Market Insight

CME's ad revenues fall due to weak ad markets and currency effects

November 16, 2012

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Central European Media Enterprises (CME) reported an 18 per cent year-on-year decline in its revenues to $140m in Q3 2012 from $165m in Q3 2011. The group ended the quarter with an OIBDA of $3.5m- a decline of 60.6 per cent from $8.9m in the same period last year.

CME operates Central and Eastern European countries: Czech Republic, Romania, Bulgaria, Slovakia, Slovenia and Croatia. The group divides its operations into three segments: Broadcast, Media Pro Entertainment (MPE) and New Media. The primary revenue source for the Broadcast segment is advertising. Even though its share in total revenue has been falling over time, in Q3 2012 CME, Broadcast operations generated more than 80 per cent of total group's revenues. It was also the only segment that reported a negative revenue growth: it declined 19.7 per cent year-on-year, whilst MPE grew 27 per cent and New Media increased by 16.5 per cent.

CME's revenues were severely hit by two external factors: weak advertising markets and unfavourable exchange rates against dollars across six countries in which CME operates.

Firstly, following the recession of 2009, CME markets remained weak and even more vulnerable to the macroeconomic situation. Whilst most of the Western European markets saw an increase in their revenues already in 2010, the majority of CEE markets declined further in 2010, with Bulgaria, Croatia and Romania and Hungary still decreasing in 2011. Current macroeconomic volatility negatively contributed to the CME markets' economies which in 2012 saw weakening GDP, lower private consumption and consumer confidence levels. These in turn caused advertisers to cut down on their advertising spending plans which were mostly set at the beginning of the year, when economic outlooks were much more optimistic. Specifically, they lowered the budgets for the fourth quarter and abandoned plans for ad-hoc campaigns that would usually take place in the run-up to Christmas.

Secondly, as a company registered on the New York Stock Exchange (NYSE), CME reports its revenues in US dollars, which makes the company even more susceptible to any changes in the macroeconomic situations across its markets of operations.  To put it in context, in Q3 CME's TV advertising markets declined by seven per cent in aggregate, which led to revenue declines of eight per cent. However, as the exchange rates were unfavourable for CME, the broadcaster saw declines of as much as 19.7 per cent at current exchange rates for its Broadcast segment.

However, the external factors were not the exclusive reasons behind CME's revenue decline in Q3 2012. The group underperformed also in terms of the audience and advertising market share. Considering prime time audience shares, the group lost shares across all markets except Slovenia, where it remained on par with the audience results in Q3 2011. In terms of TV net advertising market share, CME's performance in Q3 2011 was varied. The broadcaster increased its TV net advertising revenue (NAR) market shares from 46 to 52 per cent in its smallest market, Croatia and ended the quarter at the last year level in Romania, but declined by two percentage points in the other markets.  As a result of market contractions, two percentage points share losses in Slovakia and Czech Republic brought revenue declines of 10 per cent (at constant exchange rates).At the same time, CME's main competitor Modern Times Group (MTG) increased its market share and also saw an increase of 4 per cent in their ad revenues, using constant exchange rates in Czech Republic- the biggest revenue generating market of CME.

CME still remains the market leader in terms of both audience and TV NAR market shares across all its markets. However, current situations across the markets have proven to be difficult for CME. We estimate that all six markets will increase moderately next year. However, as CME's share of TV advertising exceeds 60 per cent in four of its markets, growing advertising revenues faster than the competition may prove difficult. In the context of digital switch-over, an increase of available channels may fragment CME's viewing and thus advertising market share. The broadcaster may therefore be well-advised to make a qualitative difference to competitors through the production of premium, local content and to diversify revenue streams beyond advertising.


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