What's Wrong With This Tv Picture?

Ronald Lauder's CME runs into rough times in the big markets

The buildup had gone on for months. Big-name advertisers from Nestle to Toyota Motor were locked up. But when opening night came on Oct. 3 for TVN, Poland's newest commercial broadcaster, it was a less than a stellar debut. Viewers were treated to two minutes of the back of a station executive's head. Hapless co-anchors on a call-in show stammered out a number no one bothered to phone. And while TVN used its prime-time 8 p.m. slot for an unknown movie, Explosion, rival stations offered Naked Gun and Batman. The early ratings: just 3.5% viewership.

The opening-night glitches set off warning bells at TVN's controlling shareholder, Central European Media Enterprises (CME). Founded by Estee Lauder cosmetics heir Ronald Lauder, CME swept into Central Europe in 1994 with Nova, Prague's first private TV station. Glitzy shows such as Dallas plus local programs and lively newscasts catapulted CME to a 59% market share. But as CME cracks Poland and Hungary this year, where ad spending is much higher, it is finding that the potentially most-lucrative forays will be the toughest yet. "We're up against entrenched competition for the first time," concedes Lauder.

BIG PLAYERS. Rivals include both private stations and state networks scrambling to hold on to audiences. In Hungary, CME is going head to head with CLT-Ufa, backed by Germany's media giant Bertelsmann, and Scandinavian Broadcast System (SBS), which is 22.8% owned by Walt Disney Co. In Poland, state channel TVP1 has a lock on 40% of the market, while PolSat, owned by entrepreneur Zygmunt Solorz, attracts 30% of TV viewers. Time Warner Inc.'s Home Box Office is also vying for audiences.

CME is headed into a rougher environment just as it's trying to recover from financial setbacks. The company lost $30 million in 1996 on $136 million in sales and saw its losses rise to $42 million in the first half of 1997. Much of that stems from a $20.7 million write-off taken when CME dumped its station in Berlin, where it lost $82 million in four years. "There were something like 20 other channels. After huge efforts, we concluded the revenues weren't there," says CME CEO Leonard M. Fertig.

He and Lauder have other worries. A 10% plunge in the Czech koruna last spring dragged down revenues at Nova, CME's only moneymaking venture. As a result, CME's NASDAQ-listed shares plunged 28% to $23. Then, in July, came another disappointment: The Hungarian government turned down CME's bid for a national frequency, awarding licenses to SBS and CLT-Ufa instead. Claiming the tender was unfair, Lauder has sued Hungary's National Radio & Television Board and is awaiting a hearing on Nov. 12. But he did manage to buy a private channel, TV 3, which reaches 35% of local viewers.

AD BOOM. Lauder insists that his ventures will pay off eventually. It takes three to five years to break even in TV, and he's counting on an advertising boom to turn his fortunes around. Average TV ad spending in Central Europe is only $9 per person, compared with $60 in Western Europe, and is expected to grow by 15% to 20% a year, analysts say. CME is already negotiating to sell ad space across its seven-country market, instead of country by country. It is also buying programming for the entire region, starting with a deal with Fox Broadcasting Co.

Meanwhile, Lauder stands by his forecast of a 25% audience share in Poland by yearend. "It may take us longer to dominate, but we'll be No. 1 in Poland within two years," he vows. With ad revenues expected to top $500 million in Poland in 1998, success there could give CME an important lift. CME's shares, which traded at $31.60 on Oct. 14, are already bouncing back. And while CME may lose as much as $60 million in 1997, some analysts say it will be earning profits by 1999. CME is "a pure play on ad growth in Eastern Europe," says James H. Friedland, media analyst of Arnhold & S. Bleichroeder Inc.

Lauder already has set his sights on markets farther east. In a bid to beat his rivals in the Baltics and other parts of the former Soviet Union, he's now talking with potential partners there. "We understand this market more than all our competitors," he declares. Opening night mishaps aside, Lauder still aims to be the region's television king.