April 30, 1997
Czech police has strenuously denied that they are investigating Nova TV for broadcasting without a licence. See Prague-based "Slovo" daily newspaper, Tuesday, 6th May, 1997
However, WSJ stands behind the above-mentioned statement. For further, more updated information, see this article. (JC)
Staff Reporter of THE WALL STREET JOURNAL
PRAGUE -- It began like other revolutions in this part of the world: five scruffy intellectuals holed up in a Prague apartment talking about "liberation."
But this time, instead of politics, they were going after another source of power: television. With the Czech Republic government set to auction off the region's first commercial-television license, the group drew up a manifesto for a "sophisticated" TV station that would be the envy of Eastern Europe. They promised international news, language classes, geography shows, legal education, Czech movies and even a late night "sociology poll."
Five years later, their station, TV Nova, is a hit. But the Bohemian founders largely have been replaced by a U.S. cosmetics heir and his deputy, the station is embroiled in controversy and the closest thing to a geography show it is airing is "Baywatch."
Using Nova as a model, Mr. Lauder and his company, Bermuda-based Central European Media Enterprises Ltd. (CME), want to become a superbroadcaster in the region. Nova draws almost a 70% share of Czech viewers and turned a profit after only three months, making it the most successful television launch ever in Europe. "We can duplicate Nova's financial success in Poland, Hungary, all of Eastern Europe," says Len Fertig, president and chief executive of the company. Mr. Lauder declined to comment on Nova or CME. Nova management says the attacks in the Czech Republic stem from a few intellectuals and regulators jealous of the station's success and will have no real impact on its plans.
But others see Nova as a different model -- of what to avoid. Worried that the country's liberalized media laws have created a huge foreign force in the market, Czech regulators are investigating Nova for alleged license breaches and have threatened to pull the plug on the station or impose a fine. The police are also investigating. Officials say Nova probably will retain its license, but the flap could result in tighter restrictions. Adding to the pressure, one of the station's founders is suing Nova over control and labeled it an "American propaganda machine."
"We've all watched what's happened with Nova," says Andras Szekfu, a media consultant and adviser to officials in Hungary, which soon will auction state-owned TV licenses to commercial operators. "I don't think any single private channel will have the possibility to become that powerful again."
When the five Bohemian founders got together in 1992 to vie for the Nova license, they figured they had all the makings of a winning bid. They had many talents: a leading political dissident, a film director, a psychiatrist, a scriptwriter and a sociologist. They were well known, and they had strong reputations as defenders of Czech culture. But they lacked on thing: money.
Enter Mark Palmer and Mr. Lauder. A savvy, former U.S. ambassador to Hungary, Mr. Palmer had left the U.S. State Department and begun working with Mr. Lauder to scour the region for broadcast investments. The two figured that as incomes in the regions rose and people started buying more consumer goods, advertising would explode, creating a second boom in television.
After a meeting with the founders, Mr. Lauder's company agreed to invest $9 million to launch the station. While Mr. Lauder retained majority control, he and his partners agreed to be "sensitive to local views and culture." Nova beat out more than a dozen competitors for the license -- which was virtually given away -- and on Nov. 14, 1994, kicked off the first commercial broadcast in Eastern Europe with the film "Sophie's Choice."
After doing intensive consumer research, he found that Czechs didn't want sociology polls. They wanted "Dallas." Nova pumped in American movies like "Pretty Woman" and "Crocodile Dundee," along with U.S. shows like "M*A*S*H" and "Melrose Place." The station overhauled its nightly news, scrapping the "heads-of-state-handshake" tedium of state-run broadcasts for the "slash and crash" style of U.S. big-city news.
Nova also turned up the volume on marketing. With help from a Czech cartoonist, Mr. Zelezny created a cuddly dog mascot named "Novak," the most common Czech last name. In billboards, magazines and newspapers, Nova celebrated Novak as a sort of Czech everyman -- rural, blue-collar, semi-skilled -- who exercises his right to choose a TV station. Nova even built a "Nova Pub" in downtown Prague, where bow-tied waiters serve up frothy mugs of Czech beer and hot dumplings beneath a giant TV screen.
