PŘÍLOHA Louče 42

The Czech TV Market and Foreign Investment

© Milan Šmíd

(Seminar at the EBP Annual Meeting 27.-29.6.2001 - Prague, Czech Republic)

I am here to describe to you the Czech television market, to mention some foreign investors and to tell you a story, which one party quarrelling about the station TV Nova calls the Great TV Robbery.

To understand all the peculiarities of the story, one needs to start 12 years ago and to get acquainted with the stage of the show and with the actors in the story.

(graph - channels in the Czech Republic)

The former communist Czechoslovakia had two nationwide television channels and a set of transmitters which rebroadcast the signal of the first Soviet channel from satellite. Cable TV was nonexistent, apartment houses used master antenna systems (MATV) with a capacity of six to eight channels. This capacity was utilized for overspill signals of foreign channels (in border regions) or for one or two channels received by a satellite dish, usually bought with money collected from the tenants of the house.

The Velvet Revolution started a chain of events which changed the Czechoslovak media landscape. In May 1990 the Soviet rebroadcast channel was replaced by a new TV channel, OK3 (otevřený kanál - Open Channel), which was a mixture of different satellite feeds (RTL Plus, SuperChannel, MCM, ScreenSport, CNN etc.)

Czechoslovakia became the first among the former East bloc nations to adopt a new Federal Broadcasting Act (on October 30, 1991), which legalized private broadcasters in a mixed public/private system.

The initial concept of the dual broadcasting system, as envisioned in the 1991 broadcasting law, presupposed that the public broadcasting sector should operate two of the three available nationwide networks. The third, at that time incomplete, network - OK3 - was left available for private broadcasters, along with all the remaining free frequencies

The election in June 1992 led not only to the division of Czechoslovakia into two independent states, but also changed the initial concept of the mixed TV broadcasting system.

The new Czech government, led by Václav Klaus' Civic Democratic Party (ODS), shared the belief that a free-market economic system in the mass communication field should be better supported. The new Czech Parliament decided that not OK3, but one of two nationwide CST networks should be privatized (the F1 channel was the choice at the end). The public-service sector should operate only one national channel and the OK3 frequencies.

In June 1993, the Czech-Italian joint venture Premiéra TV went on the air in the Prague region as the very first Czech TV private station, but its cheap programming and limited coverage did not impress the Czech audience, and it was the appearance of TV NOVA that was a real milestone for broadcasting in the Czech Republic.

On February 4, 1994, the private national television channel NOVA began broadcasting in the Czech Republic. TV NOVA became the first commercial station to broadcast nationwide not only in the Czech Republic, but also among all the states of Central and Eastern Europe.

(graph - TV market: the market shares)

The viewing public tended to favor the arrival of commercial television and appreciated the new style of commercial programming. TV NOVA surpassed its competitors after four months, in the period of May-July 1994. The peak of the TV NOVA's market share was reached in the spring of 1995, when its figures exceeded 70 per cent. The data were supplied by a media-wide opinion poll, Media Projekt. However inaccurate or distorted results of the Media Projekt may be due to the crude method of sampling the data, there is no doubt that they reflect basic trends. Even after more precise data about TV viewing was supplied by peoplemeter research from June 1997, TV NOVA retains its dominant position, which now fluctuates at about 50 per cent of the TV market.

(graph ATO - June 2001)

The arrival of commercial TV had an impact also on the advertising market.

(graph - development of advertising market in the Czech Republic
comment: turnover is about 400 million Euro, television takes about 170 million Euro, television advertising is shared by TV NOVA 65 per cent, Czech TV 20 per cent, TV Prima 14 per cent, others 1 per cent).

The Czech republic differs from other East European countries in that advertising in print media had the largest piece of the market cake. In 1998, television surpassed the print media.

The dominant position of TV NOVA on the advertising market stems from the dominant position in rating data. And this position stems also - not only from the way the TV signal is distributed in the Czech Republic

(graph - TV equipment in households
comment: 80 per cent of viewer receive the signal terrestrially, the cable penetration about 17 per cent, satellite dishes more than 10 per cent. Peoplemeter data show that cable and satellite programming is still marginal in consumption.)

There are three major groups backed by foreign investors in the cable business.

In 1999 the American/Dutch UPC acquired Kabel Plus, the Czech Republic's leading operator, and combined this network with two of its other cable companies (KabelNet and Dattelkabel). At the same time, two other groups of operators emerged in the process of concentration - Intercable and TES Media

(graph: cable companies in the Czech Republic
UPC Czech Republic - 410 000 homes passed (American/Dutch)
Intercable - 200 000 homes passed (Dutch venture - KPN)
TES Media - 100 000 homes passed (ING Baring, USA))

UPC launched Direct to Home satellite TV service for the Czech Republic with several programs in a local-language version (subtitles, dubbing) last autumn/fall.

