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SBS Funding and Increased Advertising

Senator LUDLAM-I am interested in pursuing some of the same issues in terms of the increased
advertising, particularly in the middle of programs. I know that was not the original intention, but it seems to have become part of the practice. Is lack of funding pushing SBS to thin out program content and insert this sort of material? Going to the questions that Senator Minchin was pursuing before, and having read how it was expressed here, will any of the additional money that you have in the budget be used to draw down the amount of advertising that you are putting into programming or is it all going into other areas?

Mr Brown-The additional money that we are receiving is broadly for the provision of local content, and
that is what it will be spent on. The impact of the commercial downturn does mean that some content that is funded by commercial dollars cannot take place.

Senator LUDLAM-How hard have those revenues been hit?

Mr Brown-As I said, between $8 million to $9 million this year, but we have navigated our way through that. Next year it will be a similar amount or it might be slightly more, but we are adjusting our budgets to compensate for that.

Senator LUDLAM-Are there proposals on the books? Are you going to be forced to increase the amount of advertising that you run?

Mr Brown-No. We are not allowed to and we have not sought any request for the act to be changed. The act specifies that the minutes are fixed at five minutes per hour. That is on radio and television.

Senator LUDLAM-You are pressing up against that ceiling, but you do not see the need to increase that?

Mr Brown-On television the five minutes per hour has been filled. You may recall when breaks were
between programs they could be as long as eight minutes.

Senator LUDLAM-They would be longer, yes.

Mr Brown-Now with breaks in programs they might be as short as one or two minutes.

Senator LUDLAM-I know a lot of the programming that you broadcast was not designed to be cut up.
What is your process for deciding and assessing where ad breaks will run? Why is the minister laughing?

Senator Conroy-We had a very lengthy discussion a number of years back when it was first introduced about whether or not Inspector Rex, for example, went to his dog bowl to eat his food and that was an appropriate time for an ad.

Senator LUDLAM-For a dog food ad?

Senator Conroy-Yes.

Senator LUDLAM-What is your process for assessing that sort of thing when you are looking at
programming that was not designed to be chopped up?

Mr Brown-I probably would not accept the definition of ‘chopped up'. Under the act we are allowed to
make use of natural breaks. There is industry recognition of what a natural break is. Clearly, it is not a real natural break. They are not created by nature. Nothing that is manmade has something natural in it.

Senator Conroy-Inspector Rex wandering into the bushes was not a natural break.

Mr Brown-'Natural' is used by the industry and is accepted globally to refer to points in productions
where there is a time lapse, a change of scene, a change of story in the case of news and current affairs programs, or change of skits in the case of a comedy show.

Senator LUDLAM-Wasn't initially a natural break when something finished and not some kind of
arbitrary change of tone or change of scene within a program?

Mr Brown-That is certainly not the industry definition and clearly could not be the case. It could not be a natural break if it finished because it would not be breaking anything. The term ‘natural break' suggests that there are points in productions. To go to your point, yes, there are some broadcasters-not many but a few- who commission content or make content that has no breaks in it in their domestic market. For instance, you might look at the BBC as the most obvious example.

Senator LUDLAM-That is what I was thinking of.

Mr Brown-The BBC runs content on its overseas channels. In this market if you watch BBC HD or UK
TV, which is owned by the BBC, or BBC Knowledge-all of these channels are available in Australia on
subscription television-they have breaks in them, and BBC is exercising the same judgement as we do-that there are natural breaks. If there are not any natural breaks then we will not put any breaks in, but most productions carry points in them the industry would describe as a natural break.

Senator LUDLAM-For cinema release movies, for example, or a BBC production, would you be able to
estimate for us what sort of proportion of programming SBS is being forced to break for these considerations and that was not designed for that to be done?

Mr Brown-I am not being pedantic, but I will pick you up on your terminology there. We are not being
forced to break. I must be clear that we will only use natural breaks where they emerge. Although we have a standard approach to the number of breaks, that can be varied for any production in any circumstances. You asked how many programs. The BBC would be one provider, but we would not carry a great deal of BBC material. Most of that is on the ABC, obviously. Films are not made for television, anyway. They are made for theatrical release. Most broadcasters who obtain films for television release will find natural breaks in them- some rather better than others. In our case, we limit the number of breaks in any movie to two. It is not difficult to find two moments in a movie where there is a time lapse, a change of sequence or a change of plot.

Senator LUDLAM-Is that a human process or a computer process to search for spots in the script?

Mr Brown-That is very firmly a human process. The criteria for natural breaks are documented and laid out. Staff are required to use those criteria in order to identify natural breaks.

Senator LUDLAM-Are you able to tell us, if these figures exist, how much additional net income the
SBS receives following the implementation of the decision to interrupt programs? Is it possible to break out the proportion of revenues that you are getting from in-program advertising as opposed to what is happening at the top of the hour?

Mr Brown-It becomes increasingly difficult because, as the years go by since that decision, there are
other things that have influenced it. Obviously, there is the increase in audience size and the fact that we are probably a more capable selling agency.

