Recommendations to the Putin Administration

Below are the recommendations offered to the Putin administration in February 2002.

Complaints about the Russian media are many. President Putin laments that media outlets "depend on handouts from outside people" and "perform a function that is assigned to them by their financial sponsors." Others believe that the President seeks to subjugate the media through actions against NTV and TV6.

The list of other complaints is quite long. It includes:

1. Media companies are used by provincial governors, mayors, and financial forces as instruments of inter-clan warfare.

2. Media outlets prostitute themselves by running paid PR stories masquerading as news.

3. The media is awash in a sea of illegal revenues from unregistered, indirect advertising.

4. The press poorly understands the interests of its own audience.

5. Advertising expenditures are largely not tax deductible.

6. Aggregation of audience by media companies is done randomly. Advertisers are left with less-than-desirable demographics and psychographics.

7. Media companies' lack of consumer credibility compromises the effectiveness of advertising and public relations campaigns.

8. Responsiveness to audiences takes a back seat to advancing the political and economic needs of most media companies' owners or sponsors.

9. Outside of a few major cities, it is difficult and expensive for advertisers to make effective media buys and contacts.

10. The media is viewed by its own audience as untrustworthy, especially the advertising.

11. Much of what the media is concerned about and reports on is irrelevant to the lives of its audiences.

12. The compromised state of the media engenders public cynicism and thwarts participation in the processes of governance.

13. There is a perception that the government is attempting to take control of the media to stifle dissent.

14. The withholding of information by the government is a direct assault on press freedom.

15. Journalistic standards are particularly low.

16. The legal system is inadequate for adjudicating the above problems.

Some of these complaints can be attributed to a lack of technical understanding of Russia's media sector. However, most of the complaints, if not all, can be traced to one central problem: It is that in Russia today, it is illegal to operate a profitable media company. Of course, there is not a single law that says you can not make profits as a media company. But, there are a number of laws and policies that conspire to create that effect.

The current situation is, in effect, a case of legislated unprofitability.

Take newspapers for example. Russian law limits advertising to 40 percent of each issue's content. Western newspapers average 58 percent advertising. It is nearly impossible for a newspaper to be profitable with only 40 percent ad content. Another law restricts advertisers from tax deducting all but a small amount of advertising expense. Beyond that, companies must take ad expenditures directly out of profits. Obviously, this depresses the advertising market and thereby reduces the available pool of revenue that is needed to support media outlets.

The consequences of this legislated unprofitability are:

1. With insufficient revenues from normal media activities, many media companies have turned to the practice of hidden advertising. This gives them the instant cash they need to stay in business. But, it does long-term harm. It results in the proliferation of media content that is of little interest to consumers.

In other developed countries, media companies are able to earn sufficient revenues by selling advertising time or space. Typically, a single advertiser represents no more than 5 percent of a media company's revenues. Because of this multiplicity of revenue sources, no outside party can effectively exercise control over content. As a result, media companies are free to concentrate on serving their primary audiences, the readers, viewers, or listeners.

2. Another way media companies are dealing with their inability to earn legitimate profits is by taking money from "investors." But these sources of revenue are not really investors. An investor is someone or some company that buys a share of ownership in order to receive a portion of profits. If there are no profits, there is no reason to invest. Obviously, those entities that are "investing" in Russian media companies are looking for something other than a return-on-investment. They buy into media companies in order to gain control over content. They are buying a means to influence society.

When media companies in other developed countries seek investment capital, it is usually to explore new markets, improve content to become a stronger competitor, or to modernize equipment for higher quality content or greater efficiency. In Russia, however, "investment" money is usually used to make up for unprofitability. In reality, the sources of the funds are not truly investors, they are subsidizers of loss making businesses. The outcome of this kind of investment scheme is that the needs of the investors are served rather than the readers, viewers, or listeners.

3. Another way of dealing with legislated unprofitability is by courting political favor. This may be as simple as a mayor granting office space to a media company for a price that is below its market value. More elaborate schemes involve offering advertising as patronage. For example, a factory that makes industrial products will advertise on a regional TV channel. This factory has no real need for that advertising. It is spending the money because it was asked to do so by the governor. The factory is responsive to the governor because he helps this loss-making factory stay open. The end result of this scheme is that the governor can control the content of the regional TV channel. In situations like this, it is the interests of the ultimate patron, the governor in this example, who is served, not the viewers, listeners, or readers.

4. Low salaries for journalists, too, are a consequence of media outlets' inability to achieve profitability. Underpaying journalists is yet another way for media companies to survive without sufficient revenues. As a consequence, many talented professionals leave the field to accept better paying jobs. This has the effect of lowering the overall quality of journalism in Russia. Journalists who remain are vulnerable to those who offer to pay for stories.

Over time, as all these practices have become entrenched, a very abnormal media business culture has evolved. It centers around the mistaken belief that the various forms of hidden advertising and sponsorship are effective means for companies to promote their products and services. In fact, however, they are not. That point is well illustrated by the following anecdote:

In ten cities around Georgia, groups of people huddled around newspaper stacks. They had scissors and glue pots. Their job was to cut out articles from all the local and national newspapers on the table, and piece together their "ideal" newspaper.

