Assessing Market Potential

Michael Hedges August 19, 2009 (follow on Twitter)

Commercial television investors enter markets based on several factors. Most certainly, the leading decision point is cost of entry. Revenue potential is a close second. Next is strength of competitors.

Cost of entry has equalized – mostly - throughout Europe. Quirky rules between countries notwithstanding, legal structures are, at the least, defined. Where licensing is involved, terms are usually written down. Labor and other establishment costs are also – mostly – understood.

Acquisitions are a bit more tricky. In all but the UK and the Czech Republic the biggest strategic or financial investors – foreigners – face limitations designed to the advantage of local investors. Only the bold or very brave dare tread where local ‘partners’ are required.

Assessing revenue potential is also tricky. Nobody – almost – forecast the economic upheaval that began in September 2008 and its knock-on effect throughout the media world. Advertising spending is shifting, off 5% to 10% across Europe broadly. That mainly affects smaller and less well financed broadcasters. Market leaders still make a lot of money. But bigger and richer companies often fall victim to hubris; all that made them big and rich might not be enough.

Hubris also clouds assessing potential competitors. There are markets – local and national – where competent due diligence shows the cost of competition too high. Of course, savvy investors also look at the cost of buying out market leaders. In these lean times taking on a development project is rare.

In today’s Polish television market all these considerations come together brightly.  And so again – as if it ever went away – speculation about changes is rife. The biggest commercial TV broadcaster has a new leader, a challenger is taking bidders and the public broadcaster – by appearances – is falling apart.

Last week Polish commercial television broadcaster TVN hired a new CEO, Markus Tellenbach. TVN has expanded in the dozen years since its launch and holds a respectable market share with comedies, dramas, movies and reality shows. The company has launched a news channel, weather channel, business channel and others. It recently acquired digital channel ‘n’ from its biggest shareholder ITI Group.

As Mr. Tellenbach’s investiture was announced (August 13) TVN reported “smaller than expected losses,” said Reuters. Much of the speculation in and out of Poland is that Mr. Tellenbach is seated to prepare for a bid from News Corporation. Mr. Tellenbach has most recently been chairman of Sky Deutschland’s Supervisory Board, from which he is resigning. News Corporation has recently raised its stake in pay-TV Sky Deutschland, formerly Premiere, to 40% and moved key executives in from wholly owned Sky Italia. Mr. Tellenback had been COO and CEO of SBS Broadcasting through 2005 and the KKR/Permira acquisition. (More on News Corp here)

Also last week, as if on cue, was the rumor, reported by Reuters, that CME (Central European Media enterprises) is readying a bid or, perhaps, in talks with another commercial TV broadcaster, TV Puls. Everybody denied everything, except a TVF Puls spokesperson did mention that there are ongoing talks with a private Polish investment company, perhaps for the entire television company. News Corporation has taken an interest in TV Puls before, having taken a 35% stake in 2007 only to sell it back to the Order of Franciscan Brothers a year later.

And, too, CME was once a shareholder in TV Puls, pulling out when the going got weird. Although the Polish media market has certain mid and long term potential, there is little indication that CME’s CEO Adrian Sarbu wants to risk a pile of cash with its major profit centers – Romania and the Czech Republic – are under stress. (More on CME here)

Most economists see Europe coming out of recession, France and Germany being the first. And there is certainly the potential for economics to begin turning around in Eastern Europe. Poland, bordering Germany, has a variety of advantages, not the least of which less consumer dependence on credit and, at least before the downturn, robust consumer demand. The International Monetary Fund (IMF) has forecast 0.7% shrinkage in Poland’s economy this year while local economists see a 1.0% rise. Among the newest EU Member States, Poland and Slovakia have withstood the downturn’s worst effects.

What may tip the decision to look more closely at Poland’s TV market are changes expected at public broadcaster TVP, which continues to operate highly rated terrestrial and cable channels. For several years successive governments have moved to change TVP’s funding, with the obvious intent of cutting it down to terms more friendly to politicians. The most recent plan to fund TVP through direct government subsidy has stirred employees to threaten strikes. Amazingly, through all the management changes and political intentions TVP’s employees have proved resilient and audience shares remain high.

That could change and change quickly. Massive layoffs began this week (August 17), including high profile personalities and executives. Voluntary redundancies earlier this year fell short of the 12% work-force reduction now taking place. By the end of the year, 500 fewer people will work for TVP.

Five years ago the two primary TVP channels, TVN and Polsat held more than 80% of the television audience. That percentage has slipped – no, crashed – to about 60% in the first half of 2009. Niche channels on cable and satellite are gaining in Poland like the rest of Europe. Polsat announced (August 19) yet another niche channel Polsat Futball, its 9th…with two more planned.

With all the potential upside, the remaining risks are development costs and the  time required to see profits.