Global Initiatives in
Management - Russia 2001
April 18, 2001
Audrey Clarke
Nicole Gilmore
Eileen Hart
Dan O’Leary
Table of Contents
|
I |
Introduction |
3 |
|
II |
Development of Russian Television Industry and
MediaMost |
4 |
|
III |
The Financial Landscape |
7 |
|
IV |
Competitive Strategy Analysis |
13 |
|
V |
What Happens Next? |
20 |
|
VI |
Conclusion |
25 |
|
VII |
Footnotes |
27 |
|
VIII |
Exhibits |
29 |
Most political revolutions start with – or quickly
devolve into – a grab for the television station. Television provides those seeking to change a government or
remove a leader a way to communicate directly with the people. Television enables a person or group to
promote ideas and influence public perception.
Television can even provide legitimacy.
It is no surprise, then, that during the unsuccessful coup attempt
against Mikhail Gorbachev, it was state television that was one of the primary
targets of the coup plotters.
During the mid-1990s, another kind of revolution swept through
Russia: an economic revolution. Freed
from seventy years of communism, government reformers and entrepreneurs sought
to privatize and profit from state companies with vast economic potential but
little market experience. Up for grabs
were the state oil, mineral, transport, and manufacturing enterprises with the
potential to create great wealth for those who would control them. It was one man, however, who understood the
importance of television in this economic revolution as not only a medium for
influencing the public but also as a resource for creating even greater wealth.
This man was Vladimir Gusinsky.
In 1994, Gusinsky translated his political connections and business
foresight into the creation of NTV, the first independent television network in
the post-Soviet era. During the
following four years, Gusinsky built NTV into a respected media organization
and created a profitable corporation, known as MediaMost, which was expected to
generate an estimated billion dollars in a 1998 initial public offering
(IPO). The IPO, however, never
materialized and the survival of NTV as an independent media organization has
been brought into question, as Gusinsky and his media holdings have been at the
center of a political and business storm unprecedented in Russia’s transition
to a market economy.
The following paper examines Vladimir Gusinsky’s
media holdings, focusing on its flagship NTV asset, and seeks to demonstrate
how a profitable organization was built and then imperiled by a series of
management decisions and the 1998 financial crisis. While this story has been bathed in scandal and portrayed in the
press as a battle of personalities rather than competing corporate interests,
we have chosen to focus on the business forces at play and emphasize the
strategic decisions made by the organizations involved. We do so by charting the development of the
Russia television industry, examining the structure and financial strength of
MediaMost and NTV, discussing the competitive landscape that NTV currently
faces and concluding with several scenarios of future prospects for the
company.
Television, like all other industries in the
Soviet Union, was owned and operated by the state. From the time of Lenin, the Soviet leadership understood well the
power of media to communicate with a diffuse population and influence the
public with regard to the regime’s goals.
To ensure control by the Communist Party over information flows, all
media organizations were consolidated and centralized into the State Committee
for Television and Radio Broadcasting1. This structure of media oversight provided direct control by the
Kremlin of the country’s media institutions, and continued largely unchanged
until the reforms of the Gorbachev era.
During the Soviet reign, there were two primary
national television networks based in Moscow: Channel One and Channel Two. Both networks broadcasted a series of
entertainment, cultural and news programming that was aired throughout the
republics. News was the only
programming that was aired live, with all copy and reports cleared in advance
through the centralized organization.
As it originated from the capital, all news and information had a
distinctive Moscow orientation.
With the 1991 demise of the Soviet Union, the traditional controls on
media organizations began to disappear and an increasing number of independent
newspapers were formed2. At
this time, Vladimir Gusinsky, a former theatre director, was starting to build
his financial empire through the creation of a banking-consortium and other
smaller businesses. Gusinsky entered
the media business after being approached by Mikhail Leonitiv, a friend and
former-Soviet journalist, who needed financial support for the launch of a new
daily newspaper to be published in Moscow3. While Gusinsky did not have a media
background, he quickly recognized the potential of the newspaper for furthering
his other business interests. According
to privatization expert Chrystia Freeland, “Gusinsky was the first of the
future oligarchs to grasp how central a role the media would play in the
advancement of business interests4.”
Launched on February 23, 1993, “Segodnya” (Today) became a quick success and a trusted source of news. While Gusinsky did not have experience in
the media business, he did recognize the importance of media independence and
therefore left most editorial decisions to the journalistic staff. This decision was made largely for business
and not altruistic reasons, as a newspaper perceived as editorially independent
would be more of a financial success than one overtly pushing
business/political interests. One
exception to this policy was that journalists were “discouraged” from writing
negatively about Gusinsky’s other business concerns – a decision Gusinsky
acknowledged and defended publicly5. While not initially profitable, Segodnya provided an air of credibility to Gusinsky’s growing
holdings and positioned him for future media expansion.
This expansion came later in 1993 when Gusinsky
was approached by Yevgeny Kisiliev and Oleg Dobrodeev, two leaders of ORT, a
renamed state television network, who wanted support for the launch of a new
television production company.
Gusinsky, immediately taken by the idea of moving into television,
decided to aim higher than a simple production company and immediately began
work on launching his own television channel.
