Snapshot of CEE

June 27, 2013 World Screen Featured

Central Europe has caught up to Western Europe in many ways-and that’s not entirely good news for the television business, as the eurozone crisis has dragged down economic growth, hitting the advertising market.
 
ZenithOptimedia’s research shows the Czech Republic, Hungary and Poland performing more like France, Germany or the U.K. than like Russia or Ukraine. Indeed, the media agency groups the big Central European countries in with most Western European markets-excluding the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain)-in a category called Northern and Central Europe. It forecast that advertising expenditure in the region, after shrinking 0.2 percent in 2012, will grow by 0.8 percent in 2013 before seeing a mild recovery in 2014 (2.1 percent) and 2015 (2.3 percent).
 
In contrast, Eastern European advertising markets like Russia and Ukraine, which generally bounced back quickly, have continued healthy growth. They are performing more like their neighbors, such as Azerbaijan and Kazakhstan, and ZenithOptimedia groups them as the Eastern Europe & Central Asia bloc. The ad expenditure in that region grew by 10.7 percent by the end of 2012 and is expected to be up 11.7 percent in 2013.
 
REDEFINING BORDERS
“We are coming to a time when there will no longer be a dividing line between Western and Central European media, and maybe we are already there,” says Ross Biggam, the director general of the Association of Commercial Television in Europe (ACT). About a third of ACT’s members have interests in Central Europe, including Modern Times Group (MTG) and RTL Group.
 
“The state of markets varies across Europe,” Biggam says. “Some places in Central Europe are doing better or worse than others, just as in the West. The priorities of broadcasters are the same no matter where they are. Those include protecting their intellectual property and diversifying away from being dependent on advertising. The issues are the same whether it’s CME or TF1. There has been a delay in rolling out DTT [digital terrestrial TV] in some markets in Central Europe, but that might not be a bad thing.”
 
“It’s essential to take a country-by-country view of the region,” says Lars Riegel, the manager of the telecoms, information, media and electronics practice of the consulting firm Arthur D. Little (ADL) in Vienna. “Between about 2009 and 2011, advertising was down 5 percent to 10 percent in the worst-hit countries, but that was the bottom. The advertising market is starting to grow again, and broadcasters are able to make a profit. Generally speaking, the demand for television programming is strong and it’s growing.”
 
TV viewing time per capita has been increasing steadily, especially in countries with relatively low GDPs such as Bulgaria, Croatia and Serbia. In Hungary, for example, the average viewing was 285 minutes per day in 2012, up by 27 minutes from 2007. Hungary now has more than 100 channels in the local language.
 
“Linear television is getting stronger,” Riegel says. “Despite the talk about IPTV and OTT or Google, there is still an increasing demand for traditional television, though we do expect to see this flattening over time. The number of broadcasters will at least remain where it is and may increase. The position of the public broadcasters is strong. Across the region we see that governments are definitely committed to maintaining their support. We see public broadcasters with stable funding.”
 
High-definition is finally happening in a big way, three to five years after the technology took hold in Western Europe. HDTV is now “going through the roof” after a hesitant start, Riegel says. The expansion of HD content has proven difficult to monetize, with consumers showing a low willingness to pay a premium for HD content unless a significant number of channels is made available. HDTV has been successfully used in the region mostly as a differentiating factor and consumer-retention tool. One of the leaders in HD has been “n” in Poland, which offers more than 20 HD channels and has pushed most of its subs to pay more for the service.
 
SATELLITE SURGE
Another noticeable trend taking place in CEE is the shift away from cable platforms and toward DTH services. In the Czech Republic, DTH’s share grew from 6 percent in 2005 to an estimated 31 percent in 2011, according to a report compiled by ADL. In Hungary, the growth of DTH’s share was similar, from about 7 percent to 30 percent. In Poland, the DTH share grew from about 12 percent to 50 percent. DTH’s overall market share has now surpassed cable in some markets.
 
However, the region is far from homogenous. In Hungary, cable remains the dominant platform, with a market share of over 50 percent.
 
