It doesn't seem like all that long ago when Ten Network (ASX: TEN) was riding a wave of success. It had The Simpsons, Baywatch and Neighbours and was shamelessly – and successfully – courting younger viewers.
The network seemed to have a lock on the 16 to 39-year-old age group that had lots of disposable income. It challenged for second place in the overall ratings, but it was happy not to be first as long as it was leading among the groups that advertisers wanted to reach.
Just over 8 years ago, at the beginning of 2005, Ten Network shares sold for $3.40. They've since lost more than 90 per cent of their value.
In 2009, CanWest sold its 50.1 per cent stake in Ten for $680 million, valuing the company at $1.36 billion. At the close of trade yesterday, Ten was valued by the market at only $359 million. (To be fair, that number is likely depressed by the number of shares yet to be listed after the recent capital-raising).
By any measure, Ten is a fallen star.
It's not alone in the media space, either. Much has been and will be written about the fall of traditional media.
Free-to-air television, newspapers and, to a lesser extent, radio are in the eye of the storm that has come courtesy of pay TV and the great disruptor, the internet. Pay TV itself may yet be disrupted by the "anything at any time" nature of online content.
But just as retail has fallen victim to both a cyclical economic environment and a structural disruption at the same time, it's important for investors to separate out the structural impact of the internet and Pay TV from the cyclical ebb and flow of ratings.
There was a time when the Nine Network was the unsurpassable "One" of free-to-air television. For a long time, Seven and Ten were left to battle out second and third place. Then a few years ago, Seven gained the ascendancy, relegating Nine to second-place while Ten languished.
Nine might have had some corporate troubles, but on-air at least, the network has recently managed to right the ship with some hit programs and a revitalised news effort.
Out of the ashes?
In television – just as in business – momentum is a powerful force. A hit show draws viewers, who are then exposed to the network's other offerings. They get used to that channel's presenters and learn about its new shows. They tune-in to the channel more often, and the virtuous cycle repeats.
On-air, at least, the difference between success and failure can be a few hit shows and positive buzz. Momentum is hard to create, but once present, very hard to stop.
Of course, on-air success isn't the only barometer for a company or its investors. Like many companies before them, both Nine and Ten took on way too much debt. They had no business carrying so much debt, given the fragility of their ratings, and the fracturing viewing habits of a population who for years sat down at 6pm for the nightly news almost as one.
However, now that Ten has rid itself of much of the debt burden (thanks to some high dilutive capital raisings), sold off some non-core business and cut costs, much of the necessary restructuring has been done.
An investment in Ten is not risk free – there are scenarios in which the network still goes broke, particularly if it can't restore some level of ratings success to cover its very significant fixed costs.
However, viewers are fickle, and a few good programming moves could see Ten start to recover in the ratings race. As most of its costs are fixed, extra viewers mean more advertisers and higher ad rates – and the inflow of extra cash will fall almost straight to the bottom line.
Credit and blame
Warren Buffett compensates his managers not on the outcomes they achieve, but on the things they can control.
He wouldn't pay bonuses for increased profits at an oil company just because the global oil price goes up – instead he'd likely remunerate his staff on things such as keeping costs in check.
Ten's board and management (at least the ones who were around at the time) should bear responsibility for the debt they incurred and for letting costs expand faster than the business could cope with them.
Redundancies are rarely the fault of the people who do the cutting, but those who allowed the organisation to get bloated in the first place.
Perhaps the programming team might also be in for criticism for backing the wrong horses, in terms of the shows they chose, but they're also captive to the content deals they have with US networks.
Equally, if and when the worm turns, credit should be given sparingly – at management and board level. And it may well turn.
In its current guise, the Ten Network appears friendless and without direction. If it can find a little of that elusive momentum, we may be surprised how quickly profits recover from this particularly low base.
An investment in Ten isn't one for the faint-hearted. It also might be one that evaporates completely. But, if you believe that things move in cycles, and you're prepared to be patient (and take a little risk), Ten might just give you a pleasant surprise. Seriously.
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This article contains general investment advice only (under AFSL 400691).