With an initial investment of $30 million, primarily from Gusinsky, the
new channel called NTV (an abbreviation for “Independent Television”) was
launched in October 1993 and began airing several hours of nightly news
programs in the St. Petersburg market.
Because the journalists had been recruited from ORT, the news
programming had instant credibility with the public and gained an immediate
audience6.
Next, Gusinsky set about to increase his
television coverage from one market to a national network. The challenge was that the available VHF
frequencies had already been assigned to state-controlled outlets, which meant
that he would have to work with the government of Russian President Boris
Yeltsin to gain the right to broadcast on one of the occupied frequencies. Little-watched Channel Four was selected as
a takeover target, primarily because of the weakness of its programming and its
“shared control” by the two primary national networks. To support this cause, MediaMost started a
public relations campaign to generate support from the public for the creation
of a nation-wide independent outlet.
More critical, however, was Gusinsky’s support – both through NTV’s
nightly programming in St. Petersburg and pieces in Segodnya – for President Yeltsin’s standoff with the Russian
parliament in late 19937. By
strongly supporting the Kremlin during the tense conflict, Gusinsky not only
demonstrated the value he could bring the Yeltsin government as an “independent
arbitrator” of the news, but also established the personal precedent of mixing
political calculations into his business dealings.
The final step to secure the broadcasting license
was the issuance of a presidential decree.
The process of getting the decree finalized required obtaining the
sign-off of a series of aides and ministers to President Yeltsin before the
decree ultimately reached his desk.
With the support of Moscow Mayor Yuri Lushkov, and after overcoming
several obstacles, including the fierce objection of President Yeltsin’s tennis
coach and advisor who wanted to create a sports-channel, the decree was
ultimately issued in January 1994. As a
result, NTV began broadcasting nationwide on Channel 4 from 6:00 pm to
midnight. The network offered a mix of
news and original programming. The
revenue gained by the government for the transference of the licensees was
virtually nothing. According to an
advisor of Gusinsky, “The license, in practice, never cost us anything at
all. The cost was just a few kopecks…it
was a purely political decision8.”
With the birth of NTV, Vladimir Gusinsky created
the first private media company with print and broadcast outlets reaching
nearly every Russian home. He was able
to develop such an organization by securing the talents of respected Russian
journalists to create legitimacy and with his astute ability to play politics
at the right moments to gain crucial government support. The company he created, MediaMost, was on
the verge of significant growth.
During the next five years, Gusinsky built
MediaMost into a Western-style media conglomerate with television, radio,
print, Internet and satellite holdings.
While other Russian business leaders, known as oligarchs, attempted to
build similar media companies, none had the reach or depth of MediaMost in
terms of communicating with the average Russian consumer or maintaining a
reputation of media independence.
While the scope of MediaMost was great, NTV was the only part of the
portfolio with significant “value” and a national reach. With few exceptions, all other individual
ventures could be classified as start-ups, with considerable potential but
little actual market value. Exhibit I
provides a breakdown of the MediaMost holdings.
MediaMost, like other Russian conglomerates, has
not traditionally followed U.S. Generally Accepted Accounting Principles (GAAP)
in recording its financial transactions.
It is therefore difficult to provide a complete breakdown of the
financial status of the company or the valuations of its individual parts. The relative values of the individual
holdings, however, were ascertained through an interview with Chris Hannye,
Director of Financial Analysis and Reporting, MediaMost. Beyond this information, and a sealed
prospectus, there is no publicly available financial information for MediaMost
or its operating units.
Although its holdings are extensive, the
television division of MediaMost, most notably NTV, is by far the most
developed and largest component of the conglomerate, contributing approximately
$60 million in revenue. Following
television, the company earns its second largest revenue component from its
print/publishing businesses. These
units earn approximately one-fourth the amount as the TV operations. This information is consistent with the dates
of inception for many of these holdings as well as the economic conditions of
Russia during that period. Because of
its revenue centrality in the company, we are focusing our analysis on
NTV. Exhibit II provides a summary of
available financial information.
In 1996, MediaMost recognized the potential of NTV
in terms of a public asset. As a
result, the company began preparing financial statements for NTV according to
U.S. GAAP standards in anticipation of an initial public offering for the NTV
portion of MediaMost’s holdings.
The decision to only spin-off the NTV portion of
the company was in recognition of the fact that the television assets were the
sole operating unit producing significant profit suitable for public
investment. During this time, NTV’s primary
revenue stream was from advertising, with 70% of ads purchased by global
companies seeking entry into the Russian market and 30% purchased by emerging
Russian corporations. According to
Chris Hannye, once NTV was made public, other units of the conglomerate that
achieved profitability would be spun-off.
In anticipation of the public offering, MediaMost acquired
approximately $650-800 million of financing through Credit Suisse First Boston
(“CSFB”) and Gazprombank (Note: There
are conflicting reports on the exact amount of debt secured by MediaMost
through Gazprombank. The $650-800
million figure appears to be the most consistently reported range). The debt was taken out to maintain cash flow
until the IPO was complete. This step
is consistent with the business practices of many Western corporations that
have filed for initial public offerings.
