SABCPRESENTATION TO PARLIAMENT

Robin NicholsonChief 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

LESS VOLATILITY LESS VOLATILITY

Trade Exchanges

COST MANAGEMENT

PRODUCTIVITY

Government Department Funding (Health/ Foreign Affairs/ etc.)

Multi-Channel

New Media

Trade Exchanges

Sports Sponsorship

PUBLIC COMMERCIAL

Trade Exchanges

SABC Retail (sell through)

SABC Publish

SABC Facilities

SABC Mobile WASP

New Media

IPTV

New Media

Joint Venture Content Production

Music

Interactive

Programme Sponsorship

PRODUCTS

TV

Radio

Direct State Funding

Regulatory

Content Sales (Content Eval)

LESS VOLATILE

Channels to market /Platforms

TV Licence s 21 Company

Allocation ModelSale of Airtime for

Broadcast services

Increased VOLATILITY

NGO (Private Public Funding Partnerships)

Advertising Funded Programming (AFP)

SABC FUNDING CLUSTERPROPOSED FUNDING MODEL UNDER THE ELECTRONIC COMMUNICATIONS ACT

ELECTRONIC COMMUNICATIONS ACT

BRANDS

PEOPLE TECHNOLOGY & KNOWLEDGE

MANAGEMENT

MARKETING SERVICES

Portal Gateway

Film

Consumer Products

MARKET VOLATILITY I

MPACTS ON REVENUE

1. Mix and Volatility matter 2. Funding choice impacts editorial options3. What is our current position?4. What is the targeted model?

IMPACT OF THE FUNDING MIX ON EDITORIAL INDEPENDENCE

Summary Income StatementSABC Ltd

Actual Forecast Budget MTEF MTEF MTEF

2006 2007 2008 2009 2010 2011

R'000 R'000 R'000 R'000 R'000 R'000

Revenue 3,971,096 4,277,273 4,879,440 5,464,973 6,011,470 6,552,502

Cost 3,463,765 4,171,107 4,719,235 5,195,724 5,571,051 5,964,352

Programme Cost 989,036 1,334,969 1,351,746 1,478,405 1,610,722 1,766,962

Broadcast Cost 360,136 398,913 490,970 532,064 574,363 624,332

Direct Licence Collection Cost 108,666 128,378 180,329 188,209 199,408 212,768

Facility Cost 60,608 91,940 85,466 110,883 116,205 122,636

Signal Distribution & Linking 315,082 356,156 389,512 410,429 430,745 455,298

Marketing 178,577 221,566 242,382 255,398 268,040 283,318

Personnel Remuneration 989,791 1,182,486 1,212,902 1,290,164 1,366,929 1,458,513

Travel & Accommodation 49,086 53,524 65,018 96,870 101,555 107,218

Professional Consultancy 47,077 66,846 227,513 237,455 246,835 258,436

Depreciation 125,870 85,104 170,141 279,340 327,241 330,398

Other Cost 239,836 251,225 303,255 316,508 329,010 344,473

Operating Profit / (Loss) before Net Financing Income

507,331 106,166 160,205 269,248 440,419 588,150

Forex 4,173 5,323 30 - - -

Operating Profit / (Loss) before Net Interest

503,158 100,843 160,175 269,248 440,419 588,150

Net Interest Received 34,541 43,132 63,420 65,444 82,945 101,737

Earnings before tax 537,699 143,975 223,595 334,692 523,364 689,887

Taxation 162,098 47,037 65,338 97,797 152,927 201,585

Net Earnings 375,601 96,938 158,257 236,895 370,437 488,302

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.