Market experts project further growth of more than 50 percent by 2015 in multichannel households, compared with the mere 10-percent growth forecast in Western Europe. In research by Ovum and ADL covering 20 countries of Central and Eastern Europe, the total number of multichannel households is expected to reach 113 million by 2015, up from 72 million in 2010 and 49 million in 2008. The proportion of pay-TV homes in total is expected to climb to 48 percent in 2015 from 42 percent in 2010 and 32 percent in 2008.
 
BORN TO BE FREE
The most important regional multimarket operator remains Central European Media Enterprises (CME), which was launched by American investors, led by the cosmetics heir Ronald Lauder, immediately after the Berlin Wall came down. Time Warner now owns 49.9 percent of CME. Lauder still holds 6.4 percent of the company.
 
A good prism for seeing how the market has matured is CME’s share of audiences around the region. As the regional pioneer of commercial television, the group established early dominance. Indeed, when commercial TV was brand new, its groundbreaking channel TV Nova practically had the commercial market in the Czech Republic to itself.
 
The latest figures for prime-time audience share in its target demos around Central Europe show CME with leading positions in all of its markets-but the gap between it and its rivals is closing as commercial competition has intensified.
 
In the Czech Republic, the three Nova-branded channels had a share of 38 percent in the 15-to-54 market in 2012, down from 42 percent the year before. In the 18-to-49 target in Bulgaria, its six channels, led by the bTV brand, drew a 45-percent audience share in 2012, down from 50 percent the previous year. In Croatia, the share for its three channels in 18-to-54 was 33 percent last year, slipping from 34 percent in 2011. In Romania, where CME operates eight channels, it slipped to 29 percent from 31 percent in the 18-to-49 urban target. In Slovakia, the share in 12-to-54 for its three main channels, led by Markíza, was 35 percent, down from 37 percent in 2011. Slovenia was the only market where the share held steady, at 50 percent for its flagship, POP, and CME’s two other channels in the 18-to-49 demo. CME’s broadcasting operations generated $665 million in net revenues across the region in 2012, down from $775 million in 2011. Net revenues declined in all national markets.
 
In response to the downbeat results, CME is restructuring this year, moving from a centralized pan-regional approach to a “country-based model,” said Adrian Sarbu, the president and CEO of the company, in announcing the new strategic direction. “Tough times call for bold action.”
 
CME plans to raise prime-time prices in all markets, including double-digit price increases in the Czech Republic. The group also plans to invest more in programming to bolster its share in prime time.
 
COMPETITIVE SPIRIT
Another major player in the region is MTG, whose free-TV operations comprise a total of about 20 channels in the Baltics, the Czech Republic, Bulgaria and Hungary. Jørgen Madsen Lindemann, MTG’s president and CEO, attributed the group’s strong financial performance in the first quarter of this year to the impact of new strategic ad-sales agreements in the Czech Republic and Bulgaria, plus audience share gains in almost all territories on the back of higher ratings. “We were the largest free-TV media house in the Czech Republic for the first time on a quarterly basis, when measured by advertising market share, and this is a significant milestone for the group.”
 
Sales for the group’s combined Baltic free-TV operations were up 23 percent year-on-year and reflected the consolidation of LNT in Latvia from June 2012, as well as underlying growth in Latvia and Estonia.
 
Across the Baltic region, MTG’s channels achieved a viewing share of 46.8 percent in 15-to-49 in the first quarter of 2013, up from 40.5 percent in the first quarter of 2012. Market share in Latvia soared from 36.1 percent in the first quarter of 2012 to 55.4 percent in 2013.
 
“The general economic slowdown in the West has impacted the TV market indirectly because some of the advertisers are based in Western Europe,” says Marek Singer, MTG’s executive VP of Central European broadcasting. “On the other hand, there are nicely growing markets, like the Baltics. Our fastest-growing region is obviously Africa, given the low starting point, but Central Europe is growing well, accelerating in 2013 towards double-digit growth.”
 