(graph - cable&satellite channels in Czech)

The TV Nova story in details

In January 1993 the Czech Broadcasting Council awarded the license for broadcasting on the former federal F-1 channel to the small limited-liability company CET 21 (Central European Television for the 21st Century), The company, with capital of about 7,000 USD, was founded by five, later six intellectuals, some of them with dissident pasts.

The broadcast license was governed by 31 quality conditions, which had been drafted with the help of an expert/experts? from the British Independent Television Commission. CET 21 joined with the Central European Development Corporation (later its media subsidiary, Central European Media Enterprises - CME) which provided about 9 million USD in investment to start up the Czech Independent Television Company (ČNTS - Česká nezávislá televizní společnost). Part of the money was borrowed from the Czech Savings Bank (Česká spořitelna - ČS), which was the third partner in ČNTS.

ČNTS had a registered capital of 400 million CZK, about 12 million USD. The ownership interests were divided as follows: 66 per cent CME, 22 per cent Czech Savings Bank, 12 per cent CET 21, whose license was taken as an intangible asset, a non-monetary contribution.

The new channel was launched on February 4, 1994 under the logo TV Nova. CME, owned by Ronald Lauder, later reported to its shareholders:

"The license was granted by the Czech Radio and Television Council to CET 21 for 12 years under terms which require CET 21 to cooperate with the Company in operating Nova TV. CET 21 has given Nova TV exclusive access to the use of the license."

The model was simple - CET 21 was a license holder, and CNTS was considered a service company, which provided all the necessary activities connected with broadcasting. (Annual report)

When this model was criticized as an arrangement infringing on a provision of the Broadcasting Act, according to which the license is not transferable, the Czech Broadcasting Council claimed that the editorial control of broadcasting was effectively executed by the license holder - CET 21 - and that the Memorandum of Association and Investment Agreement is a guarantee of the legality of the model.

Everything changed when the Czech Parliament amended in December 1995 the Broadcasting Act. The amendment enabled to all license holders to ask for abolishing nearly all license conditions, with the exception of those related to the format of programming service.

CET 21 and CME used this opportunity and tried to strip away any license conditions which were uncomfortable for them (e.g. an obligation to reinvest profits into original Czech dramatic programming), among them license condition No. 17.

(graph - text of condition No.17:
"The holder of the license is bound to commitments
17) that whatever changes of the legal entity who is the holder of the license, of the composition of the capital of the investors leading to a change in control over their operations, and of the provisions of the association agreement between the license holder and the investors, be in advance presented to the Council. The association agreement (Memorandum of Association and Investment Agreement) is a part of the license conditions. The parties to this association agreement were the holder of the license, CEDC and Ceska Sporitelna (Czech Savings Bank), according to the terms of the commercial agreement.)"

The Czech Broadcasting Council was reluctant to abolish this particular condition, arguing that ČNTS had been the de-facto broadcaster of TV NOVA without obtaining a broadcasting license, that the license shall not be transferable and that control over the license might be lost. The request for abolition of condition No. 17 launched administrative proceedings against ČNTS, in which the details of the arrangement between CET 21 (license owner) and ČNTS (service company) were thoroughly investigated and checked.

The proceeding was closed in September 1997 after some broadcast responsibilities were transferred from ČNTS to the original license holder CET-21, among them the contract with Czech Radiocommunications, the company which operates transmitters for distribution of the TV signal.

The Memorandum of Association had to be changed in the section where CET 21 (the license holder) no longer granted to ČNTS (the service company) "the right to operate the License," but merely "the right to use and exploit know-how connected with the License."

In the meantime, without waiting for the end of administrative proceedings, and without reporting to the regulatory body CBC, CME started to buy out the economic interests of its partners in ČNTS. Why? Because CME as a corporation wanted to say to its shareholders: Look, we are the owner of a TV channel in Eastern Europe that brings profit and cash flow to our company.

The transfer was done in three steps and finalized after license condition No.17 was finally abolished in December 1996. I do not want to go into details - look at the graphic.

(graph: quotation from the CME reports for the Security Exchange Commission:
On August 1, 1996, the Company entered into the Additional CNTS Purchase for the purchase of CS's 22% economic interest and virtually all of CS's voting rights in CNTS for a purchase price of Kc 1 billion ($36,590,000).
On August 11, 1997, the Company made the Second 1997 CNTS Purchase when it purchased Nova Consulting a.s. ("NC") from certain partners of CET 21, for a purchase price of $28,537,000, to be paid in instalments through February 15, 2000.
The Second 1997 CNTS Purchase was preceded by the Company's purchase in early 1997 of an additional 5.2% economic interest in CNTS.)

The CME 1998 Annual Report announces proudly: "The Company is entitled to 99% of the total profits of and has 97% of the voting power in CNTS."

