Overview of Ukrainian TV Broadcasting Market

TV Broadcasting Market Highlights and Advertising Market Overview The TV advertising market in Ukraine grew by nearly 50% in 2006 to reach $370m and is expected to increase by another 25% in 2007 to nearly $500m. The result of the extremely high penetration rate of televisions in Ukrainian households, TV makes up almost 50% of the countrys total advertising market according to local market watchers. Despite the quick development of other media segments, TV is expected to remain the dominant advertising medium in Ukraine going forward.
2005 ($m) TV Print Outdoor Radio Cinema Internet Total 253 132 118 20 5 2 530 2006 ($m) 370 169 164 27 7 4 741 Chg. (% y-o-y) 46% 28% 39% 35% 30% 100% 40% 2007E ($m) 462 217 194 36 8 7 924 Chg. (% y-o-y) 25% 28% 18% 33% 23% 75% 25%

TV dominates the Ukrainian advertising market

Ukraine Media Advertising Revenue Dynamics (2005-07E)

Source: Publicis Groupe Ukraine

Ukraines advertising market expanded by 40% y-o-y in 2006, to $741m, following similar growth in 2005 and remaining the fastest-growing market in Europe. The countrys overall advertising market, including non-media (or below-the-line) advertising, surged by an estimated 47% y-o-y, to $1.3bn, in 2006. For comparison, the Russian media advertising market rose by 29%, to $6.5bn, last year, while total advertising spending in Central and Eastern Europe, according to ZenithOptimedia, was up 17%, to $27.2bn, while global adspend rose 6%, to $435bn, over the period.
World CEE Russia Poland Hungary Ukraine 0 0.9 5 10 15 20 25 30 35 4.1 3.4 8.6 31.5

Ukraine has the fastest growing advertising market in Europe

458.6

40% 30% 20%

40% 29% 18% 17% 6%

2005

2006E

2007E

10% 0% Ukraine Russia

5%

World

Hungary

Sources: ZenithOptimedia, AKAR, Cortex

Adspend Comparison ($bn)

Adspend Growth Comparison (2006E; %)

Sources: ZenithOptimedia, AKAR, Cortex

Despite the booming growth, Ukraines advertising market remains very small relative to its regional peers if measured in relation to GDP and on a per capita basis. Last years media adspend in Ukraine reached 0.7% of 2006E GDP compared with up to 2.5% in CEE. Ukraines per capita adspend is also among the lowest in the world, at $15.90 in 2006 as opposed to $44.20 in Russia and up to $300 in some CEE countries. These comparisons demonstrate that the domestic advertising market still has a long way to go before it catches up with its more developed regional peers.

Measured by per capita and against GDP, Ukraines ad market demonstrates huge growth potential

Poland

CEE

300 250 200 150 100 50 0

296

2005 173 100 57

2006E

2,000

Total Adspend ($m; lhs) Growth (%, y-o-y; rhs) 1,430 1,150

1,760

60% 50% 40% 30% 20% 10%

1,500

1,000

924 741 530

44

16 Ukraine

500

Hungary

Bulgaria

Czech Republic

Poland

Russia

0 '05 '06 '07E '08F '09F '10F

0%

Sources: ZenithOptimedia, AKAR, Cortex

Adspend per Capita ($)

Ukraine Media Advertising Market Growth ($m)

Sources: Publicis Groupe Ukraine, Dragon Capital estimates

Based on the above metrics and given our economic growth projections, we expect the Ukrainian media advertising market to maintain solid two-digit growth in the mid term, reaching $1.8bn in absolute terms, or 0.9% of GDP, in 2010. Annual growth rates will moderate, reflecting the disappearing low-base effect, as well as more accurate reporting of actual advertising expenditures as opposed to previous years when certain market segments were underreported, creating a low comparison base. TV Broadcasting Market Overview The TV advertising market in Ukraine grew 46% in 2006 to reach $370m and is expected to increase by another 25% in 2007 to over $460m. As a result of the extremely high penetration rate of televisions in Ukrainian households, TV accounts for almost 50% of the advertising market according to the Ukrainian Advertising Coalition. Despite the quick development of other media segments, TV is expected to remain the dominant advertising medium in Ukraine in the coming years. Similar to other emerging markets but in contrast to developed countries, TV advertising dominates in Ukraine, boasting about 50% market share compared to some 38% globally. The countrys TV ad market roughly equals that of the print and outdoor ad markets together, and while the internet ad market continues to grow rapidly, it remains very small compared to TV and other media at this point.
100% 80% 60% 40% 20% 0% 2005 2006
Source: ZenithOptimedia

Strong mid-term growth is forecasted

TV advertising dominates in Ukraine, followed by print media

100%
5% 43% 6% 42% 6% 41% Internet Cinema Radio Outdoor Print 38% 38% 38% TV

80% 60% 40% 20% 0%

22% 25%

22% 23%

21% 24%

Intern et Cinem a Radio Outdo or Print TV

48%

50%

50%

2007E

2005

2006

2007E

Global Adspend by Medium

Ukraine Adspend Breakdown by Medium

Source: Publicis Groupe Ukraine

Procter&Gamble, with an est. $85m advertising budget for Ukraine, was the largest advertiser on domestic TV in 2006. Other leaders in the country are various alcoholic drinks producers, health and beauty product manufacturers (e.g. Schwarzkopf&Henkel and Unilever), cellular network operators (e.g. UMC, Kyivstar, Beeline and Life) and confection producers Nestle and Kraft Foods.

