TV2 and RTL Klub: Higher Connections

The public at large, and even many in the profession, remain in the dark as to why July 9th, 2012, could become a milestone date in the history of Hungarian television. RTL Klub and TV2, the two nationwide commercial stations that started out in 1997, were originally licensed for terrestrial analog broadcasting for ten years. Then, before this term was out, in 2005, the ORTT granted them an extension of five years. It is this extended contract that will expire less in than a month. If nothing happens until then, the two commercial stations may simply vanish from the terrestrial analog domain. The alternative is for the authority to enter into a temporary agreement with the providers — a solution permitted by applicable law. Remarkably, no news about such a completed agreement has surfaced to date. In fact, urban legend has it that negotiations are still under way. We have written more than once about the issue of tailoring the contracts of the nationwide stations to the requirements of the new Media Act, and about the total lack of public information on any such contractual amendments. Yet it would be crucial to know, and not just from the point of view of the media market, for how long, and in return for what fee, the authority is willing to further extend the license of the two stations.


It is hardly surprising, though, that audiences should be apathetic about the July 9th  deadline. If the temporary contracts go through, this will be more of a curiosity for media lawyers. And even if analog broadcasting grinds to a halt, this will simply not be felt by households with cable, satellite, IPTV or, as the case may be, digital terrestrial reception. Today, an estimated million and a half people across the country live in households without any of these modes of reception, which relegates them to the three analog terrestrial television stations, M1, RTL Klub, and TV2, received by a simple in-room or rooftop antenna.


A decision by the two commercial stations to relinquish analog terrestrial would leave M1, the public nationwide station, as the only one available on this conventional platform, and would make it likely that many households otherwise content with the current selection will switch to another technology. From the perspective of media policy, then, one might as well welcome the winding up of analog broadcasting by the two commercial stations, as this would push us much closer to a digital switchover. Yet there has been no word about the authority even giving serious consideration to this scenario. There has been no industry debate about the potential effects. This is little surprise given the absence of any professional discourse about the fiasco-ridden digital switchover in which the regulator would participate.


It is worthwhile to give a thought to the interests of the commercial stations. Those without an in-depth knowledge of the field assume that the television market in Hungary is sustained by advertising revenues, except that the two nationwide commercial stations make a much better living at it than the others, because they are there in practically every household in the country. So they are clearly interested in maintaining this status quo as long as possible. The reality is much more complex than that. Apart from RTL Klub and TV2, no other station predicates its business model on advertising receipts, but they all rely instead on fees paid by the broadcasting companies (whether cable, satellite, or IP) to them as the program providers. Most of the fee we subscribers pay the cable, satellite, or IPTV service provider ends up on the hands of the program provider. In other words, each distribution company operates as a sort of wholesaler. They make a deal with the program provider on how much they pay for each channel, then multiply it by the number of households whose subscribed package includes that channel. They pay this amount each month to the program provider, who uses these funds to finance the future operation of each channel. Additionally, the program providers also sell advertising space, but they remain far less vulnerable to the vagaries of the advertising market than the nationwide commercial stations for whom advertising is the sole source of income. 


For many years, of course, the two nationwide commercial stations were much envied for their looting of the television advertising market. Year in and year out, however, more and more households subscribe to one package or another. According to survey data collected by AGB Nielsen for 2011, this is now true for 80 percent of television-equipped households. One natural consequence of this situation is that so-called multi-channel households — those with access to a broader selection  — devote less time to watching the nationwide stations, simply because they have more to choose from. This has stopped in its tracks the formerly dynamic growth of advertising revenues for the nationwide commercial stations. In fact, the recession has caused a setback in these revenues. All the while, the stations making a living on distribution fees are doing well, and are far less exposed to the adverse effects of the economic crisis. Television is not typically where households seek to save money. In fact, because they have no choice but to cut back on other recreational activities, such as going out with friends, going to the movies or the theater, people will spend more time at home, and that means that the number of subscribers is not decreasing at all.


In other words, the situation has reversed today: Whereas the stations relying on advertising now struggle in the marketplace, those who look to distribution fees as their main source of income suffer considerably less from the overall economic downturn. According to news published in recent days, for 2011 Hungarian RTL Zrt. posted profits of HUF 2.3 billion at revenues of 29.2 billion, compared to 5.1 billion and, respectively, 36.8 billion in 2008, before the crisis broke out. MTM-SBS Television Zrt., the company that operates TV2, has fared even worse, posting a loss of HUF 7.9 billion at revenues of 16.3 billion, compared to profits of 3.1 billion and revenues of 26 billion in 2008.


This begs the question — particularly for TV2 — whether it is time to switch to another business model and give up the once so lucrative analog frequency. Not only would this relieve the stations from the burden of paying Antenna Hungaria large sums for broadcasting, but the direction of the cash flow would change, with the various service providers (cable, satellite, IPTV) and, through them, ultimately the viewers, paying for the channels. The fact remains, however, that the move would render TV2 unavailable for households with analog reception, thereby compromising the station’s position in the advertising market. Formerly this would have been seen as an exorbitant price to pay, but nothing could be father from the truth today. According to the Digital Switchover Monitoring, a watch service run by the NMHH, the National Media and Infocommunications Authority, the affected households would amount to no more than 16 percent in the total, and would largely be confined to the elderly and/or undereducated segment of the population, typically living in the countryside. Losing this segment, which is widely known to be less attractive a target for advertisers, would hardly curb advertising revenues severely. Undoubtedly, the overall figures would be less impressive than so far (although lately TV2 has seemed to fall behind its competitor RTL Klub anyway). In this sense, then, the setback could be apparently dramatic, but the actual impact would vary greatly depending on the specific figures scrutinized by advertisers and agencies. Those eyeing a well-defined target group, particularly if it is a young, well-situated urban segment, will not care much about the loss of terrestrial analog recipients, a set characterized by completely different priorities. But those advertisers, such as food store chains, for whom it is vital to reach the entire population, will certainly be more likely to respond negatively, perhaps to the point of deserting TV2.


In light of the financial data posted for 2011, quitting analog seems to be the obvious choice for TV2, which in fact finds itself in an advantageous position with the impending expiration of its contract with the authority. These arguments are just as valid for RTL Klub, in that this station, too, may find it profitable to give up analog terrestrial. The difference here is that RTL Klub continues to be profitable based on its true and tried business model. So it is the future of TV2 that holds more excitement at present. As is widely known, Zsolt Nyerges’s company Infocenter is eyeing to buy the channel. Beyond a mere change of ownership, however, a simple management decision also has the power to shape the future of the station. As there is nothing to indicate that TV2 would be capable of recouping its position in the cut-throat competition that marks the television market, maintaining the current business model, which has only produced massive losses of late, would run counter to sheer common sense. If TV2 nevertheless chooses to persist against the odds, the decision will clearly not have been motivated by business considerations but by some ulterior motive to keep the channel available to every household. The scheduled deadline for analog terrestrial shutdown is the end of 2014, which means that politicians during the election campaign of 2014 will be able to count on a segment of society that can still be reached via these stations. The elderly, undereducated classes living in the countryside may not be a lucrative target for business advertisers, but they may certainly be attractive for the political parties. When a station is associated with a well-defined sphere of business interests, it is hardly difficult to shape the main messages to fit certain political needs. These messages can be particularly effective when aimed at those with only limited access to a narrow range of media services.