In the Czech Republic, MTG’s channels Prima Family, Prima COOL, Prima Love and Prima ZOOM achieved a commercial viewing share of 37.5 percent in their target demographic of 15-to-54, up from 36.9 percent during the same period a year ago. The hottest market is now Bulgaria, where MTG has struggled for some time, but things have taken off under its new CEO, Didier Stoessel. Nova TV, Diema, Diema Family and Kino Nova pulled a share of 34 percent of viewing in the 18-to-49 group in the first quarter, up from 29.1 percent. In Hungary, Viasat3 and Viasat6 slid to 7.4 percent from 9.4 percent. MTG’s latest project in Central Europe is the launch of the Czech documentary channel Prima ZOOM.
 
The success of MTG’s channels varies from country to country, but there are similarities in the core portfolio of channels in most of the countries. “We have a main family channel, a young male-skewing channel and a young female-skewing channel everywhere,” Singer says. “Viewer tastes vary not only region by region, but country by country. Turkish telenovelas are a hit in Bulgaria, but they don’t work in the Baltics. Singing choirs are great in the Baltics, but not so great in the Czech Republic. Regionally we have been very successful with the production of big shows, ranging from the smashing success of Big Brother in Bulgaria to repeated success of Got Talent in the Czech Republic or Clash of the Choirs in Baltics. Also, local drama production has traditionally been our stronghold.”
 
IN THE FAMILY
RTL Group’s channels in Hungary and Croatia delivered unimpressive results in 2012, but a recent strategic diversification into cable paid off in Hungary. RTL Klub remained the market leader by a long margin in that country with a 24.7-percent market share among 18-to-49 in prime time, but the channel’s share slipped from 29.8 percent in 2011 and has fallen steadily during the past five years (from 32.6 percent in 2008) as competition has grown. Advertising sales were down sharply, but the decline was offset by seven Hungarian cable channels RTL bought in 2011, keeping the operation profitable-EBITDA was €9 million ($11.8 million) in 2012, down from €15 million ($19.6 million) the year before.
 
“The cable portfolio acquisition has enabled us to build the market’s strongest family of channels, allowing us to strengthen our total TV offer, and to enter the subscription market as a second strategic source of revenue,” says Dirk Gerkens, the CEO of RTL Klub. “We are now strongly positioned for the challenges of a fragmented market heading towards full digitization.”
RTL Klub benefited from the continuing strong performance of the local versions of FremantleMedia’s The X Factor (an average audience share of 46.2 percent), Got Talent (37.1 percent share) and The Exit List, as well as the long-running daily soap Barátok közt (Between Friends).
 
In Croatia, RTL Hrvatska operates two free-to-air channels, RTL Televizija and RTL 2. The former ranked number two in the market with a 19.4-percent share in 2012, down from 20.6 percent in 2011 and 26.4 percent in 2008. RTL 2 scored a 4.9-percent share in 2012.
 
TV advertising decreased by 9 percent in 2012, and the Croatian operation showed an EBITDA loss of €9 million ($11.8 million) after breaking even the year before.
 
One of the highlights of the year was the strong performance of the imported Turkish drama series Magnificent Century, which scored an average share of 31.2 percent in a daily slot, peaking at over 40 percent. The local version of FremantleMedia’s The Farmer Wants a Wife format was also a big hit in its third season, with a 38.2-percent average share of the target audience.
 
CABLE GAINS
Chellomedia, the European content division of Liberty Global, has built up a large channel portfolio in the region under Michael Moriarty, the managing director at Chellomedia Central Europe.
 
“Generally, we have built our Central European business through M&A, sometimes taking minority positions in channels and then buying them and taking them to the next level,” he says. “We bought 100 percent of the Hungarian documentary channel Spektrum, in 2008, and now we have rolled that out in other markets. We have been rolling out our channel Megamax for older kids, which is built on our Minimax children’s channel. After launching in Hungary, we added the Czech Republic and Romania in late 2012 and Slovakia this year.”
 
Chellomedia’s business is about the basic tier and digital. The main revenue comes through distribution partnerships. “There has been a lot of pressure on cable operators and our partners, and that flows through to us, but we are not as exposed as we would be if we were completely dependent on advertising,” he says. “The ad market has slowed down in every market. But advertising is, fortunately, a small part of our business.”
 
