Ukraine is the future, says CME’s Garin

Michael Hedges August 7, 2007

The television business has never been better in Central and Eastern Europe. From the Baltics to the Balkans with every country in between these are the best of times for commercial media. CME’s second quarter financial results contain rich insight into the present and future for the region.

“There's no doubt that several years into the future the country will become our largest market,” said Central European Media Enterprises (CME) CEO Michael Garin in the investor conference call last week accompanying Q2 results. He was referring to Ukraine, where CME is fighting its most recent challenge. Results for the company as a whole were, in his words, “astonishing.” Ukraine is a challenge.

Garin defended the company’s Ukraine television operation in last weeks’ quarterly investors conference call. CME posted Q2 net revenues 38% ahead of the same period last year as well as a 51% rise in net income over the same period. Investors on the conference call focused, true to form, on the bad news. Net quarterly revenue at CME’s Ukraine television operation Studio 1+1 fell more than 10%. (Read CME press release)

Studio 1+1’s main challenges are strong competitors, weak ratings and political instability, said Garin, adding that Ukraine is the “last remaining country” where the company does not have full operating control. CME also operates two niche channels – Kino and Citi – which show growth, pointing to a fragmenting but still expanding market. The company has two local Kyiv channels.

Ukraine has three primary free-to-air television competitors; CME’s Studio 1+1, Inter TV and First Channel Ukraine (UT), the State broadcaster. Each offers several cable channels. In addition there are a few regional operators and many specialized cable channels, including MTV-Ukraine. Ukrainian steel pipe businessman Viktor Pinchuk owns or controls three channels competing for third place.

The under-funded but striving UT trails in market share but has well-regarded news, documentary and public affairs programming. Presidential candidate Yulia Tymoshenko, leading in the polls, place on her agenda the conversion of State radio and television companies into one public service broadcaster, in an announcement August 1st.

Differences between Studio 1+1 and Inter TV are not that great financially. But Studio 1+1 is culturally (and politically) associated with western Ukraine and Inter TV the east. Inter TV is primarily owned by Ukrainians from the east (district), with a minority shareholding by Russia’s Channel One. Political winds in Ukraine seem to carry television market share. When those winds blow from the east, ratings for Russian language TV rise. With elections coming to Ukraine in September and consumers feeling insecure, sales houses, according to Garin, have been withholding a portion of their spending.

CME’s minority shareholder in Ukraine is local banker Boris Fuchsmann. Both commercial broadcasters rely on programming originally produced for the Russian market. CME has used American programming, largely films, as well as programs originally produced for its Czech and Romanian outlets. Former Studio 1+1 general manager Alexander Rodnyansky and still formally its president is CTC Media general director, one of Russia’s largest television broadcasters. Studio 1+1 buys programming from CTC, which has MTG as a minority shareholder.

CME’s saga as a Central and Eastern Europe commercial television company is a snap-shot of broadcasting in the region. Other companies with large international foot-prints and significant investment in Central and Eastern Europe broadcasting include Modern Times Group (MTG), SBS (now part of ProSiebenSat), News International and, to a lesser extent, RTL. On the radio side there is Lagardère, Emmis International and Communicorp. Facing the innumerous challenges operating commercial media in developing markets has paid off. Advertising growth in most Central and Eastern Europe markets continues expanding at double digit rates. Profits for broadcasters are “astonishing,” to use again Mike Garin’s word, compared with more developed markets like the US and Western Europe.

Ukraine may be CME’s future but the Czech Republic is the present. TV Nova TV is not only the major television operation in the Czech Republic but it has become a major operator on the European level. Net Q2 revenues for TV Nova TV were €58.3 million (US$80.5 million), 37% of CME’s entire revenue. 

Ukraine’s total ad growth rate has placed it ahead of all European countries, 40% annually. Projections by Ukrainian research firm Cortex (Publicis Group) suggest total ad spending in 2011 will reach €1.5 billion (US$2.1 billion). At constant rates – pure fiction, certainly – of 50% of total advertising going to television and Studio 1+1’s 32% ad market share, the result for CME could be as much as €240 million (US$330 million). Of course, all this depends on which way the wind blows.