After CME's media activities in Hungary and Poland in 1997-98 turned out to be an investment failure, Ronald Lauder wanted to sell the CME media business to SBS Broadcasting S.A. company. SBS wanted to know details of the CME arrangement and checked the CME claim that the company "operates TV licenses" in Central and Eastern Europe.

Mr. Vladimír Železný, the ČNTS president who became in 1997 the majority owner of the CET 21 company (thanks to the CME money), did not want to pass his sovereignty and leading position to a new investor.

Ronald Lauder thought that Mr. Železný, who sold the CET 21 economic interests to the CME for 28 million USD, is obliged to conform to the new arrangement because of the contract between Železný and CME. Železný ignored this contract and did not want to yield.

Železný was dismissed April 19, 1999 from the service company ČNTS, but he was still the chief of the license holder CET 21.

(graph - license holder + service companies 1993, 1999)

On August 5 1999 Železný and the major part of his staff left the ČNTS premises and started to broadcast from the Barrandov film studio area, with a help of a new service company Česká produkční, which financed the relaunch of TV NOVA thanks to a 1 billion CZK loan from IPB.

CME started dozens of legal cases against Mr. Železný and TV Nova, some of them on the international level. The International Court of Arbitration already has given a verdict, according to which Mr. Železný shall return 22 million USD to CME and will get back his economic interest in ČNTS, which is a worthless property now. Another arbitration proceeding, between CME and Ronald Lauder against the Czech Republic, has now begun and a judgment is expected in the latter part of 2001.

How was it possible that Mr. Železný was able to leave his business partner without being penalized or punished by the Czech regulatory body, the Czech Broadcasting Council?

The reason is in condition No.17, which was removed from the license conditions.

In 1996 CME - at that time still friends with Mr. Železný - asked for the abolition of the condition, because it wanted to by-pass the Czech regulator.

When Mr. Fertig, that time CME President was asked by a journalist:
NM: Has this transaction been approved by the Broadcasting Council? If not, do you foresee any complications regarding their approval?
LF: That's a tricky question, because it's not our belief that this transaction is subject to the broadcasting council's approval. So I can say I don't foresee any complications, because it's not our belief that they have the authority to approve it or not approve it. ... And there's a media law that says, "the broadcasting council shall regulate companies that hold licenses, which would be CET-21." I'm not sure that the broadcasting council has any regulatory authority over companies that don't hold licenses, such as CNTS."

That was Mr Fertig's opinion in summer 1996 when the CME made a purchase of the CS economic interest in the ČNTS without reporting it to the Czech regulatory body CBC.

When Mr Lauder asked the CBC for a help against Mr. Železný action three years later, the CBC answered: Sorry - we have no regulatory authority over ČNTS, it is your business matter, we can regulate only the license holder CET 21. The license condition No. 17 was removed three years ago.

(A remark: My American friend who helped me edit this paper, objected: But it was Mr. Železný who has stolen Mr.Lauder investment in Prague. My answer was: yes, you are right to some extent, but neither the CME conduct was flawless or clean.)

CONCLUSION

I do not know if there is any message or lesson in the story I told you. If there is any, it can be described in a parable. An investor is like a farmer who uses virgin land to get a good harvest. If he is clever enough, he takes care of the fertility of this land. He has two options. Either to chase quick profits and an immediate advantage from the land, or to use a long-term strategy which requires higher costs and brings not so large profits, but earnings are more safe and lasting. This long-term strategy includes the care for fertility of the soil.

To fertilize the investment soil means also to get rid of any weeds growing on the soil. By that I mean corruption, bribes, the practices of crony capitalism. Using loopholes in our laws may bring sometimes an advantage, some tricky deals may bring profit, a foreign investor may benefit from a crony business environment. The temptation is great, your Czech partners will advise you to give your business standards up and to adapt your operations to the Czech - non-standard - environment. The problem is that such a practice not only increases transaction costs, but can be used against you in the future. The Great TV Robbery may serve as an example of this sort.

Let us transform the farmer's metaphor into the Czech media business as a whole. There is no doubt that the free, plural and well-maintained media are an inseparable part and precondition of democracy, and vice versa - democracy and an open society are preconditions of market-economy success. The media that not only entertains but also educates may bring lesser profits. They have to be subsidized sometimes by other, entertainment-oriented and profitable media. However, they are needed in the process of the transformation of post-communist society.

Some investors complain that the Czech market is too small as to its population and as to its purchasing power. According to them, a quality media outlet has a slim chance to succeed in the market, because circulation is too small. But without quality media - foremost I mean the print media - there will be no educated and well-informed citizenship ready to promote democracy, the market economy, prosperity. Also, the entertaining media like television have some responsibility as to the quality of their information, and not all profit-driven solutions have a favorable impact on the climate in society.

When prosperity comes, the market and purchasing power will be stronger.