SABC PRESENTATION TO PARLIAMENT Robin Nicholson Chief Financial Officer 16 March 2007

Introduction The SABC has formulated a starting point for a revised funding model discussion over the last 2 years through it’s 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 it’s 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 it’s goals in the face of increasing local and international competition. These forces will drive competition for scarce resources and fragment commercial revenues.

FUNDING MODEL FOR SABC

Summary Income Statement

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 it’s share and growth is mainly driven by pricing. Regional splits are not available until the Radio management system (Dalet) is stable

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.

Funding

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 Key funding issues: mix between commercial & public

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 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 Key funding issues: public funding

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 Increase sources for licence income Key funding issues: 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 Improving other sources of Public funding Key funding issues: public funding

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 Growth will come from improving efficiency in all revenue streams in the short term Key funding issues: commercial funding

Summary Balance Sheet

Cash Flow Statement

MTEF – technology capital expenditure plan

MTEF – contingent capital expenditure

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 must be a key year for delivering the promised projects.

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.

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

Population without television access Current planning for new high sites (x3)( ) Future planning for new high sites (x5)( ) Sub-total Low – Power Initiative (Phase 1)( ) Low – Power Initiative (Phase n)( ) Sub-total Max of Community Halls, subsidised DTH, etc( ) Universal service: Low Power Transmitters

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 –Supply programming to channel owners –Sub-licensing of rights –Providing production support Universal service: DTH

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 Universal service: DTH – recommendations

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 Universal service: DTH – regulatory risks

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 Universal service: DTT

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 SABC’s ability to meet universal access goals before switchover occurs. 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 Universal service: DTT – new proposed frequency plan

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 Universal service: DTT - recommendations

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 Your only as good as your people and the decisions they make Another key issue: people and skills

Thank you

DTTDigital Terrestrial Television DTHDirect to Home (satellite) DVB-HDigital Video Broadcasting – Handheld DRMDigital Radio Mondiale DABDigital Audio Broadcasting WGDigital Broadcasting Migration Working Group ECAElectronic Communications Act No. 36 of 2006 FTAFree- to-air ICASAIndependent Communications Authority of SA IPTVInternet Protocol Television LSMLiving Standards Measure GLOSSARY