Official papers show Television New Zealand won $79 million in government funding for its advertising-free channels TVNZ 6 and TVNZ 7, by claiming they would be self-funding by 2012. Now they are closing the new channels down to enhance profits.

Television New Zealand told the last Labour government that two advertising-free channels it was launching to lure viewers onto the Freeview digital transmission platforms would be self-funding by 2012.

Precisely how this miracle would be achieved is not revealed in the batch of Government papers that flopped into my mailbox last week as the standard one month deadline for a response to an Official Information Act request expired.

Nevertheless, the expectation that ad-free, family-friendly TVNZ 6 and ad-free news-junkies’ favourite TVNZ 7 would be self-funded by next year is explicitly described in advice from officials at the Ministry of Culture and Heritage to current broadcasting minister Jonathan Coleman:

“The funding for TVNZ 6 and 7 was always for a finite period of time and the expectation, at the time the funding was agreed, was that by 2012 the two channels would be self-funding.”

On that basis, Labour agreed five years ago to commit $79 million over six years to get TVNZ 6 and 7 up and running, and a further $25 million over five years to get the Freeview digital transmission platforms established. This funding was in addition to the $15 million a year that Labour had already committed to TVNZ to meet its public service charter responsibilities.

To ease the pain, Labour extracted a $70 million special dividend from TVNZ one month before its Freeview funding decisions were announced. The official announcement made no public reference to the self-funded future that was supposed to be in store for TVNZ 6 and 7 after the government funding ran out. TVNZ’s CEO Rick Ellis uttered a few vague comments about the potential for revenue from programme sponsorship and from fees charged for any programme content accessed via the internet, and that was that – until June 2009.

Working through a business plan that TVNZ was preparing for the new National-led government, the Crown Company Monitoring Unit [CCMAU] spotted a problem: the state-owned broadcaster now wanted to talk about further Crown funding beyond the $79 million committed till 2012.

“TVNZ has indicated in its Business Plan that when these funding streams have been exhausted, and if TVNZ is unable to generate revenue from alternative sources, then the Crown may be requested to contribute additional funding to maintain TVNZ’s digital operations.”

CCMAU advised minister Coleman to let TVNZ know that it would have to identify “options for the long-term sustainability of TVNZ 6 and 7”. It appears that there were no further developments until early the following year.

By March 2010, TVNZ’s main free-to-air rival MediaWorks must have got wind of the funding problems with the advertising-free digital channels. Officials warned Coleman that MediaWorks were concerned.

“Two issues that MediaWorks are likely to raise with you are future funding for TVNZ 6 and 7 and the current restrictions on advertising on Sundays and certain public holidays… MediaWorks is interested in learning more about future funding options for TVNZ 6 and 7 and any impact there may be on contestable funding to which it currently has access, such as the Platinum Fund.”

The $15 million contestable Platinum Fund was created at NZ On Air when Coleman relieved TVNZ of its charter obligations and its special charter funding. TVNZ 6 and 7 were barred from “double-dipping” into the Fund while they were receiving direct Crown funding, but Coleman had been thinking of changing the rules, as the officials reminded him.

“One option you raised was for TVNZ 7 to compete for a share of the $15 million Platinum Fund.”

The Platinum Fund option seems to have died at that point, becauseTVNZ then came back to Coleman with another cunning plan. It could close advertising-free TVNZ 6, transfer some of its content onto TVNZ 7. It would fill the gap on Freeview with the fully-commercialised, youth-focused “U” channel – an on-air and on-line broadcast-internet combination with interactive audience participation and revenue-generating capacity. With this in place, it could then sustain just one advertising-free channel - TVNZ 7 – while it continued the search for a sustainable solution to keep it running beyond 2012.

Coleman took this proposal to colleagues on the Cabinet Domestic Policy Committee. In a report signed out on 14 April 2010, he warned them:

“TVNZ has a limited window in which to finalise this commercial opportunity for TVNZ 6 … TVNZ says it is not in a position to subsidise a non-commercial channel once the funding ends.”

But the proposal wasn’t all about saving at least one advertising-free public service broadcasting channel. There were also commercial benefits for TVNZ in the proposed arrangement, as Coleman’s officials reminded him.

“TVNZ has the opportunity to commercialise a re-branded TVNZ 6 with a new channel targeted at a young audience… TVNZ would improve its market share across the board. In addition, it would be operating under at least two different revenue models which would improve its risk profile.”

But by August 2010, TVNZ had not been able to close its “limited window” on the basis approved by Cabinet. It came back with another proposal – and an additional commercial ingredient to sweeten the deal. It now proposed the development of a “Kidzone24” channel exclusively for the SKY pay-to-view network. ”Kidzone24” would open up a new revenue stream for TVNZ - an affiliate’s fee paid by SKY - and draw on the programme base originally intended for TVNZ 6. Treasury officials summed up the bottom line impact in a briefing paper to its Minister Bill English.

“The financial projections show that combined, the new TVNZ 6 and the new pay channel will generate a positive contribution from 2010/11 and therefore improve TVNZ’s financial performance.”

Effectively, we are seeing TVNZ turn its inability to meet its commitment to self-fund two advertising-free public service channels into a deal whereby it collects the same amount of Crown-funding to deliver just one advertising-free public service channel until 2012 - and two new commercial channels that give it access to new revenue streams and improved profits

If Rupert Murdoch had pulled a stunt like this, our politicians would be baying for blood.

Disclosure of interests: David Beatson hosts a weekly current affairs programme on the Stratos-Triangle channels and is a former chairman of NZ On Air.