SABC PRESENTATION TO PARLIAMENT

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SABCPRESENTATION TO PARLIAMENT
Robin Nicholson Chief Financial Officer
16 March 2007
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Introduction

• The SABC has formulated a starting point for a
  revised funding model discussion over the last 2
  years through its internal management and Board
  process and through some Public participation in
  the PBS colloquilliums.
• The funding mix remains between Commercial and
  Public funding sources but with a revitalised
  strategy for growing Public funding and ensuring
  a more accountable and transparent allocation of
  the proceeds of Public funding.
• New Commercial revenues will be sought but more
  from non advertising sources including New Media
• The SABC will also actively engage in
  productivity growth initiatives and some direct
  cost reduction activities
• In seeking to revitalise its public funding and
  grow the commercial elements the SABC will be
  faced with even greater PBS requirements as
  specified in the Act and as suggested under the
  DTT announcements.
• The SABC will require even greater support form
  stakeholders to achieve its goals in the face of
  increasing local and international competition.
  These forces will drive competition for scarce
  resources and fragment commercial revenues.

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FUNDING MODEL FOR SABC
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Summary Income Statement
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Key Issues and Trends Consolidated Income
Statement

• Revenue from all sources is under pressure from
  internal dimensions and required changes in
  trading policy. Classical advertising revenue in
  particular will face increased competition from
  new entrants
• New revenue streams will show strong growth but
  relative size of advertising based revenues
  continue to dominate. Revenue mix is largely
  unchanged
• TV licence revenues requires a rate increase to
  revitalise growth. New strategies are in lower
  yielding areas such as licence inspection
  services
• Audience changes and schedule instability are
  having a significant impact on revenue combined
  with management instability has led to a 5 loss
  of share worth R125m on budget R165m at rate card
• The management team is at full strength but a
  significant amount of work is required and
  benefits can only be expected in the second half
  of the next financial year. The TV fix will take
  at least 18 months
• Radio will continue to under perform relative to
  its share and growth is mainly driven by
  pricing. Regional splits are not available until
  the Radio management system (Dalet) is stable

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Key Issues and Trends Content Costs

• 2008 will be the final year of the big content
  investments to meet ICASA licence conditions.
  This will continue to result in an unstable
  schedule and line up changes.
• Content Enterprises will continue to invest
  heavily in improving the quality of content
  including an allocation to Research and
  Development of shows and formats.
• Content sales to new channels and operators
  offer a significant opportunity over the near
  term but are unlikely in the current fiscal.
• Certain projects that are housed in Content
  Enterprises are transversal and increase the
  overhead load on platforms. This model needs to
  be investigated as significant overhead
  duplication could arise in future.
• The role clarity between Television and content
  has been done but direction in ensuring
  implementation is now required.
• The performance of Sport will be key to revenue
  and audience performance on all platforms with
  two World Cup events in 2008 budget ICC Cricket
  and Rugby World Cup. Sales needs to strengthen
  performance in this area. In particular the use
  of sales agents must be addressed.
• News has requested significant increases in
  Current affairs on Radio. Although the output is
  required further work around the HCS strategy to
  achieve the outputs is clearly required.

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Funding
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Key funding issues mix between commercial
public

• The SABC needs to increase revenue from non
  advertising sources to dilute advertising
  influence on scheduling and content choice
• Increase Public funding
• Increase funding from the sale of content
• Increase revenue from Brand exploitation and
  consumer products
• Improve the use of trade exchanges
• Launch new platforms to exploit content

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Key funding issues public funding

• Licence income remains a core element of the
  funding strategy but needs to be more efficient
  in collection and with transparent allocation to
  Public Broadcasting

• In a converged space can we account for the
  policy implications that Public money should not
  fund/subsidise commercial activities?
• Ring fenced income to support public services
  funding
• Revise the allocation model for services and
  programmes to be based on programme and services
  deliverables. This is more transparent with
  greater public accountability
• Rights ownership may vest in public entity and
  needs further investigation
• Tax exemption improves funding efficiency by 29
• Apply for VAT exemption as procures public
  services 14 gain
• Change the SAMRO contract as does not support
  commercial activities 2,5 gain

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Key funding issues public funding

