to the media ownership limits, directly aimed at stopping television networks from becoming genuinely national companies, although Kerry Stokes’s Seven has come close.

But the removal means all TV networks are now in play as either acquirers or acquisitions as networks move to mimic Foxtel’s tie-up with Austar and unlock value from slashing internal costs per viewer. As a result, the value of Seven, Ten and Nine’s licences will rise (and the value in their balance sheets). And the value of Southern Cross Austereo (which runs the Southern Cross Ten regional network) and Prime will jump as speculators climb into the shares in the expectation (WIN is not listed) of takeover bids from Ten, Seven and Nine.

The most likely scenario is that:

  • Seven will take out Prime, its regional affiliate, in NSW (Seven already broadcasts directly to regional Queensland — it is the closest to 75% of any network)
  • Nine will buy or merge with Bruce Gordon’s WIN, which is Nine’s regional affiliate and the direct owner of the weak Nine stations in Adelaide and Perth
  • Ten and Southern Cross do some sort of deal, the most likely that Southern Cross bids for the financially embattled Ten.

Deals between Seven and Prime and Nine and WIN are relatively straight forward. Bruce Gordon currently has a (loss making) stake in Ten of around 14%. One way for that would be for Nine to pay him cash for his WIN stake. That’s all Nine can do ahead of a listing on the ASX in the next two years. Nine is in the process of being recapitalised and will take on around $900 million of debt (that’s a lot, but it’s better than the $3.2 billion it owed before the recent debt for equity swap was agreed to).

Seven has around $2 billion in cash available, having raised $1 billion through accepting the News Limited bid for Consolidated Media. That would be more than enough to buy Prime and complete Kerry Stokes’ dominance of Australian television.

Ten is in the most vulnerable position. Its share register is full of billionaires or millionaires (James Packer, Gina Rinehart, Lachie Murdoch and Bruce Gordon) who are losing hundreds of millions of dollars. The question is, would they be prepared to help underwrite a merger with Southern Cross?

Lachlan Murdoch would be the most problematic. It is already a sore point that his position at News Corp and at Ten, as well as his recent acquisition of the rest of DMG Australia (a commercial radio network), while Foxtel was buying Austar and News Ltd was picking up Consolidated Media, hasn’t seen a regulator move to restrict the Murdoch family. Remember also Ten’s major program suppliers, Shine (MasterChef) and Fox (The Simpsons, Modern Family, Glee, etc) are controlled by News Corp. The Australian Competition and Consumer Commission has made it clear that following the Consolidated Media deal, News would not be allowed to bid for a FTA network. But does that apply to Lachie Murdoch in the event of a merger with Southern Cross?

If that was to happen, Murdoch would dump DMG — Southern Cross’ Austero radio network is far more important (Vile Kyle, et al) and profitable than DMG and would give the merged company a new earnings stream

The bottom line for the metro networks taking over affiliates is the difference between the affiliate fee received (from around 28% to 36% of the affiliate’s annual revenue in the case of Ten with Southern Cross, Seven with Prime and Nine with WIN). These fees are pure profit and drop straight to the bottom line. The affiliates derive their profits from the amount of revenue which remains with them, which is why they are low-cost operations.

But there are cost savings in rationalising the transmission and sales facilities, as well as programming and accounts people. Local news operations would have to be maintained and local ad sales would have to continue (Seven Queensland does that very well, as does NBN for Nine). Once the deals are done, the TV landscape would look like this:

  • Kerry Stokes would control national TV and newspapers in Perth and online operations via Seven’s joint venture with Yahoo
  • Nine would control half of Ninemsn, Ticketeck (unless sold) and some online businesses
  • Ten would have Austero and some online businesses
  • The Murdochs would control most newspapers, half of Foxtel, all of Fox Sports, realestate.com and other online investments, and indirectly control Ten.

All that would leave Fairfax stuck by itself, slowly fading away as print media revenues and sales decline. Because there’ll be no government help for newspapers.