MediaMost executives expected to generate upwards of $1 billion for NTV
from the offering. According to Chris
Hannye, for undisclosed reasons, the government was willing to guarantee the
CSFB loans, with Gazprom designated as the state-owned entity to carry these
guarantees.
In 1998, the Russian government
defaulted on its federal obligations and imposed a ninety-day moratorium on
foreign debt repayments. As a result,
the Russian economy sunk into a commonly called “financial crisis” with the
collapse of numerous private banks, a dramatic loss in the value of personal
savings and rapid inflation. Another
side effect of the crisis was the complete loss of investor and consumer
confidence in the Russian economy and government – resulting in an exodus of
foreign and domestic capital that had once flowed freely into the economy.
The impact of the financial crisis on MediaMost
was a dramatic decline in advertising revenues from foreign companies, as many
scaled back investments in branding and questioned their commitment to the
Russian market. MediaMost took
aggressive operational actions to stem the loss in revenue, including:
-
Offering advertising at
lower rates to Russian corporations, resulting in a still-maintained 50%-50%
split of revenues between foreign and domestic companies;
-
Reducing programming costs
by limiting its dependence on content from outside production houses and
foreign television outlets. Instead,
the company chose to self-produce Russian serials and other entertainment
programming; and
-
Further reducing
programming costs by re-running “classic programs” such as older Soviet and
Russian entertainment and cultural programming.
Despite these efforts, the NTV operation of
MediaMost operated at a loss from the time of the crisis until the second
quarter of 2000, at which time it became EBITDA positive (Earnings Before
Interest, Taxes, Depreciation and Amortization). Because of the loss of revenue and investor confidence, the IPO
for NTV was put on indefinite hold as the company sought a way to survive the
growing financial storm that swirled around it.
Without the funds expected to be generated from the IPO, MediaMost
had no direct way to payback the significant debt it had secured to maintain
operations in 1998. Therefore, in
November 2000, MediaMost restructured its outstanding obligations by converting
a portion of the Gazprom debt into equity, thus increasing the Gazprom
ownership of MediaMost from 14% to 25%, including a 46% ownership of NTV. Please see Exhibit III.
While temporarily minimizing its debt repayment
obligations, MediaMost still faces an upcoming payment due in July, 2001. Gazprom, as the guarantor of the loans and
in the position of being required to pay the debt if NTV could not, contends
that Gusinsky overstated the assets of NTV to the government in order to win
the loan guarantees in 1998. As a
result, Gazprom filed a claim with Russian authorities, resulting in an
investigation into Gusinsky’s finances to determine if he overstated the value
of NTV. According to much of the
popular press, the subsequent investigation became more of a personal soap
opera than a financial disagreement, as Gusinsky and his allies charged that
the government, through Gazprom, was working to eliminate the independence of
NTV while the government claimed that Gusinsky had made illegal financial
transactions concerning NTV and other of his personal holdings.
In regards to the financial aspects of the
dispute, it is important to consider if the claims are being made on pre-crisis
or post-crisis valuations of NTV’s assets.
Of course, the asset values from these time periods vary considerably. Until a final determination is made
regarding the timing of the asset valuations, this particular dispute will be
difficult to resolve.
With one investigation underway,
Gazprom sought to leverage another possible legal action relating to
MediaMost’s finances. An outdated, and
seldom applied, tax law states that a company can be forced into liquidation if
it has “negative net assets,” i.e. a company’s liabilities exceed its assets. However, as many Russian companies currently
fail to meet this standard, it was widely believed the tax authorities would
not resort to this mechanism; and if they did, it would blatantly illustrate
the political and personal motivations swirling around Gazprom’s claim on
MediaMost.
In February, 2001, fellow Oligarch Boris
Berezovsky offered to lend MediaMost $50 million and buy its $262 million debt
owed to CSFB. At the time, Berezovsky
explained that his motivation was to help maintain NTV’s independence by avoiding
a government takeover. However, little
materialized after the announcement was made in February, leaving many analysts
to believe that the announcement was nothing more than a ploy to gain media
coverage for Berezovsky in the West9.
Also in February, a group of western investors
expressed interest in investing $300 million in various MediaMost outlets. The investment consortium was led by
CNN-founder Ted Turner and included George Soros, Capital Research and
Management Co, Modern Times Group (a Swedish media concern) and Gregory Berezkin
(a Russian businessman based in Switzerland).
Initially, the investment was earmarked to pay the outside debt and thus
release NTV from any Gazprom, or state, claim/hold. The group also required government assurances of non-involvement
in the company’s affairs and a release from prior liabilities. Finally, the consortium was believed to have
an unstated condition that Gusinsky remove himself from any involvement in NTV
and MediaMost10.
In March, Alfred Kokh, the leader of Gazprom
Media, began to warm to the idea of western investment in MediaMost. Kokh’s motivation for encouraging western
investment under this condition was more financial than political. With over $1 billion invested in MediaMost,
Gazprom ran the risk of writing off its entire investment, given the current
financial state of NTV and its questionable ability to continue as a going
concern11. Due to
significant media pressure in Europe and the U.S. insinuating political
vendettas and governmental control of the media, Gazprom began to take a more
conciliatory role by hiring Deutsche Bank AG as an advisor and accepting the
idea of western investment on the condition that Gusinsky retire any ownership
of NTV12.