ConsolidatedSchedule analysis: Costs

Consolidated Act 03-04 Act 04-05 Act 05-06 F/ cast 06-07 Bud 07-08

Details R'000 R'000 R'000 R'000 R'000

Foreign 170,179 152,630 132,362 159,943 192,283

Overnight (foreign News etc) 2,578 2,825 2,246 13,787

Sub-Total External - Foreign 172,757 159,359 134,608 173,730 192,283

External Commissioning 401,242 437,119 529,603 559,830 766,775

Overnight (local News etc) 8,560 8,690 5,905 9,860 8,400

SABC Africa 5,226 6,531 3,984 5,121 9,297

Sub-Total External - Local 415,028 452,340 535,508 574,811 784,472

Facilities usage for external production 47,721 51,875 56,828 48,975 51,501

News (excluding foreign News) 259,777 266,831 330,211 609,825 214,926

Content Hub - - 22,559 102,474 111,633

Education * - 59,391 96,670 88,241

Religion 23,455 30,187 21,607 27,868 50,587

Sport 291,257 322,613 309,901 405,534 460,164

Sub-Total I nternal 622,210 671,506 800,497 1,291,346 977,052

Total = I ncome Statement (P&B) 1,209,995 1,283,205 1,470,613 2,039,887 1,953,807

% Local Content (External) 70% 74% 79.91% 77% 80%

% Foreign Content (External) 30% 26% 20.09% 23% 20%

Funding

SABC Ltd

Income Statement: funding

Actual % Change Actual % Change Budget Forecast % Change Budget

2005 2005 vs 2006 2006 2006 vs 2007 2007 2007 2007 vs 2008 2008

R'000 % R'000 % R'000 R'000 % R'000

Commercial Revenue 2,802,691 13.56 3,182,784 10.68 3,576,690 3,522,797 8.10 3,808,283

Public funding 616,758 44.17 889,175 7.10 993,574 952,332 12.48 1,071,157

Gross Licence Revenue 568,077 30.04 738,720 1.37 790,092 748,850 15.51 865,001 Government Grants 48,681 3.65 50,455 6.00 53,482 53,482 5.00 56,156 Government Recapitalisation - 0.00 100,000 50.00 150,000 150,000 0.00 150,000

TOTAL REVENUE 3,419,449 19.08 4,071,959 9.90 4,570,264 4,475,129 9.03 4,879,440

Expressed as a % of Total Revenue

Commercial Revenue 82.0% -4.64 78.2% 0.71 78.3% 78.7% -0.85 78.0%

Public funding 18.0% 21.07 21.8% -2.55 21.7% 21.3% 3.16 22.0%

Gross Licence Revenue 16.6% 9.20 18.1% -7.76 17.3% 16.7% 5.94 17.7%Government Grants 1.4% -12.96 1.2% -3.55 1.2% 1.2% -3.70 1.2%Government Recapitalisation 0.0% 0.00 2.5% 36.49 3.3% 3.4% -8.29 3.1%

TOTAL REVENUE 100.0% 0.00 100.0% 0.00 100.0% 100.0% 0.00 100.0%

• 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

Balance Sheet for SABC Ltd

Scenario: BaseThousands of Rand

Actual Forecast Budget MTEF MTEF MTEF2006H 2007 2008 2009 2010 2011

ASSETS

Total Non-Current Assets 1,284,456 1,447,143 1,711,261 1,838,590 1,868,849 1,793,451

Total Current Assets 1,985,191 2,422,120 2,457,612 2,706,988 3,177,005 3,707,645

Total Assets 3,269,647 3,869,263 4,168,873 4,545,578 5,045,854 5,501,095

EQUITY AND LIABILITIES

Equity Capital and Reserves 1,957,977 2,071,915 2,230,183 2,467,078 2,837,515 3,325,817

Government Asset Funding 100,000 250,000 400,000 550,000 700,000 700,000Other Non-Current Liabilities 523,453 704,807 727,300 734,279 674,127 590,071

Total Non-Current Liabilities 623,453 954,807 1,127,300 1,284,279 1,374,127 1,290,071

Total Current Liabilities 688,218 842,541 811,390 794,221 834,212 885,208

Total Equity & Liabilities 3,269,647 3,869,263 4,168,873 4,545,578 5,045,854 5,501,096

