(The Moscow Times, February 1, 2002)

By William Dunkerley

In 10 Georgian cities, 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, 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 was investigative reporting and coverage of government activities and corruption.

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

When interviewers questioned this puzzling outcome, the groups offered a near unanimous explanation: “They didn’t clip any such articles because the ones in the existing newspapers were not believable or trustworthy.” 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 is not that they can’t afford to, but that they do not see anything in most newspapers worth spending money on.”

I hope someone will commission ICFJ to replicate that experiment in Russia. Based on snippets of other Russian research I have seen, I believe the results would mirror the above story. Most Russian newspapers are replete with hidden advertising and sponsored stories. I am sure Russian consumers are equally astute at identifying fraudulent journalism when they see it.

All this raises the question of why so many newspapers are cutting their own throats. Why are they giving readers stories that are clearly unwanted?

The answer to that can be found in a new report just prepared for the Russian government. It blames a collection of laws that, it claims, are driving Russian newspapers into the clutches of sponsors who seek to distort the news. These laws force newspapers to satisfy the demands of sponsors and hidden advertisers, not the readers.

The report was produced by the Russian Media Fund, a project backed by ICFJ, the Sreda magazine and this author. Earlier, RMF was invited by the Russian government to offer advice on “the Russian media sector and the laws and regulations by which it operates.”

Wide ranging complaints against the Russian media are recounted in the report: from President Vladimir Putin’s lament that media outlets “depend on handouts from outside people” and “perform a function that is assigned to them by their financial sponsors,” to the concerns of others that Putin himself seeks to subjugate the media through actions against NTV and TV6.

These disparate complaints actually share a common precursor, the report indicates. It is that current Russian laws forbid legitimate media companies from operating profitably. Certainly, there is not a single law that says this in so many words, but a number of laws conspire to create that effect. They preclude the legal and economic framework needed for profitability. The situation is one 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 advertising expenditures directly out of profits. This depresses the advertising market not just for newspapers but for broadcasters as well.

Until recently, deductible advertising expense was capped at 2 percent of a company’s turnover. Now, that has changed and the allowable deduction has risen to 7.5 percent. At first glance, that might seem like a welcome improvement, but the law defines “advertising” broadly. Thus the limitation lumps media advertising together with expenses for brochures, show rooms, signage and more. The practical effect is to cap most marketing expenses, not just media advertising. By comparison, in the United States and EU countries, advertising expenses are typically fully tax deductible.

According to PricewaterhouseCoopers, the profits tax chapter of the new Tax Code “makes a significant step forward in respect of improvement of deductibility rules for tax purposes.” It came into effect on Jan. 1. Advertising expense, however, as indicated above, is on a list of expense categories that are not fully deductible.

How do newspapers and advertisers cope with all these untenable restrictions? The solution has been the kind of paid-for, slanted stories that the Georgian research groups railed against.

Another way media companies deal 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 apparent reason to invest. Entities “investing” in Russian media companies are not looking for a return-on-investment. They buy into media companies to control content and influence society. In reality, they are subsidizers of lossmaking businesses.

These entrenched practices have created an abnormal media business culture. It centers on 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 Georgian story. Instead, 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. All this has a terribly negative impact not only on the media but on the economy as a whole.

What would happen if the media could become truly profitable under the law? They would attract benign capital from investors not having an ax to grind. Serving readers, listeners or viewers, and earning profits from doing so, would become primary. Then, the media companies could afford to train and pay journalists better and solve for themselves many of the problems that are the subject of so much complaint.

The Russian Media Fund has drafted concrete recommendations to the Putin administration for remedying these problems (www.publishinghelp.com/ recommendations). I hope the administration will give serious consideration to these proposals. It is about time it became possible to operate a media company in Russia that is both profitable and legal.

William Dunkerley is a media business consultant who works extensively in Russia and other post-communist countries. He contributed his comment to The Moscow Times.