Senator Conroy-I think I did ask similar questions to this a couple of years ago. You might be able to get a measurement between what was the then advertising dollar as opposed to what was projected. It is probably updated. I was given a projected figure back then. You probably have two figures, so you can have a look at that for a comparison closer to the actual real-time issues.

Mr Brown-If you look at the last year, we did not have breaks in programs. Then if you skip a year,
because there was a year when for some programs it was transitional, and you look at the year following, my recollection is that about $12 million or $13 million increased revenue was obtained over that two-year period year-on-year comparison. As I previously said to Senator Minchin, our revenue has been increasing since then.

Senator LUDLAM-That has also come at the cost that some of the top of the hour ad breaks became
shorter, so it is being spread more evenly around the hour as well.

Mr Brown-We now place only one 30-second spot on the top of the hour. We have got rid of those inprogram breaks. They were very disruptive. They created little value in terms of revenue. They broke audience flow. People who watched one program simply would not stay through eight minutes of interruption for the next program. That meant that the promos that we placed in there that told audiences about future SBS programs were not being watched by anybody either. Some significant damage was being caused by that structure.

Senator LUDLAM-Are you concerned or are you surprised by the degree to which these opinions were
raised in the process of public submissions late last year, the degree of disquiet amongst the audience about the amount of advertising?

Mr Brown-No, I am not really. Why would anybody want any interruption of programs in a perfect
world? Even Channel 9 would prefer it if they could find another way to raise money. We do not adhere to this because we believe it is a good practice for audience enjoyment. We do it because it is the means by which we fund the programs that audiences enjoy.

Senator LUDLAM-It is because you have to. That is why I was using the language like ‘you are forced
to' before, because I figure it is not something that you prefer to do.

Mr Brown-What we sought to do three or four years ago was to lift the scale of Australian storytelling. I think we have been very successful in that. I heard Mr Scott say that back in 2006 or 2007 the ABC had a very low level of drama, and SBS exceeded it comfortably, which was quite remarkable. If you watch SBS-as I hope you do this year-you will see The Circuit returning, East West 101 and Who Do You Think You Are? These are all programs both of scale and quality that SBS could not afford to make in the past.

Senator LUDLAM-In your funding submissions to the minister did you propose funding that would be
sufficient to allow you to cease or wind back the amount of advertising that you play?

Mr Brown-No. I believe I answered this at the last Senate estimates. I made the point that our focus was on expanding services and not finding revenue to offset the commercial revenue.

Senator LUDLAM-I guess that conversation was a bit hypothetical; now we have a budget. Also in
February the minister supplied estimates that between $29.3 million to $39.7 million would be required to maintain operations for 2008 if the network were to stop interruption of programs through advertising. Those were estimates at the time. Can we verify that they are accurate now, with the benefit of hindsight and the budget?

Mr Brown-I think they are broadly accurate. I am aware that you have lodged a question on notice in this regard, and we are currently preparing those figures. From my early understanding, they are broadly accurate.

CHAIR-Senator Ludlam, we are scheduled to go to dinner now. Do you have many more questions?

Senator LUDLAM-I am happy to come back after dinner. That is fine.

CHAIR-We will break for dinner.

Senator LUDLAM-In relation to the tail end of the line of questioning around advertising and what
proportion of the income from the sale of airtime that SBS actually receives, are you taking a big commission from advertising agencies?

Mr Brown-That is, television airtime?

Senator LUDLAM-Yes.

Mr Brown-I think I am on the record as saying it is approximately 80 per cent.

Senator LUDLAM-It is 80-20.

Mr Brown-It is the industry standard that, of all advertising booked on any commercial or SBS network, that agency gets 10 per cent. Because we outsource our collection and our selling of advertising, there is an amount similar to that we pay. I am not sure if we discussed it here but it has certainly been made public that that function will become an in-house function from 1 July, so future revenue will be 90 per cent, but as I speak to you today it is 80 per cent. In four weeks time it will be 90 per cent retained.

Senator LUDLAM-So the current state of play is that 20 per cent is going to commission and you will be winding that back to 10 per cent, or is there a production component in that?

Mr Brown-No, there are two commissions in play. The first one is the commission of 10 per cent that is withheld by the agency that is buying advertising off you, so on behalf of a client. That is how that agency derives their income. They spend $1 million with a network; $900,000 of it goes to the network; $100,000 stays with the agency. In the case of SBS, since advertising started in 1991 we have been outsourcing our sales functions so that is not being performed by us; it is being performed by another entity for our benefit. That incurs a commission structure as well. I cannot tell you exactly what it is, but I think I have always made it clear that it is about 20 per cent in total. It is that second element that disappears on 1 July and then we will only be paying the same commission as every other network, and that is 10 per cent.

Senator LUDLAM-Has it been about 70-30 split to date?

Mr Brown-No, it has been 80-20 and it is going to 90-10.

Senator LUDLAM-I am with you. You will take that back. What is the decision behind internalising
those functions? Why has that decision been made?

Mr Brown-The outsource model has worked well for us and the company, Stenmark, has performed well, but at a certain point we formed a view that it would be more efficient to in-source it and it would also allow us to more strategically align that function if it were under our direct control.

