Video International is parting ways with BGTRK (the All-Russian State Television and Radio Company). This will benefit Russia’s three big channels. They will now sell ads through their own sales outfits. Yet the emerging “world with three poles” will have little effect on the advertising market.

Maxim Borisov and Zarina Khisamova

The largest company on Russia’s media market, Video International (VI), will no longer sell ad time for BGTRK, the state television and radio company that includes channels such as Rossiya (Russia), Kultura (Culture), and Sport, as well as a variety of radio stations and regional TV companies. The end of this relationship was one of the main conditions put forward by Pervy Kannal (Channel One) if VI wants to extend its advertising contract with the federal television company.
This means that VI, which currently sells about 70% of all TV advertising in Russia, will lose its monopoly. This change is appears to be directly connected to Mikhail Lesin’s departure from his post as Minister of Print Media. Lesin, one of VI’s founders and unofficial patrons, made sure the company had an exclusive hold on the market.

Too close for comfort

The Video International Group produces ads and infomercials, places ads in print and electronic media, and conducts PR campaigns and media research, but most of its power comes from its role as media seller with exclusive contracts with television channels to sell their ad time. In addition to BGTRK and Pervy, VI works with STS, Ren TV, Euronews, M1, and several leading channels in Ukraine and Belarus.
VI gained its monopoly after its main competitor Primier-SV disappeared from the market due to the 1998 economic crisis and a scandalous criminal investigation of its owners, primarily Sergei Lisovsky. The media community saw VI’s increased strength as a product not only of market factors, but also of its patrons’ influence. For a while after the crisis, a monopoly had a positive effect on the market. “After the default, thanks to the reasonable price regulation of TV ads by a single but by then already very professional company, the TV companies and advertisers were less hurt by the aftermath of the crisis,” says Ilya Slutsky, President of the Media Arts Advertising Agency.
However, after the ad market grew and the channels themselves gained strength, TV execs had reason to be unhappy. “The situation in television for the last few years is absurd. You could only refer to what the federal channels were doing as the `media business’ by putting the phrase in quotes,” says Andrei Milekhin, General Director of the research holding ROMIR-Monitoring. “The channels, or in other words, the producers, simply handed over their product and did not control pricing.”
“When one and the same media seller is selling ad time on two competing channels,” argues Konstantin Ernst, General Director at Pervy, “they will wonder why, say, does this advertiser have more ads running on Rossiya than on Pervy, or vice versa?” Everything else about his company’s work with VI, Ernst emphasizes, is completely satisfactory.

The Ernst combination

As the directors of the various companies involved in the combination—the General Director of VI Yuri Zapol, Konstantin Ernst, and Chair of BGTRK Oleg Dobrodeev—have diplomatically stated, the present decision is the result of two years of negotiation between the three parties. The initiator of the combination was obviously Pervy which stands to gain the most from the change. That Ernst has gained a market configuration more favorable to his channel became clear late last year during a media research tender. Several years ago, Russia’s leading channels united into an organization called the Media Committee, which was supposed to competitively select a single audience research company to measure the number of viewers for various programs. These numbers are of utmost importance to the media market, as they form the basis for ratings and ad prices. “This is the key that allows one to elegantly and effectively manage the ad market,” explains Milekhin, a long-time opponent of the existing system. “Media researchers can simply fiddle with the cities selected in their sample and a channel’s share changes if not by several times, then at least by several percentage points.” Since the late 1990s, the golden key, as it is called in world of TV, has been in VI’s hands. TNS Gallup Media got a contract thanks to its work with the media seller. Despite the fact that many market players were not happy with Gallup’s data, no one doubted that the company would win a new five-year contract.
However, late last December, Pervy came out against Gallup, which can be seen as an attack on VI. The tender was put off until the end of June. Over the following six months, according to our sources, Pervy began to develop a relationship with Gallup Media’s competitor, the Italian company AGB Holding. One got the impression that Pervy was getting ready to lobby for this company at the upcoming tender, and the Italians became the tender’s second favorites. The next six months also saw the official dismissal of Lesin, which unsettled VI’s once untouchable position and gave Pervy new opportunities to promote its interests. Pervy was not about to miss this chance and made the media seller pick between channels.
VI’s decision to stick with Pervy surprised many. BGTRK is the media seller’s “home turf” where it began its climb to the top of the media business. Perhaps the reason VI accepted Ernst’s offer is as prosaic as can be. Pervy earns more from advertising than the state television company. The TV channels do not make their earnings public, but according to expert estimates, Pervy holds about 30% of the TV ad market and BGTRK a little more than 20%. One of the weightiest arguments, specialists believe, is that BGTRK is a state organization that should not develop via outside sales and commercial interests, as these could depart from the holding’s particular political and governmental goals. This is why it is more convenient and profitable for VI to work with the more commercial Pervy.
It is highly probable that Pervy’s particular position in the audience research tender was one way to apply pressure to the media seller. Now that the VI situation has been resolved, Pervy will strengthen its position regardless of who wins the contract.

A world with three poles

The most important aspect of the current combination for BGTRK is that the company is getting out of an absurd situation when its ads were being sold together with Pervy’s. The separation from VI will happen over two to three years so that advertisers will not notice. Afterwards, the contract between the two companies will be dissolved by mutual agreement. By that time BGTRK will have formed its own ad agency and will stop paying commissions to the media seller. The cause for concern is that VI, according to Yuri Zapol, will be responsible for “providing any consulting or technical assistance necessary” for creating the BGTRK sales department. Clearly, an immediate end to all collaboration with VI would be fraught with complications. As Zapol put it, “This would lead to great losses for the market as a whole and for BGTRK in particular.” However, creating a sales organization with the help of a future competitor has its risks.
Thus, as a result of the agreement, the TV advertising market will have three poles, three different sales outfits selling ad time independently. VI will work for Pervy. BGTRK will create its own department and NTV Media will remain the third player. Yet Zapol and VI will doubtless lose as a result of recent developments. When the media seller stops working with BGTRK, it will lose a substantial portion of its income, around a third according to expert estimates. The advertising market does not anticipate any more shakeups in connection with recent events. “Nothing will happen in the short term, as BGTRK will not start working independently until at least a year and a half or two years from now,” believes Sergei Piskarev, General Director of NTV Media, “or in the long term, as sales divisions will have to coordinate their pricing. Otherwise, a price war could ensue and no one wants that.”

More in Russian>> www.expert.ru