The struggle between Gusinsky and Gazprom, the government
and potential western investors has caused the fundamental business of
MediaMost to suffer. The goal of
MediaMost in the mid-1990’s was to form a media holding company capable of
exploiting synergies between outlets and producing sustainable profits at each
operating unit. However, due to the
uncertainty surrounding the future of the company, the individual units are
working more independently and are pursuing strategies that do not necessarily
benefit the company as a whole13.
The resulting intra-company competition for advertising revenue has
negatively impacted cash flow and further imperiled the long-term operations of
MediaMost.
Another casualty of MediaMost’s
financial difficulties and the political wrangling is the ability to maintain a
standard business planning process.
According to Chris Hannye, management is unable to form a coherent
long-term strategy for the operations because of the constant physical
interruptions of police raids and the general uncertainty regarding the
ownership and structure of the company.
Therefore, management “runs the business ‘one day at a time’ and has
been in a constant ‘crisis management mode’ for the better part of a year14.”
Currently,
Gazprom values NTV at $300 million, a
marked decrease from the potential $1 billion expected to be generated from the
planned initial public offering in 1998.
What “true value” NTV actually has is impossible to calculate, as the
organization that ultimately gains control could change the perceptions of
Russian consumers, impact ratings and thus change potential ad revenues15.
While MediaMost has been engaged in the financial
struggle with Gazprom concerning debt repayment, it has also been in the
position of trying to resurrect a once successful business and working to
re-ignite growth. As described, this
has been a challenge from a management perspective given the outside pressure
that has been applied and the emphasis placed by the company on daily survival
rather than long-term strategy. To
analyze MediaMost’s long-term prospects of salvaging its core business and
moving towards profitability, the following provides a competitive strategic
analysis of the company and the challenges/opportunities it faces by applying
Michael Porter’s “Five Forces” framework.
Please see Exhibit IV for a description of the Five Forces.
MediaMost, upon inception, was recognized as an
independent news outlet with a unique voice, positioning itself as the primary
source of news free from government controls.
To this end, its journalists publicized controversial issues, such as
the war in Chechnya, and often opposed government dealings, demonstrating to
the growing class of free-market minded citizens that there was now a news source
they could trust. As a result,
MediaMost claimed a quick leadership role in the early 1990’s among Russian
media and became the standard against which other organizations were judged.
The one significant rival that emerged in 1994 was
a re-launched ORT, under the ownership of fellow oligarch Boris
Berezovsky. By this time, Berezovsky
had recognized the importance of television in shaping his business empire and
convinced the Yeltsin government that an alternate media power should be
created to balance Gusinsky’s influence.
Berezovsky therefore gained control of ORT, in much the same way
Gusinsky had claimed NTV, and started to compete head-to-head with MediaMost
for advertising dollars and political influence16. As a result, the rivalry between the two
oligarchs became intense, as each organization staked out different political
agendas and sought an advantage in terms of maintaining a leadership position
in the eyes of the public. Only with
the 1996 presidential election – in which each oligarch recognized the benefits
of a Yeltsin victory and agreed to join forces against the Communists – did the
rivalry subside for a short period of time.
In the past year, the rivalry between NTV and ORT
was reduced as each organization became embroiled in battles with the
government. The source of the
government friction was each network’s opposition to the election of Vladimir
Putin and strong support of Yuri Lushkov and Yevgeny Primakov in the 2000
presidential election17.
Once Putin ultimately won the election, pressure was applied on both
organizations, which resulted in less competition between the two and more
focus placed on basic survival. In
early 2001, Berezovsky succumbed to the pressure, which included an investigation
of his holdings and associates, selling his share of ORT and essentially
passing control of the network into the hands of the government18. When ORT came under this government
influence, it became less a rival to MediaMost, as the network lost any
credibility it had built up and was perceived by the public as a mouthpiece for
the state. As such, Berezovsky accused
the Kremlin of “concentrating all mass media so that it can carry out any
policy it wants with impunity19.”
While ORT has receded as a competitive threat, the
state-owned network of RTR has recently emerged as a potential competitor to
MediaMost’s leadership position by providing new, innovative programming. According to ratings/market share data from
2000, RTR has secured a 16.5% share of television viewers during the day, and
15.7% of the prime time market on a national basis (Exhibit V). Although RTR lags behind both NTV and ORT,
it has a considerable percentage of the prime time market in Moscow – the most
highly coveted segment for advertisers.
According to MediaMost executive Mark Hannye, “RTR has been in the
process of upgrading the quality of its programming and building its brand
image among the Russian people. These
moves have made RTR the ‘sleeping giant’ of the industry and a competitor we
will have to watch.”