Cash Flow Statement for SABC Ltd

Scenario: BaseThousands of Rand

Actual Forecast Budget MTEF MTEF MTEF2006H 2007 2008 2009 2010 2011

CASH FLOW FROM OPERATING ACTIVITIES Cash Receipts from Customers 3,792,325 4,002,240 4,857,779 5,416,104 5,961,980 6,492,176Cash Paid to Suppliers and Employees -3,140,980 -3,942,800 -4,542,831 -4,857,639 -5,158,018 -5,629,059Net interest received 34,541 43,131 63,419 65,444 82,945 101,737Taxation Paid -143,888 -118,219 -163,811 -141,742 -221,645 -292,167

Net Cash Flow from Operating Activities 541,998 -15,647 214,556 482,167 665,262 672,687

CASH FLOW FROM INVESTING ACTIVITIES Purchase of Fixed Assets -199,324 -216,805 -434,259 -406,670 -357,500 -255,000(Increase) / Decrease in the LT Loan Receivable 1,948 14,859 0 0 0 -0

Net Cash Flow from Investing Activities -197,376 -201,946 -434,259 -406,670 -357,500 -255,000

CASH FLOW FROM FINANCING ACTIVITIES Increase / (Decrease) in LT Borrowings -20,864 -26,188 -7,326 0 0 0Increase / (Decrease) in Government Funding 100,000 150,000 150,000 150,000 150,000 0Increase / (Decrease) in Other LT Liabilities 67,428 207,542 29,819 6,979 -60,152 -84,056Increase / (Decrease) in Capital 2,139 0 0 0 0 0

Net Cash Flow from Financing Activities 148,703 331,354 172,493 163,408 89,848 25,134

Net Increase in Cash and Cash Equivalents 493,325 113,761 -47,210 238,905 397,610 442,822Cash and Cash Equivalents - beginning of year 368,426 869,028 982,789 935,579 1,174,484 1,572,095

Cash and Cash Equivalents - end of year 869,028 982,789 935,579 1,174,484 1,572,095 2,014,916

Cash Flow Statement

MTEF – technology capital expenditure plan

2004 2005 2006 2007 2008 2009 2010 2011 TOTAL

R'm

100 150 150 150 150 - 700 17 69 108 134 188 -1 -19 - 496

17 69 208 284 338 149 131 - 1,196

100 150 150 150 150 - 700 - 69 22 -46 156 277 18 12 508

- 69 122 104 306 427 168 12 1,208

NON-TECHNOLOGY CAPITAL EXPENDITURE PLAN

SABC Funding - 37 67 115 521 471 140 71 1,422

TOTAL SABC CAPEX PLAN - 106 189 219 827 898 308 83 2,630

Revised technology plan

MTEF

R' millions

SABC LIMITEDTECHNOLOGY CAPITAL EXPENDITURE PLAN

SABC Funding

Original technology plan

Government Grant

Government GrantSABC Funding

MTEF – contingent capital expenditure

2008 2009 2010 2011 TOTALR'm

100 100 100 100 400 150 150 150 - 450

150 150 150 450

250 400 400 250 1,300 Total

Contingency capital expenditureR'millions

DTT

New media2010 Soccer world cup

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 2009. 2008 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.

2008 2009 2010 2011

936 1,175 1,572 2,015 Cumulative capital expenditure adjustment to cash - -250 -650 -1,050 Contingency capital expenditure -250 -400 -400 -250

Adjusted probable year end cash balance 686 525 522 715

Funding planR'millions

Closing balance per 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 3 600 000

Current planning for new high sites (x3) (600 000)

Future planning for new high sites (x5) (500 000)

Sub-total 2 500 000

Low – Power Initiative (Phase 1) (1 500 000)

Low – Power Initiative (Phase n) (800 000)

Sub-total 200 000

Max of Community Halls, subsidised DTH, etc (200 000)

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

Thank you