Russian Media: Recovery Seen in 2010, Surge Thereafter

Anastasia Obukhova
Analyst, Media & IT
VTB Capital

Having become one of the 10 largest media markets in the world last year, Russia still remains relatively underdeveloped at 204.2 billion rubles ($7 billion). In 2009, it contributed only 0.5 percent of gross domestic product, versus 1 percent to 1.5 percent in the EU. However, we foresee this more than doubling in the coming five years, in ruble terms. Television accounts for more than 55 percent of total ad budgets — the crisis fuelled the ratio increase — and is among the cheapest in the international peer group, with the 2009 Russian television cost per thousand at about $2.70 versus about $6 to $11 in Europe.

Following the 17 percent year on year decline in 2009, Russia’s television ad market is set to rebound this year, with the recovery trend climbing in the second half of 2010 thanks to price increases and a restoration in inventory sell-out. We believe that once the television inventory sell-out ratio hits 100 percent, which is likely closer to mid-2010, television networks may be able to increase prices on inventory. Given the limited supply (Russian television channels can sell only 15 percent of air time for advertising), the equilibrium in supply-demand could return to pre-crisis levels. We think that the television market is set to more than double between 2009 and 2013, in ruble terms.

FMCG advertisers still dominate the Russian television ad market, accounting for two-thirds of the top ten advertisers’ ad time. Still, sectors such as retail, cars and services, dominant in developed markets, have not yet reached similar positions in Russia’s television ad universe. In fact, Russian television advertisers’ structure reflects the country’s still underdeveloped consumer economy. In addition, these trends also reflect the concentration of advertisers following the crisis: Multinationals and companies exposed to the most resilient segments of the economy (such as mobile operators) benefited from the uncertainty in advertising prices in the first half of 2009. Moreover, almost a quarter of Russian television ad spending comes from the 10 largest advertisers.

Russian Internet ad growth is the ultimate value driver for companies with Internet exposure. First and foremost, the Russian Internet ad market remained small, at 19 billion rubles in 2009. It covers just 9 percent of total ad spending versus the 15 percent to 20 percent seen in developed markets. Back in the 2003-2008 period, it had emerged as the fastest growing segment with a compound annual growth rate of 100 percent. Furthermore, we see it expanding more than six-fold over the next five years on the back of an explosion in Russian broadband penetration, surging from the current 25 percent to more than 60 percent by 2014.

Russia’s public media sector is represented by only a handful of media companies. CTC Media, the only public free-to-air broadcaster listed on the Nasdaq stock exchange in the United States, is uniquely positioned to capture the Russian television ad growth, the ultimate value driver for domestic television companies.

Its highly competitive business model stems from 1) its premium audience, driven in turn by a clear programming focus on pure entertainment 2) the ability to price at a premium to the market (CTC network’s current power ratio is more than 1.5) and 3) margin resilience with an increasing focus on in-house programming. RBC, another public company, has all the chances to benefit both from the Russian Internet and television ad growth.

Its business model stems from 1) its primary focus on the two highest growing Russian media segments — the Internet and television 2) its exposure to a premium high-income audience and 3) its business news segment being the backbone of the company’s core operating areas.