The brightest spot for MediaMost in the competitive landscape is that
there are a series of barriers that may help prevent entry into the
market. The government’s limiting of
the number of media firms competing for advertising revenue and the viewer-ship
of the Russian people will help MediaMost regain market share and move towards
profitability. The five key barriers to
entry include:
-
Network Frequency/ Satellite Resource: One of the key
barriers preventing entry into the market is that there are a limited number of
television frequencies and satellite positions on which networks can
broadcast. Currently, the UHF
frequencies are either owned by the government or held by NTV. While possible, securing a government-owned
frequency would be much more difficult and expensive than in the early days of
privatization when state assets were sold for virtually nothing. In addition, MediaMost holds the only
satellite position that reaches the entire Russian Republic and members of the
CIS. This key inimitable resource
compounds the difficulty in entering the market, as competitors are not able to
secure a position with the reach of NTV.
-
Sources of Information: An
additional barrier to entry is that political relationships/ties are essential
for accessing information from within the government – a key need of news
organizations looking to grab the public’s attention with daily news. Kirill Haratyan, Deputy Editor-In-Chief of
Kommersant, a daily business and political newspaper published in Moscow,
commented that the new Putin administration has a more coordinated approach to
the dissemination of information, which has sharply limited access but often
improved the quality, credibility and consistency of information released. While this centralization has made it easier
for journalists to access the basic news of the day, it has also meant that
they have become increasingly dependent on building confidential sources over
time that can provide additional background information beyond what the government
is willing to release. According to
Haratyan, “without connections, information flow is limited which in-turn
delays the news reported.” Therefore, Haratyan argues that sources inside the
Kremlin are critical to the success of a media organization, thus making limited or no access to such officials a significant
barrier to entry in the Russian market.
-
Labor Pool:
A further challenge that
may prevent new entrants into the market is that the
labor pool for journalists is very small, which makes building a credible team
a challenge in this industry. As
Haratyan noted, there are few journalism schools in Russia who train students
on the basics of news reporting, fact checking and media standards. As a result, many organizations like Kommersant believe the only way to build a strong staff is to build a
team from the ground up. While new
entrants could develop such internal training, it would mean that their initial
entry into the market would be accompanied by journalists who do not have name
recognition or a built-in reputation for quality with the public. Not having a strong staff, therefore, would
make it difficult for new competitors to enter the market and compete against
an experienced team like that of MediaMost.
-
Financial Viability/Capital Investments: Building
a new media organization will require a significant capital investment from any
organization looking to enter the market.
It cost more than $30 million for Gusinsky to launch NTV in 1994, even
thought he secured the broadcast rights for essentially nothing, with
considerable investments from other sources in recent years needed to bolster
operations. Any new entrant in the
market would have to make a considerable capital investment to purchase the
broadcast rights, build a strong team and establish a brand. According to Mark Hannye, “Startup costs are
significant. Equipment for publishing and operating the newspaper press alone
makes it unattractive to potential entrants.”
Besides startup costs, financial viability is not guaranteed. On a basic level, foreign advertising
revenue – a necessary source of income – has decreased significantly since the
crisis, making the overall market unattractive for entry by a new competitor.
-
Brand Image: Since 1994, MediaMost has been able to build
a strong brand for NTV and established a fairly solid reputation within the
market. While this brand and reputation
have been tarnished during the recent struggles with the government, the
network is still recognized for independence and quality programming within
Russia. Building an equally strong
brand would take time and be expensive; and would require a sustained focus by
a new competitor.
Substitutes
Substitutes to NTV do not appear to
serve as a direct threat to MediaMost’s ability to grow and move towards
profitability. The two main
alternatives in the television market to NTV are ORT and RTR – both government
controlled entities. While many
consumers may be willing to watch these channels for entertainment programming,
they may be skeptical of the news reported on them because of the influence of
the government. As a result, one could
argue that the threat of network television substitutes overtaking NTV is
rather low, as NTV has built a clear niche for itself in the news arena. However, as stated above, it is important to
consider the emerging threat of RTR in terms of the innovative programming it
airs.
Aside from other broadcast networks, the Internet,
newspapers, radio and Western cable programming comprise the other main
substitutes that consumers could access instead of NTV. Of these, the Internet has the greatest
potential to serve as a substitute to television, like in Western countries, as
consumers could access a limitless supply of global news, entertainment and
other programming. However, according
to Petr Skobelev, Internet penetration in Russia is limited to 2.5 million
Russians20, which means that television will continue to be the main
source of news and entertainment for the time to come21.
There is one main group of “buyers” of MediaMost’s
product: advertisers who purchase air time/print space to promote their
products and services. Prior to 1999, one company, Video
International, controlled all advertisement production and placement for all
networks. The company was owned by
Mikhail Lesin, the current Minister of the Press and served as the only broker
for advertising22. As such,
companies interested in advertising space could not leverage their individual
buyer power to force ad placement prices downward – but instead worked through
this single organization. Because of
the politics involved, MediaMost recently opted to create its own advertising
firm, Smart Media. By consolidating all
purchasing through this advertising house, MediaMost has been able to minimize
buyer power in terms of rate negotiations and work to preserve the highest
possible fee structure – minimizing the loss of revenue to the highest degree
possible during the turbulence of the past two years.
NTV is a ratings success and considered a true
market leader. However, as the
switching costs of advertisers are low, companies could choose to advertise on
a competing network or in a competing newspaper with little or no tradeoff. Moreover, as previously stated, after the
crisis, foreign companies decreased their ad placement on all outlets, causing
a decline in revenue for the industry as a whole. Therefore, we must consider buyer power to be an intermediate
threat to the long-term success of NTV, especially if it is not able to hold
its position as a market leader.