Looking ahead, Moriarty says the group has some channels that it would like to see in new markets in the region. “We have spent the last three or four years cleaning up our portfolio, so to speak,” he says. “We bought a channel called Deko, for example, that we have now re-branded as Spektrum Home. Last year we re-branded all of our movie channels as Film Café and Film Mania.”
 
Chellomedia also owns outright the MGM networks all over Central Europe (excluding Poland, where ITI is a joint-venture partner), after having bought out much of MGM’s global channel business in 2012.
 
“There is a rich pipeline of opportunities,” Moriarty says. “Even the mature markets offer opportunities. They are digitized so we can offer digital channels. We have HD feeds for our sports channels and Spektrum. We have apps for our Minimax and TV Paprika.”
 
Most countries in Central and Eastern Europe have already launched DTT with limited success, except in the Czech Republic. The first OTT platforms have also taken flight, such as CME’s Voyo in the Czech Republic and Nova Play in Bulgaria, and Polsat’s ipla in Poland. ipla was given a boost at the outset by delivering exclusive live online content from behind the scenes of the reality show Jak Oni Spiewaja, the Polish version of ITV Studios Global Entertainment’s Soapstar Superstar.
 
A HYBRID MODEL
The consulting firm ADL is high on a hybrid DTT-OTT offering, enabling viewers to consume basic linear channels on their TV sets for free via DTT and enhanced by on-demand content via OTT.
 
“We think hybrid TV could have a big impact on the market,” ADL’s Riegel says. “Hybrid TV adds a new dimension to satellite or terrestrial television, which does not have a return path to enable two-way communication as cable and IPTV do. In Germany, Media Broadcast has started to roll out the HBB (hybrid broadcast broadband) platform, offering not only broadcast channels but Internet content as well on the same EPG. This will enable terrestrial channels to reinforce their position by expanding their offer without charge to the consumers. They can also earn additional revenue because the business model of HBB is that web providers will pay the terrestrial channels to appear on the EPG with their main channels. We see this as possibly having a strong impact in Eastern Europe over the next two to four years. This is a region where there is high penetration of pay TV in several of the main markets, notably Poland, Hungary and the Czech Republic. Consumers are used to paying for additional programming. The success of hybrid TV will depend on the quality of the programming offer. But in principle it means that all of a sudden terrestrial operators will be able to offer a long trail of free programming as well as on-demand at low cost. This could put pressure on the pay-TV market.”
 
CALLING THE TELCOS
Consolidation in the telecoms and TV sector is still ongoing in the CEE region. For most players, the main rationale is to strengthen their market position or to support convergent offerings. As in Western Europe, telecoms and the TV sector have been offering bundled packages in several markets.
 
Platform operators have also started to acquire content providers. In the biggest of those deals, Cyfrowy Polsat, the largest DTH platform in the region, acquired Poland’s number two TV channel, Telewizja Polsat.
 
ADL sees increasing consolidation leading to a push in quad-play offerings, putting pressure on mobile-only or fixed-line-only players. The company warns that single-play offerings of cable operators could be at risk as their TV-only users could switch to bundled offerings or OTT offerings. Of course, all of this will raise regulatory issues as competition intensifies.
 
Regulators in Brussels are generally better informed about what’s going on in the television markets in Western Europe than they are about Central Europe. “Being a part of the European Union, broadcasters in Central Europe would be doing themselves a favor by getting more in front of European regulators,” ACT’s Biggam says.
 
The convergence of Western and Eastern Europe is likely to accelerate as multicountry groups focus increasing attention on investment opportunities in the region in the near future.
 
“The region needs to be watched carefully over the next one to two years,” ADL’s Riegel says. “You have players who have private-equity partners that are looking for an exit after several years. Some companies are quite profitable already and others have prospects for growth. We see opportunities opening up in Poland, Hungary and Russia, for example. Russia is definitely an attractive television market and it’s growing. The television markets as a whole are growing in Bulgaria, the Czech Republic, Hungary, Poland and Slovakia. The outlook for programming providers is extremely positive. They have a lot of opportunity to expand their presence. It’s important to be on the right platforms.”