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06-09-2005 The Moscow Times - By William Dunkerley - Is the possible acquisition of Izvestia by Gazprom a deal or a joke? Last week, it was announced that the state-controlled gas monopoly was about to purchase control of Izvestia from ProfMedia, which also owns Komsomolskaya Pravda and other media properties. Now the focus in the media has shifted to the motivation for the potential sale. Various observers are asserting that it is another attempt by President Vladimir Putin to get more control over the press. Gazprom's takeover of NTV in 2001 was widely viewed as an assault on press freedom by Putin. Could the Izvestia deal be the next step in some master plan? Let's apply some reality testing to that proposition. Izvestia has a circulation of about 235,000. By comparison, its sister paper, Komsomolskaya Pravda, has a circulation in the millions. For this reason, the suggestion that Izvestia's sale would mean a takeover of the print media sounds more like a joke. Yet while the potential sale would not necessarily result in complete control of the press, could it be a good business deal? It sounds like Gazprom may get Izvestia at a good price. Georgy Bovt, a former Izvestia managing editor and current editor of Profil magazine, said ProfMedia paid $40 million when it acquired its stake in Izvestia. How much will Gazprom pay? This has not been officially announced. But $10 million to $20 million is the speculation among publishers polled by Vedomosti. Buying a newspaper property for half price or better sounds like quite a deal. Now, let's reality test that, too. Izvestia is certainly a good name, recognized by all. But, is it also a good business, one worthy of Gazprom's investment? In developed countries, newspaper profitability comes from advertising revenue. Circulation revenue usually just covers the cost of distribution and perhaps promotion. In the United States, for example, newspapers average around 58 percent advertising content. That provides enough revenue to pay professional wages to staff, to pay market value for rent and printing services -- to avoid relying on the subsidies that are so common in Russia -- and to produce profits that will offer a return on investment for owners. How much advertising is in Izvestia? On the positive side, Izvestia has been improving as a product lately. It has added color, a weekend supplement, an improved opinion page and other features. Yet there seems to have been little concomitant gain in advertising. This may be a sign that the advertising, editorial and circulation departments are failing to function according to a unified plan. A leadership vacuum at the top is a frequent cause of this kind of uncoordinated activity. Thus, if we analyze the deal as a purchase of a profitable business, at first glance, it does not make a lot of sense. What's more, it is hard to understand why the gas monopoly would want to expand its role in the media business. In 1996, when Gazprom acquired a 30 percent stake in NTV, then-CEO Rem Vyakhirev explained that he planned on using the television network to communicate with his 1 million shareholders, which was why Gazprom was buying in. The present Gazprom management may have a similar goal in sight for Izvestia, but not all shareholders are on the same page. Investment fund Hermitage Capital, a Gazprom minority shareholder, has been critical of the rising costs of the gas giant's non-core business activities. Buying a newspaper that may be on shaky financial ground certainly could reinforce that concern. Regardless, perhaps the discussion of the Izvestia sale has done some good by focusing public attention on the need for Gazprom to finally get out of the media business. Following the takeover of NTV in 2001, Putin characterized Gazprom's role as an interim one. It has been quite an extended interim period. However, there is actually good business sense behind the idea of holding the Gazprom media properties until now. Earlier, media advertising was largely not a tax deductible business expense for Russian companies, due to tax laws left over from the Yeltsin era. A private-sector initiative successfully advocated for a change in the Tax Code. Thus, in mid-2002, advertising finally became a legitimate business expense in Russia and is now fully tax deductible. In part as a response to this improved business regulation, there is now an advertising boom underway in Russia. As a result, foreign publishers are flocking to the Russian market, companies like Sanoma, News Corp. and others. Many believe that Russia is the world's fastest-growing ad market. What better time could there possibly be for the Kremlin to make good on the promise that Gazprom would be just a transient player in the media market? Now is the time for Gazprom's media holdings to go up for sale. Gazprom is in no position to take the admirable editorial improvements started by the Izvestia staff and translate them into success in business terms. The company has displayed an absence of business acumen in the media field. Over the course of its stewardship of NTV, the channel has lost value as a brand and lost its reputation as a source of independent news. It remains successful because of the favorable ad market. Thus, Gazprom could sell its media holdings now and not experience the impact of the mismanagement of its media brands. On the other hand, if Gazprom stays in the media business despite the current opportunity to get out at a propitious time, it would certainly look like the company was more interested in propaganda than profits. But this is a fool's game. Russians are smart, literate people. They can recognize phony news stories that are bought and paid for. Indeed, many viewers and readers are upset by the hidden advertising and other distasteful content that is all too often foisted upon them. In increasing numbers, media consumers have been calling for the reinstitution of regulation to end this nonsense. Moreover, newspapers that are felt to be pure propaganda render poor value to advertisers because these outlets engender distrust. If all Gazprom managers really want is to be propagandists, not businesspeople, then the joke is on them.
William Dunkerley is an independent media business consultant working in Russia and other post-communist countries. He contributed this comment to The Moscow Times.