There are two key suppliers that influence how
MediaMost is able to successfully carry out operations: the government which “supplies” the right to
function and journalists who provide their talent. As witnessed by recent political developments, the government is
a powerful supplier not obligated to do business with MediaMost. In fact, MediaMost alleges that the
government has impeded its ability to carry out operations by imposing legal
restraints on its activities and supporting its competitors with little or no
consequence – except for recent public opposition23.
In addition, journalists are a major
supplier of talent and credibility to the network. As discussed previously, the available supply of recognized
journalists is very tight at the present, which means that it is difficult to
attract qualified talent that will be respected by the public. Over the past seven years, NTV has recruited
and developed popular on-air personalities that viewers like and respect. If, at any time, these journalists chose to
leave the organization en-mass, the company would instantly lose one of its
most valuable resources and be significantly damaged in the market. This supplier power means that MediaMost
will have to be cognizant of the reactions of its journalists to any new
management structure and work to maintain positive employee relations.
Both of its primary suppliers could
make it difficult for MediaMost to operate successfully in the coming
year. Repairing and maintaining
positive relations with each will be essential for the company to return to
profitability in the near term.
In addition to the main five forces,
other outside pressures exist that have dramatically affected the media
industry. In the case of media
organizations in Russia, one of these outside forces has the strongest impact:
the volatile political environment.
According to each source interviewed in Russia, MediaMost would not be
in the current predicament if it had supported President Putin in the last
election. The fact that Gusinsky
aligned himself, and the views of NTV and other MediaMost publications, so
strongly with Yuri Lushkov in the last election has caused retribution on the part
of the Putin government. As such, it
appears that if Lushkov were in office, the financial obligations that are the
strongest weapons in the current fight would have been essentially forgiven and
the entire crisis averted24.
In the words of an American embassy official, Gusinsky bet wrong.
Despite these political forces, the
analysis of MediaMost’s competitive positioning indicates that the company is
well suited for growth and will be able to achieve profitability. It is fairly immune to new entrants in the
market, experiences little threat from substitutes and has not been impacted by
the relative power of the buyers of its product. The only points of concern are the threat of increased rivalry
from RTR and the power of its suppliers – but neither of these forces provide
serious reason for long-term concern if NTV is permitted to once again function
as a traditional media company without the baggage of the political situation.
One challenge in researching MediaMost and investigating its current
financial struggle is that it has been a moving target. Every week there has been a new development
or another theory of what will ultimately take place. After exploring the current landscape in which MediaMost finds
itself, we have arrived at three different scenarios that illustrate possible
next steps in this evolving story. The
one common element to the scenarios is that each has Gazprom ultimately gaining
some kind of control of the network, as all of the research and a majority of the
interviews conducted make clear that this was near certainty. The scenarios are: Gazprom passes control of
NTV to the government, Gazprom maintains independence of NTV, and international
consortium enters.
A common public perception of Gazprom’s role in
the struggle for NTV is that its ultimate victory could lead to a government
take-over of Russia’s only independent news organization. This could occur as Gazprom would be free to
appoint its own management and restructure the organization as it sees fit,
acting on behalf of the Kremlin.
However, as many have argued, such a take-over would destroy any
credibility for NTV as a media institution and lead to a reduction in the
overall value of the network.
A Gazprom takeover of NTV on behalf of the
government would more than likely lead to:
-
A mass exodus of or strike
by NTV’s employees if they perceive that the government is trying to manipulate
the network for political purposes or shape the content of the news reported.
-
A reduction in the
brand-image of NTV, as it would no longer stand for “independence,” as
symbolized by its name, but rather would be seen as a puppet for the
government. The loss of brand equity
would have the following potential impacts:
a loss in viewer-ship as the public would doubt the independent nature
of the coverage and a resulting reduction in the amount advertisers would be
willing to spend to promote their products on the network.
-
A loss in value for the
network as a financial entity. What has
set NTV apart from the competition is its reputation for independence and
strong brand in the eyes of the Russian people. The loss of the brand would dilute significant financial value
from the company, and would not enable Gazprom to reclaim the investment it made
in the network.
-
Gazprom and the Putin
government would face intense criticism in the West for the takeover of the
only nationwide independent media in Russia. While the Russian government is
not beholden to public and governmental opinions in the West, it certainly will
not want this single issue to continue to cloud future economic, security and
trade discussions.
The factors listed above have been widely reported in the Russian and
Western press. As a result, if Gazprom
was operating from a financial perspective and looking to protect its
investment in NTV, this scenario would not be the best approach to take. If Gazprom ultimately allows the Kremlin to
control NTV, it will clearly demonstrate that the true motivations throughout
this struggle have been political.
Gusinsky himself described what would happen if the government attempted
a takeover of the network in saying, “You can't kill
NTV in secret. Its death will be public
because if NTV becomes loyal and dishonest, that means it will no longer be
NTV. And then everyone will understand that the television company was killed25.”