Senator LUDLAM-I put this to you, Minister-I think a couple of senators around the table this evening
have raised this-it was a pretty strong policy that the government took to the last election about eliminating, if possible, advertising during programming. You have been forced through budget circumstances to fall back on that for the time being? Is it still government policy, once the financial situation improves, to reverse that and have SBS-

Senator Conroy-Could you refer me to where I stated that it was government policy?

Senator LUDLAM-So it was not government policy?

Senator Conroy-I am just asking you if you could refer me to any document source or Hansard where I have actually stated (a) we would reverse it or (b) it was a policy going to the last election.

Senator LUDLAM-That is very interesting. They are not statements that you made in the run-up to the election that you were not happy to see advertising during programming specifically-

Senator Conroy-No.

Senator LUDLAM-Not winding back advertising altogether but during the programming itself, which is
what we have been discussing tonight.

Senator Conroy-I said: can you show me a statement where I said that we would get rid of it or that it
was an opposition policy going into the last election? All you have done is quote my general view, which is that I am unhappy about it. We have said consistently over the last 12 months that we would look at it during the triennial funding round. The global financial crisis has descended on Australia and we have been dragged into it, so we are not in a position at this stage to be able to compensate SBS if we were to insist on them moving away from the current model.

Senator LUDLAM-You might require a slightly better citation than this., the website,
which I am sure you are familiar with, is running a quote by you when you were opposition spokesperson for communications:

"Labor has opposed and continues to oppose the decision by SBS to introduce in-program advertising."

I will find the date of that for you.

Senator Conroy-No, I am not disagreeing that I said that-

Senator LUDLAM-Okay. That was-

Senator Conroy-I am disagreeing with your interpretation of what that meant.

Senator LUDLAM-Can you bring us up to date on what that actually meant?

Senator Conroy-It meant exactly what it said. It just did not mean what you are saying it said.

Senator LUDLAM-I am pretty happy with the context of the quote, that you opposed when you were in

Senator Conroy-I am pretty happy with it too; I made it.

Senator LUDLAM-But it was not government policy at the time; it was just an opinion?

Senator Conroy-It was an opinion. It was never stated-you will not find any election document or any
public statement that says we would reverse it.

Senator LUDLAM-But it does not say-

Senator Conroy-There is a reason that you do not have a quote there saying we would reverse it, and the
reason is that we never said it.

Senator LUDLAM-Sorry to belabour the point, but you also have not said, ‘I, Mr Conroy, oppose'; you
have said, ‘Labor has opposed and continues to oppose'. But at the time you did not say, ‘But we will do
nothing about it once we are in government'; you just opposed it on principle at the time?

Senator Conroy-Yes. I am not happy with it and the economic circumstances absolutely mean that we are not able to compensate SBS for the funds that they currently derive from the new format.

Senator LUDLAM-That is all right. That is all I was trying to get to. Would you restate that today: you
continue to oppose that? It is obviously not a decision; it has been forced by budget necessity. Mr Brown has said this evening that it is not something that he enjoys having to do, but that is just what it came to.

Senator Conroy-I would concur with Mr Brown. We are not in a position where we can compensate SBS if we were to insist or were we to move a change, and therefore for the foreseeable future the situation stands.

Senator LUDLAM-I appreciate that. Can we go to the issue of the size of the loan that SBS took in the
recent past? You said, I think in response to an earlier question this evening, that you have not actually drawn down those funds yet. Is there a reason for that? Is it contingency funding or is it earmarked?

Mr Brown-No. I think it is just a procedural matter. It is due to be drawn down in June.

Senator LUDLAM-Was that to replace a shortfall in core funding? Can you step us through where that
loan falls in your thinking in the overall budget context?

Mr Brown-I did go through this at the last Senate estimates. The reason for it is that SBS as an
organisation lives pretty much hand to mouth. We talked earlier about the scale of surplus and how we try to manage it to as small a surplus as possible. But there are events that require us to prepay, particularly sports rights. So if we secure, as we have, the 2010 FIFA World Cup and the 2014 FIFA World Cup, the payments for those events-which are quite substantial-have to be made in years preceding the year in which the matching revenue comes in, so we have to cash flow this and some other areas as well.

In the past we have not really been exposed to this difficulty because we had a fund for digital transition.
That was to equip the SBS premises with digital equipment. This has been progressively expended over recent years and the very last dollars go out this calendar year. As those funds have dwindled, our cash position has deteriorated. So we are back to a situation of having no working capital. By that I mean additional funds obscured the fact that we have no working capital because we were using that for working capital. We took the view that if we received a loan that was to be paid off over five years we would use those five years to try to build up a level of working capital.

Senator LUDLAM-I apologise if you went through this at an earlier session, but can you tell us how
much you believe you will eventually pay back in interest repayments to the Commonwealth? Is it a loan that accrues interest? Effectively it is one arm of government lending a sum to another.

Mr Brown-Between $2 million to $3 million-perhaps $2.5 million-I would have thought, over a five
year period.


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