The advertising rebound that is driving big revenue growth and a new round of media deals is also likely to mean the government’s rebate of licence fees to the free-to-air TV cartel will cost taxpayers tens of millions of dollars more than estimated — and will have to be made up for in the coming Budget.

This week, Kerry Stokes’s Seven Group, currently aiming to merge with another arm of Stokes’s media and construction empire, newspaper and radio group WAN, predicted an earnings increase of 20% for 2010-11, driven mainly by television advertising. Last week regional broadcaster Prime unveiled a return to profitability on the back of a 10% increase in sales in the first half of 2010-11. Southern Cross, which operates across regional radio and television and is looking to acquire Austereo, reported a rise of 5.9% in revenue.

Regional media markets rarely see the sorts of strong advertising growth of metropolitan areas, which are highly cyclical, so Prime and Southern Cross suggest the rebound extends right across the country.

Things looked rather grimmer this time last year. On February 7 last year, Broadband Minister Stephen Conroy sparked weeks of controversy when he announced the government would be giving a generous rebate to the commercial TV broadcasters in order to ensure they could continue to produce local content, as they are required to as a condition of their licences. Conroy cited the internet, digital switchover and the impact of the GFC as the reason for the handout. A meeting between Conroy and Stokes on the ski slopes of Colorado featured prominently in media coverage of the decision, until it emerged Tony Abbott had a secret meeting with Rupert Murdoch. The Coalition ended up backing the rebate.

Conroy was right about the GFC. Broadcaster revenue — on which licence fees are based — fell in 2008-09, by 9%.

But the broadcasters have all been generously compensated by the government for digital transition, either directly in the case of regional broadcasters, or through restrictions on competition and the punitive anti-siphoning list. And while internet-based advertising revenues have continued to outperform virtually every other medium, that has primarily been at the expense of newspapers.

Better yet, in 2009, the industry’s pliant “co-regulator” ACMA also signed off on a remarkable change to the industry’s code of practice allowing tens of millions of dollars worth of extra advertising.

The dip in advertising revenue proved to be short-lived. Last July, Free TV Australia revealed figures for 2009-10. Due to the recalcitrance of the Ten Network, they might be the last global FTA revenue figures we see until ACMA puts together its annual compilation of licence fee data, usually many months after the end of the relevant financial year.

In 2009-10 ad revenue rebounded to $3.692 billion — below 2007-08, but a healthy lift from the GFC-smashed return of 2008-09. The licence fee rebate announced by Conroy was 16.5% in 2010, 41.5% in 2011 and 25% in 2012. In last year’s budget, the rebate was costed as a net $209 million. That involved some sleight of hand, however.

First, the cost of the lost licence fee revenue of $243 million was offset by the rise in corporate tax revenue of $36 million — that is, the additional revenue not paid as licence fees flowed through to the bottom line of the broadcasters and meant they paid a bit more tax. Fair enough.

But what did officials calculate the revenue on? It turns out they used 2008/09 as its projection for 2010, 2011 and 2012. In essence, it predicted that the massive impact of the GFC would continue to hammer ad revenue for three years afterward, even when it was becoming apparent that revenue was rebounding. Quite why Department of Finance officials would have agreed with such an unrealistic costing isn’t clear. It’s their job to reality-check the claims made by line agencies such as DBCDE. Sometimes hard-pressed finance bureaucrats miss things in the pre-budget rush — it’s a demanding time — but the government made this decision in February, not in the budget process.

Calculating the licence fee is slightly complicated — the formula is progressive, so big licensees pay more than smaller ones. Regional broadcasters don’t earn anywhere near what 7, 9 and 10 do in the capitals, so they contribute much less to the licence fees. But with some averaging you can reverse-engineer the budget costing to see that it was assumed advertising revenue would grow at 2% pa across all three years. That’s below CPI, and it also assumes that non-advertising revenue e.g. from program sales and affiliation fees — doesn’t change at all.

Based on Free TV’s figures from last July, taxpayers are already out of pocket more than a million dollars. That’s not much, but the high growth seen this year and its continuation next year will significantly increase the cost to taxpayers.

Crikey costed two scenarios — a conservative one in which growth in ad revenue is at the bottom end of current projections — 6%. This is below current analyst forecasts — for example, a fortnight ago UBS forecast that metropolitan TV ad revenue would rise 10% this year. That scenario also holds non-advertising revenue steady in real terms.

That means the licence fee rebate costs taxpayers an extra $20 million. Minus additional corporate tax, that means we’re out of pocket by $17 million, all which is a straight gift the highly protected FTA cartel.

The high-growth scenario assumes 10% growth for all broadcasters. That’s still well below Seven’s 20% growth, but Seven gets a premium for being No.1, so we’ve assumed that growth will be atypical even for metro broadcasters. The high-growth scenario also assumes non-advertising revenue recovers back towards the levels of the middle of past decade, although still well short of 2004-05, when the networks earned more than half a billion dollars from other sources.

Under the high-growth scenario, the rebate costs taxpayers $279 million, $35 million more than estimated, with an extra $4.9 million coming back to Treasury via tax receipts.

The sorts of increases Seven is claiming would send the cost north of $50 million.

The impact will have to be costed into the May budget. A spokesperson for Minister Conroy told Crikey “as with any revisions to budget estimates, revisions of the estimated rebate net cost will be undertaken in the context of the 2011-12 budget”.

Bear in mind the 2011-12 budget is expected to contain significant spending cuts. The Broadband and Communications portfolio might have to find a couple of tens of millions worth of savings.

The $280 million the rebate will now cost would have been a handy contribution to the cost of the flood recovery package — in fact it would nearly cover the cost of the government’s concessions to the Greens to secure their support for the package. What chance do you reckon there is of Kerry Stokes, James Packer, Lachlan Murdoch and the private equity outfits surrendering it? But with a booming advertising market, they can far more easily afford to give up their rebate than PAYE taxpayers coughing up via the government’s flood levy.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey