Misappropriation. Fee reduction of the National Radio

HVG.hu carefully walked around the economic environment of the national commercial radio stations. One of them is alive and well, the other one only exists by the mercy of the Media Council. The majority owner of one of them is Zsolt Nyerges, the other one was supported by the Socialists, while they had capacity for such a thing. However, the common issue of the two radios is that they could only win because they were the subjects of a political deal. The Neo application according to the Supreme Court judgment was not in breach of law – by contrast in the first and second instance judgment – while Class’s was found in breach of law. Neo has no money to continue and as for Class there is no legal basis to continue. A real success story.

There is another figure in the HVG article which surprised me more than the State Gambling Company adverting spend: the media service fees of the two national radios are 460 million HUF each per year. The authenticity of the amount has not been confirmed either by the authority nor any radios and Origo and Kreativ are currently suing the Media Council for the publicity of the contract with the radios. However, while no disproof or at least a rectification application is received, there is no reason to doubt the authenticity of the information. Of course, this is a lot of money for the seven years period of the entitlement, those fees add up to 3.5 billion HUF per radio frequency. But where are these amounts from the amounts that the two winning applicants offered for the frequencies in 2009?

At the time of the tender, Laszlo Majtényi wrote a separate opinion regarding the bid of Class and Neo: “According to the univocal position of the expert opinions, it can be declared about several of the bids submitted to ORTT that they are based on unrealistic market aspects and calculations, their market assumptions and expectations are obviously unfounded and consequently, they are not capable of using the broadcast license according to the conditions undertaken during the entire term of the license.” The expert opinion by Corvinus University concludes: „We believe there is no hope for the bidders to achieve the results they forecasted in their business and financial plans, i.e. to pay the offered broadcast fees during the whole term of the license” The ORTT Office – which proposed Class’s bid to be excluded for formal invalidity otherwise – expressed its concerns in a more restrained way, and declared the business plan “risky”, “would only be possible under an extremely economical management”.

Based on the CFT (specific tender rules), the bidders starting from the second year of operation offered the broadcasting fee – in the new law called the “media services fee” – according to a formula, in which in addition to the 200 million fixed-fee is topped with a percentage of their net sales revenue. The intention with this solution was that the service fee would flexibly align to the respective market conditions of the broadcaster while the broadcasting fee should not be less than the previous broadcasters paid to ORTT. In case of a reasonable offer, the income-related fee obligation automatically adjusts to weaker economic performance thus guarantees the long-term survival of the enterprise. In comparison the fixed fee is better for the operator, who will surely expect higher revenue, as Class can count on the advertisement spending of the Gambling Ltd., since this method allows proportionally for it to pay less.

Class offered 200 million HUF plus 55% of the annual net revenue (not the profit!), while Neo offered 200 million HUF plus 50% of the annual net revenue. The majority of the ORTT members at the time, including of course Annamaria Szalai, and ex-MSZP Gyorgy Ladvánszky, who were later rescued to the supervisory board of MTVA, found nothing wrong with the above opinions. What could be more natural to a company, or even for two at once, to renounce its larger half of revenues, just to have fun in the radio business.

According to the business plans enclosed to their bids, Class would pay more than 1.2 billion HUF, and Neo would pay close to 860 million HUF as their respective Media Service Fees. Class planned to pay more than 9.5 billion during the initial term of seven years, while Neo planned to donate more than 7.2 billion to the media authority. In this respect 460 million per year does not seem like much.

No one forced these applicants to assume fees of this magnitude. Class achieved net sales of 2.333 bln HUF and Neo reached 641 mln HUF of net sales last year. The fixed 460 mln HUF media service fee therefore for Class turns out in the formula equal to 200 million + 11% of net sales, and for Neo equal to 200 million + 41% of net sales. Therefore Class received significantly larger discounts than Neo. In addition Neo’s result was so bad last year that they actually have to pay the proportion of the income what they undertook in their bid. One big lesson of the above is that the 200 mln + 41% offer cannot survive, not to mention the 200 mln + 55%, and the other lesson is that roughly 200 mln + 10% should have been the well-founded offer.

The losing candidates submitted significantly modest numbers in their business plans with much less payment commitments. The highest valid but unsuccessful bid was 200 million + 15% of net sales, based upon which, the candidate would pay 603 mln HUF in 2012. 143 mln HUF more than the winners pay now. But even the lowest offer, 200 mln HUF + 10.5%, planned 571mln HUF for this year in broadcasting fees, which is 111 mln HUF more than the current fee. Apparently, these offers were much closer to market realities compared to the offers of the successful applicants (Neo & Class).

Either way we look at the numbers, the two current national radios perform worse than what the weakest applicant planned and submitted in their business plan. Based on today’s figures Class FM would not have won the tender since Slager and Danubius submitted better offers than Class actually performs. Neo FM’s offer would still win regarding the sales rate, however nowadays there is no need to prove that the business plan of the bid was not well founded. All this also makes the tender process completely meaningless, even if presumably the other applicants would monitored using the same deviation from the planned and actual business results.

The Media Council is trying to sell this as it fits into the general discount given to all radio market participants regarding to media service fee reductions. But this is clear hypocrisy. The two national radios submitted their bids in the middle of the crisis when every market analyst calculated further a decline in the advertising pie that the radio market is especially vulnerable to. Failure to pay attention to these facts lead to the unfounded business offers. That is basically the applicant’s risk and responsibility and although the majority ORTT was divided in this regard, according to the CFT such offers should have been excluded. In fact, the same majority of the ORTT also rejected the offer submitted from the circles of Radio 1 containing essentially the same financial engagements as Class and Neo offered in their business plans. The Radio 1 (group) has ever since not been a favorite of Annamaria Szalai.

The successful applicants and decision-makers, of course, played (at the time of the tender) for the (expected) forthcoming fee reductions. Even this move could not save Neo due to the lack of political wind behind it that could have guaranteed the results on the revenue side. The MSZP foolishly believed that some kind of principle of “enough and to spare” continues to apply in the distribution of (State) advertising money – also generally in the overall economy – but the Fidesz grossly disregarded the rules of the game. This piece of good news is that perhaps they will never return to these rules and they need to rethink the whole-washy business.

The question is what kind of decision ICSID will make based upon the above figures in the lawsuit initiated by Slager and Danubius? And who will pay the compensation awarded to the losing bidders?