Free-to-air television is one of the things we take almost for granted. Since the equalisation reforms of the 1980s and early 1990s, regional Australia has enjoyed much the same television services as metropolitan Australia. The 2000s saw the introduction of digital TV, with the federal government pouring in funding to underwrite its rollout in the regions. The regional TV industry met that challenge and thrived.
But today several new trends are converging to create the biggest challenge that regional TV has ever faced. The consequences will be significant. Over the next few years, it is likely that the regional TV industry we are familiar with will change dramatically.
First, regional TV stations have to pay the metropolitan networks for most of the content they show. Since equalisation, the amount they have to pay has grown. In the 1990s, it was around 20 per cent of the regional TV networks' revenue. Today it's more like 50 per cent. That's a big increase in the cost base.
Second, free-to-air television has been hammered by the new subscription video-on-demand (SVOD) services like Netflix. And this competition isn't easing. It's getting stronger with the entry of Amazon Prime, Disney+, Binge and a host of others.
The free-to-air networks are responding with their own online services. You can watch free-to-air catch-up TV online if you have a good broadband connection, and the NBN is making this easier and easier. We estimate that by 2025 about one-quarter of all free-to-air viewing in Australia will be online. These are called broadcast video-on-demand (BVOD) services.
But there's a catch. Those online free-to-air TV services are operated by the metropolitan networks, not the regional networks. The metros control the content, and their agreements with the regional TV network don't allow the regionals to operate their own BVOD services. Whenever you watch a free-to-air show online, those ads you see aren't generating revenue for the regional network. They are generating revenue for the metropolitan network. And the more free-to-air TV that is watched online, the less revenue for the regional TV networks.
These changes are already having a big impact on regional TV advertising revenue. Responding to a federal government reform paper earlier this year, the three biggest regional TV networks - WIN, Prime and Southern Cross Austereo - reported that their revenues in the key eastern Australian markets had fallen by 29 per cent between 2015 and 2020.
The reforms of the past few decades have improved service delivery enormously, and created a truly competitive market for TV advertising for regional businesses. But it has also put the regional TV networks on a higher cost base, which they are increasingly ill-equipped to maintain. This has already led to the closure of some local news bulletins, and more will close in future.
It isn't hard to work out what happens when the cost base is mostly fixed and the revenue keeps falling. We estimate that the regional TV industry could become unprofitable by 2024. If nothing is done, the result will inevitably be the disappearance of local coverage first, then the withdrawal of service in the most unprofitable areas.
But it is very unlikely that nothing will be done. The federal government is committed to ensuring equal or close to equal services in regional Australia. The only question is how to do it best, as the technology and finances of the industry change, and how much it might cost.
It depends on a lot of factors - how media regulation might change, what deals the regional and metropolitan networks might reach, and how much money the federal government is prepared to invest to keep the show on the road. But we have a reasonable idea what the possibilities are.
The first option is a subsidised status quo, where the government is committed to open-ended and growing financial support to the regional TV industry. By 2026, we estimate this could amount to $160 million a year, and this would increase if regional revenues continued to fall. This would expose the government to an open-ended financial commitment that might ultimately be comparable to running another SBS.
Another approach would be to shut down terrestrial transmission in some areas to reduce costs, and move households to satellite TV. This option would also impose significant establishment costs. The hardware alone costs a household about $400 (not including installation costs), and the government would inevitably be called upon to heavily subsidise this.
Then there are bigger possibilities. Back in 2017, the government relaxed media regulation to allow metropolitan networks to acquire or merge with regional networks. Some networks already have close working relationships and share some systems. Merged national networks would be able to carry regional costs more easily, and offer BVOD services nationally.
The regional networks themselves would prefer to merge between themselves to make a bigger, more profitable regional TV conglomerate. Some versions of this "regional champion" approach involve mergers with other regional media like newspapers. This wouldn't prevent the erosion of their advertising revenue by metropolitan BVOD, but it might reduce the cost base enough to keep the industry viable. But this option requires changes to cross-media legislation - legislation which is being reviewed by a Senate committee at this very moment.
Finally, we might see a combination of these measures. While one or more regional networks might merge with their metropolitan counterparts, others might merge with other media locally. Maybe satellite delivery could be considered for the costliest parts of the country, with the whole thing supported by some upfront and ongoing government subsidies.
These are issues that the federal government and the industry will need to address over the next few years. But what we can say for certain is that change is coming, and it can't be delayed too much longer.
- David Kennedy is managing director of research firm Venture Insights and co-author of the new report, Regional commercial TV in Australia: challenges and opportunities, commissioned by Swinburne University of Technology.