The continued competition between Central European Media Enterprises (CME) and Modern Times Group (MTG) has caused a rupture in the Czech advertising market. Following our previous analysis of MTG's strategy change, CME, who is the legacy market leader on the Czech national TV advertising market, now reported a 44 per cent year-on-year decline in TV net advertising revenue (NAR) for Q1 2013. This translates into a drop of TV ad market share from 66 per cent in Q1 2012 to 47 per cent in Q1 2013. CME's share had previously been relatively stable since we started tracking the broadcaster in 2009. The Czech Republic is CME's biggest market, generating 36 per cent of the group's broadcasting revenues in 2012.
CME faced a tough Q1 2013 overall. Its TV NAR also fell in its other markets of operation, most notably in Bulgaria, where revenues dropped by 27 per cent to $12.3m. CME's overall TV NAR contracted by 24 per cent year-on-year in Q1 2013 to $102.4m. Factoring in diversification revenues, which fared more favourably, the ad slump brought CME's total revenues down 18 per cent to $137m.
In its quarterly results call, CME considered its share loss a temporary blip in the market, which will return to its normal state soon, potentially even in H2 2013. While we agree that the magnitude of CME's market share decline is indeed a factor that price adjustments can soften, we also think that CME's market share decline is structural. CME's Czech losses are down to a change of pace in the longstanding competition with archrival MTG, spurred by the ongoing volatile economic climate in Central and Eastern Europe (CEE).
To protect revenues after years of market decline, CME sought to raise its Czech TV advertising prices double-digit for 2013. Yet, this pricing strategy backfired. It was met with fierce opposition from advertisers and agencies. Clients did not accept these rates and instead shifted budgets away from CME to key competitor MTG, whose pricing was much more competitive. This does not appear striking at first glance. However, the relative ease by which budgets were shifted marks a more profound change. It points to a growing confidence on the demand side of the advertising business. Still a few years ago, Czech advertisers and planning and buying agencies were struggling with the market dominance of CME. They de facto had to accept prices dictated by the broadcaster for lack of alternative. There just was no other TV outlet with such reach. It was a supply-side world reigned by CME. Today, the demand side is in the driving seat.
Yet, while the role of the weak conomy is apparent in this, the impact of MTG demands further explanation. Historically, MTG has made itself a name with high discounts on TV ad prices in order to steal market share from CME. But MTG has revisited its approach recently. The broadcaster has ramped up the attractiveness of its portfolio. In late 2012, MTG partnered with a third force in the Czech TV ad market, TV Barrandov. This deal allows clients to buy inventory across broadcasters and thereby obtain greater reach. MTG complemented this by launching new thematic channel Prima Zoom in order to tap into a wider spectrum of audience demographics. The cooperation and channel launch allowed MTG to increase its prices, but justifiably so (and to a lesser extent than CME). This strategy is now bearing fruits at CME's expense.
However, CME may have a chance of salvation. Once the economy improves and advertiser demand returns, CME is in a better position to capture this demand in terms of pricing strategy. As we have reiterated in numerous previous commentaries, increasing TV ad prices without getting under pressure from clients demanding higher discounts is notoriously difficult. CME's resilience to pricing pressure, despite the current negative consequences, may just enable the broadcaster to monetize future cash-happy advertisers without needing to bring up prices as high as MTG would have to.
Yet, this strategy remains a gamble and it is not clear whether there will be long-term salvation for the currently beaten CME on the Czech market. The nature of its competitor, MTG has changed. MTG has established itself as a force to be reckoned with beyond the historical price argument.