The Novaks of the nation have lapped it up. Take Aneta Novak. Lounging in a "USA" sweatshirt in her living room in Kralupy, a dreary refinery town just north of Prague, Mrs. Novak spent much of a recent afternoon watching Nova soap operas. Nova often blares from the Novaks" living room from 6:30 a.m. to midnight. She is partial to the American sitcoms, but her favorite program is "Taboo," a late-night sex talk show. Her husband prefers sports and action movies like "Die Hard." Her three-year-old son David pads into the living room every morning and turns on "Esso," a music-video show featuring the likes of the Spice Girls and Aerosmith.
"The only thing David knows how to do with the clicker is press 3 for Nova," Mrs. Novak says. "There's no reason to change it." The result: Nova TV generated more than $45 million in operating income on revenue of $109 million last year. CME's stock, which trades on the Nasdaq Stock Market, has more than doubled since it went public in 1994, largely on the success of Nova.
Mr. Zelezny says the criticism comes from a small group. "The intellectuals believed Czechs were special, more sophisticated," he said. "We proved they were wrong. We showed that Czechs are like all other Europeans, whose first interest is soccer, with erotica a close second. For that, we will never be forgiven."
But aside from programming, Nova is also coming under attack for its regulatory dealings. To get around concerns about foreign ownership, Nova and the Czech Broadcasting Council designed a loophole. Instead of giving the license to CME-controlled Nova, the government recommended that the license be given to a company wholly owned by the original Czech founders, called CET 21. Nova was then given the "exclusive, unconditional and irrevocable" right to use the license.
The dual structure allowed the government to say the broadcaster was Czech, yet allowed the American partners majority control. But a new council, chosen by Parliament after the old one dissolved amid controversy, is questioning the arrangement. Because CET 21 was given a stake in Nova in exchange for allowing use of the license, the council argues the arrangement amounts to an improper transfer.
"It's like transferring your driver's license," says Zdenka Hulova, vice chairman of the Czech Broadcasting Council. "You can't just give it to someone else."
Mr. Fertig, CME's chief executive, says the company has only followed the government's own instructions. "They told us to set up the company this way, so we did," he says. "If there's a problem with it and they want us to change it, we will."
At the same time, Nova is grappling with another controversial discovery. It began with an inquisitive journalism professor at Prague's Charles University, Milan Smid. In November, while showing students how to access U.S. corporate securities filings, Dr. Smid pulled up CME's name on a whim and found a document that would make headlines.
Attached to a CME earnings release was a plan for Mr. Zelezny to take over CET 21 -- with CME's help. Under the agreement, CME lent Mr. Zelezny $4.7 million to buy out the original founders and gain control of 60% of CET 21.
The deal, which was closed last summer, gave CME a strong ally in the license company. It also made the original founders instant millionaires, even though they had little to do with running the station. Fedor Gal, a leading Slovak dissident and one of the founders, received more than $1.2 million from the sale. Mr. Gal says the money will allow him to focus on his book-publishing business. The founders have also been paid a "consulting fee" every month for an amount that wasn't disclosed.
Czech authorities are steaming over the deal. CET 21 was required by law to seek approval on changes in ownership. But regulators say they only heard of Mr. Zelezny's deal long after the deals were signed. The council says it is reviewing the matters and may launch a second inquiry.
Mr. Fertig says Nova wasn't required to tell the council about the deals because the law demanding approval was recently stripped from the books. "The point is moot," he says. "And if we weren't a U.S. public company, we wouldn't have to disclose any of this."
Legal nit-picking aside, Nova's political influence ensures the company will probably prevail. Its news broadcast commands a dominant share and is far more influential than the state-broadcast news. "They can make or break us," one senior member of Parliament says.
Still, regulators aren't the only ones attacking Nova. The latest volley comes from one of the founders, Petr Krsak. An eccentric film director and former TV writer, he openly criticizes Americans and lambastes Mr. Lauder as a "dumb ointment salesman." As a result of the split, Mr. Krsak never sold his shares in CET 21 to Mr. Zelezny. Mr. Fertig said Mr. Krsak never wanted to sell; Mr. Krsak says he was closed out of the deal.
