Things are looking up for Nine.

After years of lagging larger rival Seven and going from near-administration to an end-of-year IPO, the Australian free-to-air major has a window to consolidate recent gains before the next wave of sports rights renewals, together with possible regulatory upheaval, transform the competitive landscape.

While Seven remains Australia’s largest free-to-air broadcaster, its lead has been eroded by Nine, led by CEO David Gyngell. Improved news and sport content, as well as direct control of two local affiliates, earned Nine a bigger share of a tough ad market last year.

Third place network Ten, meanwhile, has attempted to recover audiences by targeting a younger demographic, but continues to lag well behind.

Gyngell must now sustain momentum to fend off competition, not just within free TV, but from increasingly powerful pay-TV and online players as well.

“The challenge for Nine’s management is to demonstrate consistency for advertisers, and prove 2012-13 was not a flash in the pan,” Sebastian Rennie, chief investment officer for media agency MEC in Australia, tells Media Business Asia.

Power of sport

Market conditions, however, seem to be on Gyngell’s side.

After a flurry of expensive rights negotiations in recent years, no major sports rights are up for renewal until the Australian Football League (AFL) in 2017 and the National Rugby League (NRL) in 2018.

AFL’s 2011 renewal cost Foxtel and Seven A$1.25 billion (US$1.1 billion), up 60% from A$780 million. Nine and Foxtel meanwhile paid A$1.03 billion in 2012 for the NRL rights, up 38% from A$749 million.

Sports costs continue to rise as its power to gather large live audiences, which advertisers value, becomes increasingly rare.

Historically, summer sporting events have also provided Australian networks with an annual platform to launch their new programming line-up.

“All three networks have unusually enjoyed a sporting start to 2014 – cricket on Nine and Ten, tennis on Seven,” notes Kenny Stewart, Australia CEO of media agency Vizeum.

Australian free TV companies have traditionally enjoyed protected access to essential domestic sports franchises. However, a new coalition government has promised to review existing regulation, with an eye to scaling back.

Legislated in 1992 but not enforced until 2006, these laws preserve free-to-air broadcasters’ first right-of-refusal for a lengthy list of sporting events deemed nationally significant.

Foxtel, Australia’s dominant pay-TV platform, has been lobbying for equal access to sports franchises to boost pay-TV adoption, less than a third of TV homes.

Despite years of intense lobbying, the political weight of removing free access in a sports-mad nation has stayed the hand of prior governments.

Zero-sum game

At the same time, fresh signs of life in Australia’s despondent ad market are also encouraging for Nine.

After two difficult years, free-to-air advertising is expected to rise gradually through 2017. Continued ratings success for Nine will deliver a greater share of any market upswing.

Currency swings remain problematic, however. With the Australian dollar losing almost 15% to the US dollar in 2013, ad budgets housed offshore can significantly alter local ad spend.

Nonetheless, Seven won’t cede ground without a fight.

Although Nine’s revenue share is forecast to reach 38.5% in 2015 from 34.3% in 2011, “it’s a zero-sum game,” according to brokerage and research firm CLSA. Nine’s gains have come at the expense of Ten.

Improved revenue mix

The outlook is welcome news for Nine, which has been through some dramatic changes in recent years.

Having been rescued from insolvency in 2012 by US-based distressed debt investors Oaktree Capital Group and Apollo Global Management, management has improved cash flow by selling off Nine’s old magazine business, ACP.

They also took control of Mi9, Nine’s online joint venture with Microsoft. This and the purchase of the local affiliates were seen as efforts to boost valuations for the IPO. 

While Australia’s online ad market as a whole is booming, now representing 26.3% of total ad spend, revenue at Mi9 is expected to drop once Microsoft no longer directs traffic to the site. Direct control of affiliates in Adelaide and Perth however, will likely yield higher margins.

A 1% revenue share gain for Nine in Perth and Adelaide should translate into 0.25% extra national revenue as well as a welcome 1.4% ebitda boost, according to CLSA projections.

Meanwhile, Nine’s listing documents highlighted its events arm, which contributed a cool A$167 million in revenue and 18% of ebitda.

Although the IPO weathered a number of negative price revisions, Nine finally listed in December – a feat prior management failed to achieve.

A flat stock performance post-IPO suggests the market is not overly optimistic about Nine’s prospects.

The next two years may be the last chance to prove them wrong.