FMCG, alcohol and cellular networks spend the most on advertising in Ukraine

The market growth described above has been fueled by many factors, including the entrance of foreign companies, increasing competition among FMCG producers, growing interest in regional markets and rising advertising prices. In terms of price and volume, a price increase of about 60% has been the key driver of market growth in 2006. The overall amount of available advertising airtime changed little last year due to the relatively stable number of channels on air and a law that allows no more than 15% of total airtime to be allocated to advertising. TV advertising has the lowest cost per contact among all media in Ukraine and, in the coming years, despite the development of other advertising segments, it will continue to dominate the market. The market currently faces a deficit of TV airtime and it is currently unclear for how long demand will outstrip supply on the market. The key factors to consider will be the overall level of demand (in particular, advertising spending by cellular operators) and a possible ban/limitation on alcohol advertising on TV. In 2007, one prime-time GRP (a standard 30-second advertising spot) on top-tier Inter channel costs $1,300, up 30% from December 2006. On second-tier ICTV, the GRP price increased 25%, to $1,000. Generally, market participants expect a 2545% jump in prices for 2007. Key Market Players and Competition Overview Currently, the Ukrainian TV market can be separated into three segments. The absolute leaders are Inter and 1+1, each holding approximately a 20% audience share. These channels enjoy a slightly higher share of total TV advertising revenues than their audience share. The second tier includes Noviy Kanal (New Channel), ICTV, STB, TRK Ukraina and TET. These channels have somewhat more limited geographical coverage and their audience share ranges from 3% to 7%. The country has a large number of third-tier channels, including Channel 5, First National, NTN, Tonis, M1, Megasport and others.
Channel Inter Audience Share (aged 18+) 21.43% Description

Demand is growing and already outstrips supply, resulting in significant price inflation

25-45% price inflation expected for 2007

The market can be separated into three major segments based on audience share

1+1 Noviy Kanal (New Channel) ICTV STB TRK Ukraina TET Pershiy (First) National NTN Channel 5 Tonis M1 Others

18.20% 7.31% 7.29% 6.44% 4.51% 2.69% 2.17% 2.14% 2.04% 1.41% 1.21% 22.01%

A major national channel with diverse content that targets family viewers with a slight focus on older (+45) segments of the population. Reportedly owned by local businessman and politiciam Valeriy Khoroshkovskiy with a minority stake held by Russias Channel 1. A major national channel with diverse content that targets family viewers with a slight focus on younger audiences. Partially owned by one of its founders, Alexander Rodnyanskiy, and Central European Media Enterprises (CEME). A general content channel targeted at young audiences. The channel is reportedly controlled by steel pipe magnate Viktor Pinchuk. A general content channel also reportedly controlled by Viktor Pinchuk. The channel is in a close fight with Noviy Kanal for third spot. A general channel with news, information and educational programming targeted at a middle-aged, educated audience. It, too, is reportedly controlled by Viktor Pinchuk. A general content channel based in Donetsk and controlled by SCM Group (Rinat Akhmetov). A pure entertainment channel controlled by Privat Group (Igor Kolomoyskiy) A government-owned general content channel. The channel is relatively underfunded and has not been able to keep up with competition in terms of quality content offering. This channel has moved from being news-oriented to being more entertainment focused. This year, NTN has purchased and started showing several popular TV series. A politically oriented news channel that rose to national prominence for its coverage of events during the Orange Revolution. Controlled by politician and businessman Petro Poroshenko. One of the first commercial channels in Ukraine. Recently announced plans to move from general content to more business-related news and related programming. A youth-oriented music channel launched in 2001. The most successful all-music format channel in Ukraine so far.
Major TV Channels in Ukraine
Sources: GfK Ukraine, Dragon Capital

A specialization trend has emerged in recent years, as growing competition in the industry has forced market participants to seek out niche audiences. Consequently, such specialized channels as M1 (music), Megasport (sports channel, approx. #15 in the ratings), TET (entertainment), Channel 5 (news) have risen in the rankings and increased their geographical coverage. Currently, in a landmark development, MTV has become the first international channel to enter the Ukrainian TV market. Following MTVs successful development in Russia since 1998, MTV-Ukraine is currently finalizing work to obtain the necessary broadcasting licenses and expects to launch in 2H07. Horizon Capital holds a majority stake in MTV-Ukraine. Overview of Market Regulations One of the key regulations governing TV broadcasting and advertising market is a requirement that no more than 15% of total airtime be allowed for advertising (and no more than 20% in any given hour). Also, a major decision was approved by parliament in 2006 that should see Ukraine completely switch from analogue to digital broadcasting by the end of 2015. Currently, about 90% of the available frequency range is already occupied. Switching to the digital broadcasting format will allow more channels to enter the market, though at present market participants have not made significant strides towards investing in or adapting to the new changes envisioned for 2015. Given that alcohol producers control a large share of TV advertising in Ukraine, alcohol-specific advertising regulations require separate attention here. Since 2003, advertising of alcoholic drinks and related brands on TV and radio is allowed only between 11:00pm and 6:00am. Alcohol producers have been able to circumvent this limitation by sponsoring various TV programs (notably sports news and music TV programming) and by engaging in product placement activities. Currently, several draft laws have been registered in parliament intended to limit or outlaw altogether alcohol advertising on TV. However, few significant limitations appear likely to succeed given the powerful lobby of alcohol producers in parliament and their ability to switch from direct brand advertising to TV program sponsorship, product placement and other indirect advertising activities.

A specialization trend has emerged recently

MTV-Ukraine is the first international channel entering the market

Regulations limit total advertising time A switch to digital promoted by the government but not likely in the short term

A ban on alcohol advertising on TV has been discussed but is not seen as likely