If the courts find that Mr. Krsak wasn't given the same offer as the other founders, Mr. Zelezny's deal could be nullified.
Mr. Krsak says his goal isn't money, but to return the station to Czech hands. "I'm not after the money or power," he says, sipping cappuccino in a smoky Prague cafe. "I just want to give Czechs back their TV station."
The Wall Street Journal
Dear Sir or Madam,
RE: "HIT CZECH TV STATION HAS MANY INTELLECTUALS IN A SNIT" by Robert Frank, WSJ, 30th April, 1997
Your article, while informative and objective, contains a number of errors. I hope you will be able to correct them in print.
1. First of all, your reporter has not studied in detail the quarterly and annual reports, submitted by CME to SEC (which are available on the Internet) and has FAILED to understand the crux of the problem.
The Zelezny - CME "loan agreement" of 1st August, 1996 is NOT really a loan agreement. It is a clever vehicle which has enabled CME to acquire the additional 5,2 per cent participation interest in NOVA TV, held by members of CET 21.
Basically, CME gave Zelezny $5,220 000 (NOT $4,7 million, as is incorrectly stated in your article, there was also an advance of $520 000, paid out by CME) and ordered Zelezny to:
Here are the appropriate quotations from the Zelezny - CME loan agreement:
"Upon the occurrence of the Release Events [i.e. the registration of the 5,2 per cent of the CNTS shares in CME's ownership] [...], the Borrower [i.e. Zelezny] shall continue to exercise all voting rights associated with the Additional CET 21 Participation Interest [...] only as directed by the Lender [i.e.CME]." Article 9.4.b of the Loan Agreement.
"The Borrower [i.e. Zelezny] agrees [...]to cause an effective and valid amendment of the memorandum of association of CET 21 s.r.o. to be adopted and registered with the appropriate Czech Companies Register, such amendment to provide that the Lender [i.e. CME], as a participant in CET 21 s.r.o., shall have a veto right over any decision of whatever nature which is to be taken by the participants' meeting of CET 21, s.r.o." Article 9.4.(c) of the Loan Agreement.
The Czech media law states that the broadcasting licence is NON-TRANSFERABLE. Hence CME seems to have broken Czech law.
2. Your reporter states that the "government [was] set to ***auction off*** the region' s first TV licence. This is misleading. The Czech government GAVE the licence AWAY for free. (Not "virtually", as you state in yourarticle further on, but fully.)
3. TV Nova did not start broadcasting in November 1994. It started broadcasting at the beginning of February 1994.
4. Zelezny was not a spokesperson to Czech PRESIDENT, but to Czech PREMIER Pithart.
5. Nova TV's competitor, Czech Television is not a STATE television station, but a PUBLIC SERVICE TV station.
6. There are no "shares" in CET 21 s.r.o. or in CNTS Nova. These are not public limited companies. There is only "participation interest".
1. Your article quotes Milan Uhde, a member of the Czech parliamentary media commission as saying that the Council for Czech Radio and TV broadcasting will probably only fine Nova TV.
In view of Nova's large profits, any fines that the Council can impose on Nova are laughable. CME's NASDAQ prospectus summary says, I quote:
"The Czech Radio and Television Council has legal authority to impose fines in the amounds of Kc 10,000 ($362) to Kc 2,000,000 ($72,438) for failure to comply with this legislation or with recommendations of the Czech Radio and Television Council. ****The imposition of such fines will not have a material adverse effect on Nova TV or the Company.***"
2. You state in your article that Czech courts are examining whether or not Krsak has been offered a similar deal to the other CET 21 founder members.
Is your reporter aware of the fact that the CET 21 participation interest seems to have been purchased from the CET 21 founder members approximately at the same time when CME purchased 22 per cent CNTS participation interest from the Czech Savings Bank for approximately twice the price offered to the CET 21 members? Does this not constitute insider dealing? Of course, the Czech Republic has no law against insider dealing.
Why is it that nobody is bothered by the fact that the CET 21 founder members received their "millions" for nothing, only because they had been awarded the TV licence for free? Their millions came directly out of the pockets of the Czech taxpayer.
Yours sincerely,
Dr. Jan Culik
University of Glasgow
United Kingdom
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