Faced with a drop in revenues and earnings, the Nine Network is now under pressure to cut the secret affiliation fees charged to the operators of the Nine stations in Perth and Adelaide.
These affiliation fees are pure gold for Nine (and to a much lesser extent Seven and Ten). They are levied on a share of the sales revenues of the affiliates: STW9 in Perth, owned and operated by Sunraysia TV, and NWS9 in Adelaide, which is owned and operated by Southern Cross Broadcasting. The actual dollar amounts are not known but industry sources suggest that between $95 million and $120 million of Nine’s earnings before interest, tax, depreciation and amortisation of $215 million, came from the affiliation fees.
That means the Nine owned stations in Sydney, Melbourne and Brisbane (plus the much smaller Nine station in Darwin) may have earned as little as $95 million.
And while the actual figures are not known, it is known that the fees have helped remove this year’s earnings at STW and have slashed Southern Cross’s returns from Adelaide. So the word in the TV industry is that “Eva (Presser at Sunraysia) and Tony (Bell at Southern Cross)” have joined up to exert pressure on Nine.
This pressure comes as Nine’s AFL rights end this weekend. Both Sunraysia and Southern Cross want Nine to cut the fees because there’s no longer any AFL coverage (which have been good earners in both markets, although Nine Perth hasn’t been able to make a profit). Rival Seven will reap considerable benefits in both markets in having AFL for the next five years.
Complicating the situation is the ownership situation at STW: Sunraysia owns around 49%, WIN owns just over 43% and doesn’t have a board seat.
WIN is of course controlled by Bruce Gordon and his family, the biggest regional TV operator in the country. The Gordon family and WIN have become concerned that they are locked into STW in a minority position, which is losing money and there’s no exit strategy around. WIN wants STW to make money and wouldn’t object if Eva Presser and Tony Bell could extract concessions on the affiliation fees.
Sunraysia is yet to report but has already said the company’s $2 million first half profit (which was down 38%) will disappear in the second half and the company could lose as much as $4 million, perhaps more.
Southern Cross is also yet to report, and while it lumps its Adelaide and regional TV revenues and earnings together (it is the main regional affiliate of Ten), it has referred to the impact of the fees paid to Nine in previous profit statements.
Nine’s bottom line remains under pressure: most broking analysts are only forecasting a marginal rise in earnings over the next two years (one leading broker believes it will only rise to around $240 million at most by 2008 on an EBITDA basis).