CME enters Hungarian TV bid amidst Czech controversy

By Brian Kenety

Prague

Central European Business Weekly,

March 14th - 20th, 1997,

e-mail address: cebw@traveller.cz

The Czech broadcasting council is threatening to pull the plug on Nova TV, the flagship station of the American-financed Central European Media Enterprises (CME) group, over allegedly biased newscasts. Some council members admit that the station's foreign ownership and dominance of the market are underlying contentious issues.

The brainchild of two former US ambassadors, cosmetics magnate and heavy-weight Republican fund-raiser Ronald Lauder (Austria, 1986-1987) and 26-year State Department veteran Mark Palmer (Hungary, 1986-1990), ME began acquiring television and radio stations through predecessor companies in 1991.

Today CME broadcasters in seven countries across the former Eastern bloc, reaching 95 million viewers from the Rhine Valley in Germany to the Carpathian Mountains of Ukraine, a figure expected to exceed 129 million people this year. Advertising expenditures in the region have been growing an average of over 50 per cent per year, and CME has aggressively been cutting out the middlemen, selling airtime directly.

Nova, however, is currently CME's only profitable station, with the group's 15-month-old Romania and Slovenian stations just now breaking even and other ventures still in the capital-intensive development phase. The Czech station has come under intense scrutiny by the country's independent media watchdog group, which in January threatened to revoke the station's operating license.

CME has also run into problems with the council over its buyout and reformatting of the Czech nation-wide radio station, Alfa. A publishing company, closely related to Nova this month sought to buy the right-wing newspaper Denni telegraf, prompting editorials that Nova was seeking an informational monopoly.

Meanwhile, CME continues to win and seek licences throughout the region, and is exploring opportunities in the Balkans, the Baltics and the former Soviet Union. Being first to secure commercial licensing in each market has been the key to CME's success, as most countries have only two or three television frequencies available.

As CME President Leonard Fertig told Reuters, broadcast licences are "scarce resources. So when you win that, there isn't much left for the next person."

On February 4th, 1994, Nova became the first privately owned nation-wide station in post- communist Europe. Profitable only after nine months, the following year Nova increased revenues 266 per cent, to $44.8 million, as television advertising skyrocketed. In 1996, the station took in $108 million, seven of every ten dollars spent on television advertising. The station has a 65 per cent viewership, the highest in Europe.

In March last year, based on the group's then 66 per cent stake in Nova, CME received a $8.45 million dividend, or 107 per cent of CME' s initial 1994 investment. CME in January increased its stake in Nova to 88 per cent.

"Why should such a money-making factory belong to the Americans?" said Czech Council for Radio and Television Broadcasting deputy chairman and spokesman Petr Stepanek, following a January news conference.

"The real problem with Nova' s ownership," said Mr Stepanek, "is where the profits are going to and it's no secret the American investor (CME) is simply not bringing anything to the Czech Republic. The problem is that money, aside from taxes, leaves the country." Nova generated nearly all of CME's 1996 revenues of $138 million and "CME borrowed the money within the Czech Republic to found Nova. Neither I nor anyone from the council would be so preposterous as to belittle foreign investment... What I am suggesting is that this is not really investment at all."

Some post-communist countries, such as Hungary, have set minimum bids of tens of millions of dollars for their nation-wide terrestrial frequencies, but imposed fewer restrictions on would-be foreign owners. The Czech state, however, reluctant to relinquish state control of the airwaves, awarded its only nation-wide television frequency to be privatised free of charge.

In February, 1993, the council granted a broadcasting license to Central European Television for the Twenty-First Century (CET 21), a group of six Czech and Slovak film-makers and academics. It was to be a "grand sociological experiment," according to one observer.

CET21, backed by CME, won the licence on a pledge to fulfil 21 conditions relating to informational, cultural and educational content. CET21 promised to "strive to overcome social and cultural differences among people, to educate its viewers to be tolerant," commission original Czech films and in off-peak times, broadcast community advisory programmes, with a dozen news and current affairs updates per day.

The group was led by Vladimir Zelezny, a television scriptwriter and a former spokesman for Petr Pithart, the first Czech prime minister after the 1989 "velvet revolution". Mr. Zelezny is now Nova director, heads the CME television station group subsidiary and is among the most popular Czech public figures. Technically Nova is not a broadcaster, but rather "provides services" to CET21, which holds a 12 peer cent stake in the station.

All but one of the 31 conditions were repealed in January 1996. The last, condition No. 17, which required all proposed changes in ownership structure to be reported to the council, came off the books in January 1997.

The CET 21 pledge to broadcast quality programming has clearly been abandoned. Nearly half of Nova's airtime consists of dubbed American serials like Beverly Hills 90210 and Dallas, and prime time is dominated by American action films and romantic comedies. Much of Nova' s Czech and European programming consists of game shows, variety shows and sporting events. Late-night adult entertainment rounds out the mix. CME applies a similar format to its Romania, Slovenian and Slovakian stations.

Jiri Pehe, director of the Prague-based Open Media Research Institute, said that "although Nova doesn't observe the (31) licence conditions ... it has become such a factor in Czech politics and culture, to revoke its licence would be a scandal of great proportion that nobody wants."

Rather than follow the Czech way and award a free broadcast licence, Hungary this March is asking for a minimum bid of eight billion forints, or $50 million for MTV2, a state-owned channel. Scandinavian Broadcast Systems of Norway, backed by Walt Disney and Viacom, and Luxembourg-based CLT, which in December challenged CME's domination of the Polish market, in launching the RTL7 station are CME's chief rivals for MTV2: French, German, and British interests have also presented bids.