• Increase sources for licence income

• Multi channel television will enable better
  collection
• Enforce multi channel (Multichoice) subscriber
  base payments
• Deploy Mobile TV licence revenue strategy
• Introduce a Broadcast levy on all new TV
  equipment
• Enforcement through TV inspectorate
• Apply for a rate increase to counter effects of
  inflation

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Key funding issues public funding

• Improving other sources of Public funding

• Develop funding relationships with International
  foundations that fund PSB programming without
  compromising editorial independence
• Carnegie, Rockefeller foundation, SABC Foundation
  for CSI, The Wellcome Trust UNESCO etc
• Direct funding of Public programming by
  Government departments and institutions
• Technology recapitalisation
• Corporate social responsibility opportunities

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Key funding issues commercial funding

• Growth will come from improving efficiency in all
  revenue streams in the short term

• TV Airtime exploitation will move to overnight
  ratings and seek to remove discounts and achieve
  average station pricing for all time channels
• Introduce advertising Transmitter splits to
  reduce free audiences and offer more choice to
  advertisers.
• All consumer product offerings will be
  consolidated into one sales channel SABC Retail
  to focus on channel management for brand and
  content exploitation
• New media offerings will focus on
• Mobile Content Offerings (WASP ring tones)
• Mobile Service offerings (WASP directories etc)
• Airtime exploitation with platforms (Win iKhaya)
• Content creation will move to Content
  Enterprises as new unit
• Consistent and policy based use of trade
  exchanges

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Summary Balance Sheet
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Cash Flow Statement
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MTEF technology capital expenditure plan
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MTEF contingent capital expenditure
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Key Issues and Trends Capital Expenditure

• While a significant number of project are making
  their way through the approval process the
  execution of the projects is significantly behind
  schedule. The BETPRO is intended to assist in
  execution but the shortage of skilled
  technicians, project managers and engineers
  remains a stumbling block to execution.
• Project implementation and monitoring is now key
  to managing the risk of non delivery. The SABC
  must be able to meet the broadcast requirements
  for 2010 in 2009. 2008 must be a key year for
  delivering the promised projects.

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MTEF funding plan impact
Note As such, the contingency capital spending
would reduce the cash holding and thus reduce the
net interest received as per the cash flow
statement.
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Universal service Low Power Transmitters

• Given short-term coverage constraints and that
  high sites have almost run their course
  consider alternative technology of low power
  localised transmitters
• Would provide coverage to a patchwork of
  villages/communities relatively quickly and at no
  cost to intended audiences
• Lump sum of R50 million and annual social
  investment of R5 million per year
• R50 million will be paid over to Sentech an
  additional request in terms of their MTEF

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Universal service Low Power Transmitters
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Universal service DTH

• Two opportunities were identified for the SABC
• Platform owner
• Subscription TV application with Sentech (option
  to expand to cable)
• Business plan due diligence exercise conducted
• Critical Business Risks
• Ability for market to sustain multiple new
  players
• New Free-to-air (DTT) channels services will
  dilute the value proposition
• Funding requirement R8bn
• Content supplier
• SABC biggest producer aggregator of content in
  Africa - distinct advantage as a content
  provider
• Packaging of SABC branded channels
• Exploitation of sports and other rights
• Developing programming propositions for new
  players
• Increasing content sales through licensing of
  content
• Sale of archive content
• The following opportunities exist for
  distribution of content
• Partner with platform owners as a strategic
  content supplier
• Supply fully packaged channels to platform owners

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Universal service DTH recommendations

• Opportunity 1 Platform Owner
• Little to no public service value for SABC
• High level of investment over long period of time
  making it a very high risk opportunity
• Lack of a comprehensive investment and decision
  making framework with criteria to evaluate from
  both a public service and investment point of
  view
• Pursue only if SABC has strong partners that can
  fund the rollout
• Opportunity 2 Content Supplier
• Lower risk, although reliant on establishing
  distribution partnerships
• Does not require as much investment
• SABC has significant experience in content
• Not dependent on SABC owning a platform
• Pursue as it presents potential new revenue
  opportunities

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Universal service DTH regulatory risks

