2012 Annual Report & Accounts ENTERTAINMENT ANYWHERE Prague Moscow Stockholm 14.59 17.36 20.14 ContentsContent CEO’s Review 1 CFO’s Review 4 Five Year Summary 6 Modern Responsibility 10 Directors’ Report 16 The MTG Share 46 Corporate Governance Report 50 Board of Directors 60 Executive Management 63 Consolidated Financial Statements 67 Parent Company Financial Statements 72 Notes to the Accounts 77 Audit Report 128 Definitions 130 Glossary 131 Modern Times Group MTG AB Annual Report 2012 CEO’sCEO’s reviewreview This is my first annual review since taking over as CEO of MTG in September last year, but this is my nineteenth year at MTG, and my eleventh as a member of the senior management group. I have never stopped learning at MTG and now more than ever, as I have travelled around the operations over the past few months to learn more about the parts of the Group that I had not previously reached, and to understand what we offer our customers in each area. This has been an inspiring journey, meeting with a large number of our 3,191 employees from Accra to Helsinki, and London to Kyiv. Each market has its own unique characteristics, but it is great to see that our entrepreneurial way of doing business not only embraces this diversity, but actually harnesses it. The colleagues that I meet share the same passion for our business and our customers; they continually demonstrate the same innovation when it comes to solving problems and identifying opportunities; and they take the same pride in craftsmanship when creating, developing and promoting the entertainment products and services that our customers enjoy around the world. A lot has been said about the uncertain economic outlook in our markets, the impact of technology on consumer behavior, and the fact that our industry is changing faster and more fundamentally than ever before. This is our daily reality, and everything that we do is focused on building the media house of the future, in order to ensure that we constantly innovate to remain at the forefront of our industry and continue to grow. The media house of the future is your house, it is the way that you will consume, use, more closer to, and immerse yourself in, entertainment in the future. TV is now available on multiple devices and is mobile – both in and out of the home. So you can now choose between the TV set, the computer, the smartphone, the tablet and the games console... TV is also available on-demand as well as on a linear (scheduled) basis, so viewers are not only choosing what they want to watch but also when they want to watch it. This of course affects the business model in a number of ways, as advertisers increasingly pay for reach delivered through TV viewing on the internet, and subscribers opt for packages that provide all that they need via the open internet for a monthly fee. We are better positioned than anyone to capitalise on these shifts in the industry’s tectonic plates for four reasons – firstly, because we have a balanced mix of advertising and subscription revenues and are not bound by a single business model; secondly, because we are platform agnostic, meaning that we already make our channels and services available on other people’s networks so we benefit from overall industry growth; thirdly, because we are present across four continents so we are able to deploy new products, services and models rapidly and efficiently to an installed and growing customer base; and, fourthly, because we do not own much infrastructure and can therefore move quickly and flexibly without tying up a lot of money in costly long term development projects. All of this provides us with fantastic opportunities, which is why we are investing now and more than ever before. Our investments are focused on three key areas – content, technology and countries. Customer preference and purchasing is driven by three key factors – quality, price and accessibility. The first of these relates to the quality of the content on our channels and platforms, which is why we acted during 2012 to secure long term deals with the major Hollywood and local independent studios and signed multi-year agreements for exclusive access to key domestic and international sports rights. We have invested in technology to ensure that our channels and services are accessible on both Modern Times Group MTG AB Annual Report 2012 1 CEO’sCEO’s review review our own Viasat (satellite) and Viaplay (online) platforms, as well as on 3rd party networks, and we have competitive price points for each service. And we are constantly looking to expand our footprint into new markets in Europe and Africa. This is all quite a long way from the launch of our first channel – TV3 – across Scandinavia on new year’s eve in 1987 – 25 years ago. It shows just how far we have come on our journey, and there is a lot to learn from the last twenty five years as we plan for the next twenty five. We launched a total of 21 TV channels last year, and there are more to come this year, so we are breaking more monopolies and challenging more incumbents than ever! It was our emerging markets businesses that showed the strongest growth in 2012 as we took advertising market shares in almost all of our markets, and successfully grew our subscriber bases in all territories. There was little encouragement from the local economic development in these countries, but our free TV channels grew their audience shares and revenues in the Baltics, the Czech Republic, Bulgaria and Ghana. Free-TV emerging market profits were up for the year as we counterbalanced these investments by closing down our Slovenian operations and further reducing our underlying cost base. These advertising markets will return to sustained and higher levels of growth than the Western markets, and we are better positioned today to capture this growth when it comes. Furthermore, our position as the largest shareholder in CTC Media ensures that we will also participate in the high levels of growth in Russia, which is expected to become the largest TV advertising market in Europe next year, and is already the largest market in Europe by number of internet users! Our emerging markets pay-TV businesses grew their satellite subscriber bases in Russia, Ukraine and the Baltics and we had a combined total of almost 600,000 satellite subscribers by the end of the year. The Baltics are more mature and well penetrated markets now, while Russia and Ukraine offer huge potential as digitalization approaches for a combined population of almost 200 million people. Separately, 32 of our Viasat channels are made available via third party pay-TV networks to subscribers in 31 countries across Central and Eastern Europe, Africa and the United States. This business, which was launched 10 years ago, now attracts 84 million subscriptions. Five out of the fifteen most watched pay-TV channels in Russia are Viasat channels, including the top 2. This is why we are investing further in these markets. We signed multi-year deals with four Hollywood studios and launched a new HD premium pay-TV channel package across Russian and the CIS at the end of the year. We expect to show healthy growth in 2013 and plan to breakeven for the combined emerging market pay-TV businesses despite the investments that we are making. Our Nordic pay-TV business is the segment where we are investing the most, in order to ensure that we have the best possible content offering and make it as broadly available as possible. Our total subscriber base continued to grow due to the rapid development of our Viaplay online pay-TV service, and this is set to continue as we further enhance the service and its availability. Viaplay has opened up a whole new universe of potential customers for us, as virtually every one of the 9 million homes in the Nordic region has the necessary broadband speed to use the service. The decline in the satellite base reflected the competitive pressures in Denmark in particular, where uneconomic consumer offerings have created a short term negative effect, but our average revenue per premium Nordic 2 Modern Times Group MTG AB Annual Report 2012 CEO’sCEO’s review review satellite subscriber has continued to grow as we have raised prices and added services. The investments that we are making in our content offering (movies, series, sports) and the development of Viaplay will drive growth but also result in a lower profit margin moving forward. Finally, our free-TV business in Scandinavia is a key focus area for us at the moment, as we have lost audience and advertising market shares in Sweden and Norway in particular, while the markets have grown. We have made changes across the board – from longer planning and piloting horizons to closer relationships with content producers, and from even tighter demographic positioning to even more tailored advertising solutions. We are also securing higher viewing shares online and in the regional advertising markets where the price per eyeball is higher. We delivered a healthy margin of almost 20% for the business in 2012 and will continue to invest where we see opportunities, as we look to increase our audience and advertising market shares. With new competitive environments come all sorts of opportunities of course, and we have recently signed several highly significant channel distribution agreements. We have concluded a number of deals with Telenor that will enable us to launch a long awaited third free-TV channel in Norway; put all of our Viasat pay-TV channels on their large scale cable network in Norway; raise the household penetration of our free-TV channels in Denmark and Sweden by including the channels in Telenor’s networks; and secure attractive third party channels for our pay-TV package offerings in Denmark.