CME was granted a regional licence for Budapest in 1995, and last year bought state-owned Videovox, Hungary's leading movie dubbing company. CME's Palmer did not manage to convince Hungarian broadcast authorities that "quality of programming ... and concept, rather than an auction to the highest bidder" should be the criteria for the tender, as he told the trade ministry quarterly, The Hungarian Economy, last year.

In Poland, CME plants to invest $150 million over the next three years into TVN, a joint-venture which on February 25th, 1997, added a second regional television operating licence. Signals will initially reach half the Polish viewers, but should ultimately reach 85 per cent of the population, or 31 million viewers

In the Ukraine, where television advertising sales rose from $9 million in 1995 to $ 20 million last year, CME and local partner Studio 1+1 have acquired a 10-year broadcasting license, and already provide programming to the state-owned UT2, which reaches nearly all of the country's 52 million viewer.

Through stock issues, CME has invested upwards of $200 million in central and eastern Europe, including some $25 million in seed capital from Mr. Lauder in 1991. The CME stock price hit a high of $37 1/8 on January 20th, 1997, on New York' s secondary market NASDAQ, up from the $14 October 1994 initial public offering.

Prudential Securities January 22nd projected a 12-month target price of $46, but as noted in the Forbes magazine February 24th issue, with a stock value of $800 million - six times company revenues - CME "is not an under priced stock." And if problems with the Czech broadcasting council persist, future CME bids could be affected, say analysts, causing a downward turn in the stock.

"Profit is one proof of which company is the true broadcaster ... And there has been a de facto transfer of the licence from CET21 - a shell company with only one employee, a secretary - to Nova, which has over 400 employees, and does not have a licence to broadcast," says attorney Cestmir Kubat, who has filed a lawsuit on behalf of the one CET21 participant who refuses to sell his stake, over objections to Nova' s low brow format. "You can't transfer a driver's licence to a second party - it's illegal - and a broadcasting licence is more important because every society is controlled by television. It is high time proceedings to take away Nova' s operating licence began."

The council has threatened to shut down Nova on several prior occasions over ownership and licence transfer issues, but with the repeal of the Broadcasting Act, effective January 1996, it has been stripped of much of its control over the station.

Nova carried al but three of the 50 most popular television programmes of 1996 and vice-chair Zdenka Hulova admits that most council members are not eager to sanction the popular station. "You can imagine what it would be like it we terminated a television station with a two-thirds market share," Ms Hulova told Tyden magazine, adding that the council would likely only impose a $72,500 maximum fine, if Nova continues not to comply with the body's regulations.

Regulations still in force require broadcasters to present balanced news reports and the council charged on 29th January that Nova promotes its business interests in newscasts and in Mr.Zelezny's 26-minute viewer call-in programme "Call the Director", in which he "deliberately misinformed viewers about media issues" and repeatedly "mixed commentary with information".

Jan Kasal, Chairman of the Parliamentary media Committee, has frequently been at odds with the council over the issue of CET21 and Nova. A regular guest on "Seven Days", Nova' s weekly political roundtable show, Mr. Kasal championed proposals to limit primetime advertising on Nova's chief competitor, Czech public service television (CT1), once characterised condition No. 17 as "threat to democracy" and says the only matter of import regarding Nova is that CME pays taxes.

"[How can] Kasal assert it is normal for a nation-wide private station to have a high share of foreign capital?" said Mr. Stepanek, noting that Rupert Murdoch had to become a US citizen in order to buy Fox TV

In July 1996, CME lent Zelezny $4.7 million towards a partial buyout of CET 21. He pledged to vote in accord with CME on dividends and other matters for the duration of the five-year loan. In August, CME moved to increase its Nova stake to 88 per cent, by buying out the Czech Savings Bank's stake for $37.9 million. The bank lent CME 85 per cent of the money to finance the deal, which was finalised on January 7th.

These actions, which would bring CME's Nova stake to over 93 per cent, were done without notifying the broadcasting council, in apparent violation of condition No.17. The loans first became known to the Council through a posting on the US Securities and Exchange Commission Internet site (http://www.sec.gov ) discovered by a Prague professor of journalism. Although registered in Bermuda, CME is listed on the New York secondary market NASDAQ, and must file information with the SEC.

"Why would a private loan for something become known to anybody?" quipped CME President Leonard Fertig, insisting that no Czech laws had been violated. "The actual transaction was agreed to, but not implemented, not registered, not anything, until, indeed the council had done what it was required to do back in January, which was drop the licence condition."

The council is still deliberating over the legality of CME's August loan towards Mr Zelezny's CET21 buyout, of which Mr. Zelezny only officially informed the council at a January 29th meeting, weeks after No. 17 came off the books. Following that meeting, the council said proceedings could begin to revoke Nova's operating licence over the content of "Call the Director" and news programming.

Mr. Zelezny went on the counterattack, warning parliamentary deputies on January 30th that American financiers would respond to "attacks" against Nova "through diplomatic channels" and other "non-visible" means.

The US Embassy in Prague distanced itself from the affair with a statement issued on January 31st: "The Embassy wishes to correct the misperception that it may be contemplating a diplomatic intervention or other 'expression of views' on behalf of Nova TV (and) does not believe there are grounds for such action."

But CME co-founder Mark Palmer, who still uses the title of Ambassador, said he had not yet bee asked "to intercede with anybody" but was favourable to doing so. In October, Mr. Palmer resigned from the CME board, and over the next two months, sold some 300,000 of his 800,000 shares, for approximately $9 million.

Mr. Lauder did not respond to interview requests on the subject of "diplomatic pressure," however the Estee Lauder cosmetics company, of which he is a director, recently considered taking on the wife of the likely new Czech Ambassador to Washington as a paid consultant, said a source involved in the arrangement. The New York Times reported on February 5th that Lauder has for two years employed the New York governor' s wife as a consultant in his efforts to expand his broadcasting efforts in the Middle East.


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