• Issues were submitted to ICASA dated 31 January
  2007
• The need for ICASA to develop regulations on
  must-carry as per ECA
• ICASA must determine the extent to which pay TV
  operators must carry the television programmes of
  the public broadcaster, subject to commercially
  agreed terms
• Suggested to ICASA that it should impose a
  must-carry rule on pay TV operators and should
  publish these rules before awarding licences
• The need for ICASA to amend the regulations on
  national sporting events
• The ECA amended the law on national sporting
  events and the regulations must now also be
  amended in order to provide for a deadlock
  breaking mechanism
• Argued that ICASA should do this before issuing
  licences
• The need for ICASA to set public interest
  programming obligations for pay TV operators
• Argued that all tiers of broadcasters should make
  public interest contributions such as for
  instance the obligation to provide public access
  channels.
• The need for ICASA to ensure that SABC has access
  to subscriber databases of subscription TV
  licencees in order to verify TV licence holders

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Universal service DTT

• National policy to migrate from analogue
  terrestrial broadcasting to digital broadcasting
  by 2015
• Offers a platform for distribution of more
  content both during and after switch-off on a
  free-to-air basis
• Two primary opportunities
• Platform owner
• Content Supplier
• However, alternative business models also present
  themselves which impact on the funding model
• Platform owner within a walled garden
• Content supplier in an open space
• Content supplier to a walled garden

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Universal service DTT new proposed frequency
plan

• Sentech and ICASA have developed a new frequency
  plan for DTT roll-out which allows for four
  national multiplexes, instead of the two allowed
  for under the previous plan.
• It is being suggested that the two additional
  multiplexes be reserved for use by DVB-H
  operators exclusively.
• In this way, the new plan does not provide for
  additional capacity for DTT.
• The new plan would require extensive analogue to
  analogue migration on all the free-to-air
  channels. This would impact significantly on SABC
  television audiences and may mean that up to
  10.7m viewers would need to retune their
  televisions or replace their antennas.
• In addition, the new plan would severely curtail
  further analogue migration which would impact on
  the SABCs ability to meet universal access goals
  before switchover occurs.

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Universal service DTT new proposed frequency
plan

• For these reasons, the SABC should not give its
  support to the new proposed frequency plan
• The plan will effectively result in a transfer of
  social value from the 10.7 million viewers in the
  lower LSMs to viewers in the higher LSMs who
  would be able to afford the DVB-H devices to
  access the DVB-H signal
• The SABC finds this disturbing and cannot accept
  or support such a plan
• If it is decided that additional national
  multiplexes are required for DTT, the possibility
  of M-Net and CSN conducting a hard migration
  should be investigated.
• Any additional frequencies that are made
  available must be made available for additional
  public service delivery

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Universal service DTT - recommendations

• Opportunity 1 Platform owner
• Ownership of multiplex enables public service
  delivery, including delivery of services such as
  24 hour news
• Control the platform on which SABC licenced
  channels operate
• Limited impact on cost and on current business of
  SABC
• Subject to final policy from DoC
• Remains a viable and lucrative opportunity
• Opportunity 2 Content Supplier
• Opportunity to exploit current and future content
  on free-to-air
• Supply new channels or individual programmes
• Offers new revenue opportunities within current
  business model
• Opportunities for subscription channels at a
  later stage
• Not dependent on DoC policy
• Remains a viable and lucrative opportunity

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Another key issue people and skills

• Your only as good as your people and the
  decisions they make

• Introduce key elements of the SABC academy
  through a centre of excellence that focuses on
  commercial decision making and utilisation of
  productivity tools.
• Make sure that staff are competent to use new
  systems
• Motivation comes from an empowering workplace
  where accountability is wanted not forced
• A strong retention strategy is required
• Succession planning will ensure sustainability in
  management and reduce risk
• Remuneration must be market related
• Performance measurement and management is not a
  negotiable

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Thank you
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GLOSSARY

• DTT Digital Terrestrial Television
• DTH Direct to Home (satellite)
• DVB-H Digital Video Broadcasting Handheld
• DRM Digital Radio Mondiale
• DAB Digital Audio Broadcasting
• WG Digital Broadcasting Migration Working Group
• ECA Electronic Communications Act No. 36 of 2006
• FTA Free- to-air
• ICASA Independent Communications Authority of SA
• IPTV Internet Protocol Television
• LSM Living Standards Measure