Scenario
Two: Gazprom Maintains Independence of
NTV
From a financial standpoint, once it gains control, Gazprom will have
an incentive to maintain the independence of NTV in order to maximize the
investment it has made in the company.
As discussed, keeping NTV independent is essential for continuing the
network’s brand image, credibility and standing with the Russian people. By doing so, Gazprom has a better chance of
ensuring a solid network with the potential for creating strong revenue growth
for the future.
The two most critical ways of maintaining the independence of NTV is
to establish a “hands off” approach to editorial content and to retain the
employees who helped create the reputation of independence in the first
place. While Gazprom may wish to
replace the business management of the network, it should keep the on-air
personalities who are recognized by the Russian people and trusted for
providing an independent perspective.
If the employees choose not to stay with the network, Gazprom could
rebuild by hiring new anchors and reporters (either those with national
“personalities” or those who could be groomed for prominence) and strengthening
the journalistic standards that would help ensure the continued independent
nature of NTV’s coverage. In sum, while
the talent may turnover, Gazprom will only be able to maintain NTV’s
independence by not changing the content, quality and critical-nature of the
reporting on NTV. If any aspect of the
programming changes, in a pro-government manner, the public will suspect that a
takeover by the Kremlin has occurred, harming the brand equity of the network.
Maintaining the independence of NTV will appease
many of the constituencies involved, including:
-
Gazprom has the potential
to earn back the investment in NTV over time.
-
Gusinsky will be assured
knowing that the independence of NTV as a media organization will be
continued.
-
President Putin will not be
accused of orchestrating a complete government takeover of the media.
-
The on-air personalities
and reporters will continue in their current positions and work to report the
news in an independent fashion.
This has the greatest potential for Gazprom’s long
term financial gain so long as Gazprom is able to clearly illustrate to the
public that independence has been maintained.
Throughout the course of the in-country research, the most
often-mentioned scenario of what would happen was that Gazprom would ultimately
gain control of NTV, Gusinsky would sell his shares to the international
consortium led by Ted Turner and Gazprom would relinquish some of its shares to
keep an even distribution of control.
The role of the consortium would held ensure media freedom.
During the research and interviews, the following
factors made it appear that this was the most likely scenario to unfold:
-
Power of Gazprom: The entire struggle for NTV has been a
“David and Goliath”-like battle, in which Gazprom has had vastly more resources
and power to use against the much smaller MediaMost organization. Gazprom has been able to wage this battle on
multiple fronts: emphasizing the large
amount of debt owed to it and leveraging relationships inside the government to
apply additional political and legal pressure.
Therefore, from observing the situation and speaking with a number of
sources, it seemed like only a matter of time until Gazprom would be able to
gain control of the network and force Gusinsky out of a management role.
-
Maximize Investment: The prior discussion clearly illustrates how
Gazprom’s investment could be maximized.
By selling a significant portion of his interest in NTV, Gusinsky would
be attempting to gain the most possible from his original investment in the
network. Gusinsky, no doubt, is a
rational enough businessman to realize that the battles are sure to further
drain MediaMost’s resources, and that in order to ultimately prevail, he would
have to find a way to pay off its debt to Gazprom due in July, 2001. Since MediaMost does not have access to
sufficient capital to meet its obligation, the only way for the company to pay
its debt is to arrange for a deal with a group like the consortium.
-
Swift Resolution: The final reason that this scenario appeared
most plausible is that it provides benefits for all the parties involved. President Putin would win the personal war
against Gusinsky and at the same time not appear to curb freedom of the
press. Gusinsky could come across as a
“martyr” for relinquishing control of the network he founded in order to
maintain its independence while at the same time see his shares of NTV gain in
value. Moreover, the revenue garnered
from the transaction would enable him to reinvest in his other MediaMost
holdings – most notably the satellite and newspaper. Finally, Gazprom would be able to realize the investment it
originally made in NTV and remove the complication of Gusinsky’s involvement in
the network.
The obvious complication of this scenario ultimately coming to
fruition is the personality factor, in that many believe Vladimir Gusinsky will
fight to the finish to maintain some sort of control over NTV. While no one doubts his interest in remaining
involved in the network, several of the experts we consulted responded that he
ultimately will have no choice and that relinquishing ownership will be the
only option available.
Undeniably, the struggle for NTV is an extremely complex story that
is unfolding before our eyes. Those who
claim that the battle is solely about business concerns or just about freedom
of the press are ignoring the complexity of the ongoing situation. However, exploration of the struggle from a
business perspective has enabled us to reach several conclusions about
operating in the modern Russian economy.
-
Politics Matter: One of the key takeaways of the struggle for
NTV is that politics matter in the modern Russian economy. Vladimir Gusinsky was able to use his
political connections effectively to obtain exclusive ownership of NTV in the
first place, used subtle political support from his media organizations to
curry favor with politicians as he grew the network, and then ultimately was
harmed when he overtly and aggressively supported the opposition candidate to
now President Putin. Any business
leader looking to operate in Russia should be cognizant of these forces and
know how work within them.
-
Importance of Fundamentals: At the same time, the heart of the battle
for NTV is a dispute over debt. As explained
by Professor Peter Ekman in an interview in Moscow, aside from the political
issues involved, an added complication of the story was a disagreement
concerning the valuation of NTV’s assets and the terms by which the debt had to
be re-paid. These points demonstrate
that despite the tumultuous conditions of the Russian economy, the fundamentals
of business and the terms of obligations are still critically important.
