TV networks will need to spend more on content and sports rights to combat increasing competition from streaming services even as they try to keep costs down, an analyst says.
Morningstar senior equity analyst Brian Han believes the impact on broadcasters of a dwindling free-to-air advertising market will be exacerbated by a likely step-up in competition in what is already a "fierce TV ratings battleground".
As a result, networks will need to aggressively drive down non-content costs and improve operating efficiency.
"The is no escaping the increasing competitive intensity in the free-to-air television market," Mr Han said in a research report on Tuesday.
He said Nine will not be able to sustain its "stellar" 39 per cent share of market revenue, amid Seven's committed ratings leadership and a rejuvenated Ten.
He predicts Seven and Nine will each attract 37.5 per cent of market revenue, while Ten will settle at 25 per cent under the new ownership of CBS.
"Seven is not going to give up its decade-plus reign as the TV ratings leader without a fight," he said.
"CBS did not go through the painstaking process of acquiring Ten just to be content with a paltry low-20 per cent share of the metropolitan TV advertising market."
But a relentless pressure on audience numbers will reduce industry revenue in the current financial year and again in 2018/19, he added.
The networks will therefore need to boost revenue from areas outside of traditional TV screens - such as on mobile and streaming platforms.
Nine boss Hugh Marks said at the company's November annual general meeting that the network will rely on shows such as Australia Ninja Warrior and The Block on its free-to-air TV and its catch-up service 9Now, in order to compete with the $6 billion video market.
But Mr Han argues the larger digital market brings with it a greater number of competitors, which will put further pressure on content costs.
"The likes of Netflix, YouTube and Amazon Prime Video do not appear to even need to do much for Australian consumers to flock to their services," he said.
Seven is making $25 million in job cuts over the next 12 months in response to falling ad revenues and market competition, but Mr Han said increasing competition will continue to put pressure on earnings.
"These dynamics are likely to overwhelm management's concerted efforts to cut costs, by putting further pressure on content and rights expenses," he said.
Morningstar has cut its fair value estimate on Seven shares to 66 cents, from 73 cents, and downgraded Nine to $1.40, from $1.50.
Seven West Media shares were unchanged at 60 cents on Tuesday, while Nine Entertainment closed three cents higher at $1.55.