After analysis, the results from this exercise were truly amazing!

The experiment, conducted by the International Center for Journalists (it administers a USAID-sponsored media assistance program in Georgia), was analyzed by categorizing the kinds of articles the groups clipped together. These results were compared with a list on which consumers previously indicated what they wanted to see in their newspapers. High on that list were investigative reporting, coverage of government activities, and of corruption.

The comparison between the "ideal" newspapers and the list revealed a huge discrepancy.

When interviewers confronted the groups with this puzzling outcome, the group members offered a near-unanimous explanation: "They didn't clip any such articles because the ones in the existing newspapers were not believable or trustworthy." The Georgians believe that these kinds of articles are almost always commissioned or sponsored by someone for political purposes and are unfair and factually inaccurate.

Consumers are acutely aware they are not getting what they want: "news stories they can trust and believe." They also said even though the economy is bad, "the reason they don't buy more newspapers isn't that they can't afford to - but that they don't see anything in most newspapers worth spending money on."

We believe that if this experiment were replicated in Russia, the results would mirror the above story. Most Russian newspapers are replete with hidden advertising and sponsored stories. We're sure Russian consumers are equally astute at identifying fraudulent journalism when they see it.

This cult of sponsored stories and hidden ads leaves advertisers without the level of promotion their companies need, and leads the media to destroy their most important asset, audience trust. This has a terribly negative impact not on only the media, but on the economy as a whole.

Any of the ills listed above could befall a media outlet and its audience in other countries. But, when consumers are presented choices between media outlets that do not serve their interests and ones that do, they will choose the media outlets that do. Thus, the forces of the marketplace confer the rewards of success upon audience-responsive media companies. Those that fail to be responsive will either fail financially, or will exist as a financial burden to their sponsors, perhaps without an audience. Currently in Russia, there are few such choices because of the legislated unprofitability of the media. Thus a free market is unable to function for the media.

When Russia acquires a healthy media sector in which companies can produce legitimate profits, the media will be able to resolve many of its own problems. Profitable companies will be able to support effective professional organizations. They will have the means for upholding journalistic standards by offering training and self-regulation, rather than just complaining about the state of standards. Additionally, many observers complain about the weakness of the court system for adjudicating media disputes. But, the inherent dysfunction caused by legislated unprofitability creates a milieu that defies any realistic adjudication.

Our strong recommendation is that the Russian government must take the initiative to make it possible for media businesses to operate both legally and profitably. Legislated unprofitability must be ended. Unless this step is taken, the Russian media will continue to suffer from their present ills.

To bring an end to legislated unprofitability, the following steps are recommended:

1. Change the provision in the Law on Advertising that limits advertising content in print media from 40 percent to 70 percent.

2. Revoke the Finance Ministry order that limits advertising expenditures to 7.5 percent of turnover. There should be no limitation on a business's ability to count legitimate media advertising expenditures as a tax deductible business expense.

3. Continue a policy of offering no tax abatement to media companies. Offering special tax status to media companies encourages their acquisition by non-media companies for use as a tax dodge.

By making these changes, you will be establishing a framework within which a truly free and consumer-responsive media sector can develop. It will also put an end to the irresponsible, sponsored media - the ones President Putin has criticized so consistently. Their end will come not from an administrative dictate, but rather from consumer choice. The only reason consumers are now turning to the inaccurate, dishonest sponsored press is because they have no better alternatives. The Russian Media Fund's proposals will give Russian consumers better choices, media outlets that will finally have the legal support for creating consumer-responsive media offerings.

This development of the media sector will not happen automatically, however. Both media companies and advertisers alike have become adept at making the best of the current dysfunctional situation. Making a change to a new, more civilized way of business will require new business behavior.

However, if we can come to agreement on seeking our recommended changes, we are willing to provide, at no cost to the Russian government, two services: (1) assistance in advancing these recommendations through the appropriate Russian governmental and parliamentary bodies, and (2) a massive education and training program for the media sector, media companies and advertisers alike. Its goal will include imparting the new technical skills that will be needed. It also will include changing the business culture of the media sector.

This is an educational and training intervention methodology that has not been attempted before by existing media assistance organizations in Russia. Our aim would be to profoundly change the media business culture. This is not an area of expertise that the traditional assistance organizations possess. Our team, however, is well experienced in this area, and we are willing to put that expertise to use for the betterment of the Russian media sector. President Putin has expressed an interest in a new direction for Russian media reforms. Now, we are offering a fresh and innovative approach.

To be successful, this approach mandates a coordinated effort between the Russian government, the Russian Media Fund, and major advertisers in Russia. There must be a carefully sequenced effort between these parties. In the future, we will be providing you with additional advice that will include details on how to carry out this plan. Meanwhile, we invite your feedback on the recommendations made herein. We hope you will be willing to discuss this new program for media reforms at your earliest convenience. Thank you for your consideration.