-
Freedom of the Press Will Survive: Many have charged that the
battle for NTV is about destroying the only independent news outlet in
Russia. However, as described in the
strategic analysis of MediaMost’s business and the potential scenarios that
will take place, it is becoming increasingly clear that there is a place in the
Russian media landscape for an independent news outlet that holds the trust of
the Russian people. If not Gazprom,
then some other organization will seize this opportunity.
With these business conclusions in mind, it is important not to
minimize the struggle for NTV in terms of the opinions of the Russian people
and the emotions the conflict has brought to the surface. The fight for the television station – a
constant of all revolutions – appears to be over. The next step, regardless of its ownership, is to rebuild NTV
into a profitable media organization which serves the interests of the Russian
people.
Footnotes
|
1 |
Mickiewicz,
Ellen Propper, Split Signals: Television and Politics in the Soviet Union,
Oxford University Press, 1988, pages 224-225. |
|
2 |
Mickiewicz,
Ellen Propper, Changing Channels: Television and the Struggle for Power in
Russia, Duke University Press, 1999, page 223. |
|
3 |
Freeland,
Chrystia, Sale of the Century: Russia’s Wild Ride from Communism to
Capitalism, Crown Publishers, 2000, page 148. |
|
4 |
Freeland,
Chrystia, Sale of the Century: Russia’s Wild Ride from Communism to
Capitalism, Crown Publishers, 2000, page 150. |
|
5 |
Freeland,
Chrystia, Sale of the Century: Russia’s Wild Ride from Communism to
Capitalism, Crown Publishers, 2000, page 150. |
|
6 |
Freeland,
Chrystia, Sale of the Century: Russia’s Wild Ride from Communism to
Capitalism, Crown Publishers, 2000, page 152-3. |
|
7 |
Freeland,
Chrystia, Sale of the Century: Russia’s Wild Ride from Communism to
Capitalism, Crown Publishers, 2000, page 155-7. |
|
8 |
Freeland,
Chrystia, Sale of the Century: Russia’s Wild Ride from Communism to
Capitalism, Crown Publishers, 2000, page 156. |
|
9 |
Higgins,
Andrew, “Russian Tycoon Enters NTV Fray By Offering Loan, Help with Debt” The
Wall Street Journal, 2/8/2001 |
|
10 |
Higgins,
Andrew, “Turner-led Investors Make Strides in Plan to Buy Stake in Russia’s
NTV” The Wall Street Journal, 2/16/2001 |
|
11 |
Campion,
Walsh, “Gazprom, US Discuss Western Role for Russian TV Firm” Dow Jones
Newswires, 3/7/01 |
|
12 |
Higgins,
Andrew, “Russia’s Gazprom to Sell Part of Its Stake in NTV” The Wall Street
Journal, 3/5/2001 |
|
13 |
Discussion
with Chris Hannye |
|
14 |
Discussion
with Chris Hannye |
|
15 |
Higgins,
Andrew, “Russia’s Gazprom to Sell Part of Its Stake in NTV” The Wall Street
Journal, 3/5/2001 |
|
16 |
Freeland,
Chrystia, Sale of the Century: Russia’s Wild Ride from Communism to
Capitalism, Crown Publishers, 2000, page 144. |
|
17 |
Discussion
with Peter Ekman |
|
18 |
Discussion
with Peter Ekman |
|
19 |
Higgins,
Andrew, “Russian Tycoon Enters NTV Fray By Offering Loan, Help with Debt” The
Wall Street Journal, 2/8/01 |
|
20 |
Lakaeva,
Irina “Internet Security in Russia” U.S. Commercial Service Moscow, 3/12/01 |
|
21 |
Discussion
with Petr Skobolev |
|
22 |
Discussion
with Peter Ekman |
|
23 |
Baker,
Peter and Glasser, Susan “State Controlled Company Takes Control of
Independent TV Network”, The Washington Post, 4/3/01 |
|
24 |
Discussions
with Peter Ekman |
|
25 |
Dixon, Robyn, “Besieged Tycoon a Symbol of Russia’s Suppressed
Media” Los Angeles Times, 2/10/01 |
Exhibit I The Evolution of
MediaMost Holdings
|
|
|
|
|
|
Television
|
|
|||
|
NTV (1994) |
Television
Broadcasting
-
70% of Russia's
territory, as well as Byelorussia, Ukraine, Azerbaijan, Kazakhstan and the
Baltic states -
Broadcasts 18 to 20 hours
a day -
Audience: 102 million |
|||
|
NTV Plus (1996) |
Pay Satellite Television
Services A
-
Approximately 40
channels, 110,000 subscribers |
|||
|
NTV International
(1997) |
Broadcasting for the
Russian-speaking population in Israel, Western and Central Europe, the Middle
East, Northern Africa and the U.S. |
|||
|
TNT Networks |
Regional focused broadcasting
|
|||
|
New Russian Series
(2000) |
Production of serials
for NTV holding's companies. |
|||