As the first wave of the winter weather drifted into Moscow in late October, a crowd of umbrella-wielding media planners and buyers shuffled into the city's opulent Hyatt Hotel on Tverskaya Street. They had come to hear Sergei Vasiliev, the general director of Video International, the sales agency partly controlled by the Kremlin, that handles up to 70 per cent of Russia's television advertising market.
It's the agency you must deal with if you want to advertise on any of the major channels - Pervy Kanal, Rossija and CTC. It has few competitors, and clients pay the price demanded.
After filing into the hotel's Petrogradsky conference room, the room fell silent as a bearded, grey-suited man moved to the podium. Vasiliev, the most powerful man in Russian TV advertising, had arrived.
Already stung by rises that doubled prices between 2005 and 2007, the buyers listened intently, hoping rumours of further inflation were exaggerated.
As Vasiliev opened a Powerpoint slide of expected prices for 2008, the room's silence turned to gasps of surprise, then whispered chatter that slowly rose in volume.
According to VI, average TV ad prices will rise by around 55 per cent next year - the biggest increase yet - and by up to 155 per cent in some regions. Grumbles of discontent rolled through the crowd and, for a minute, a revolt appeared certain.
"How can Russian companies compete at those prices?" one buyer interjected. Standing up amid the disappointed crowd, Karina Ter-Grigoryan, the general manager of AFIS, said the price increase would force smaller advertisers off the air.
"Russian brands will not be able to compete - television will be the domain of the big foreign brands," she said, to loud and enthusiastic applause. Vasiliev smiled wryly, his fists gripping the podium.
The event, which broke up after similar interjections from other agents, shows how fast the Russian media scene is changing. VI's latest price increase means rates for TV time in Russia will have risen by 237 per cent between mid-2005 and 2008.
"Advertising on television since the start has been dirt cheap and highly effective, so it was the main medium used by advertisers," Mark Huntley, the general director of Tarantula Russia, a subsidiary of International Marketing & Sales Group, says. It is the only medium to reach across the steppes and tundra and 11 time zones; it takes around the same time to fly from Moscow to New York as it does from Moscow to Vladivostok.
Now, with prices skyrocketing and inventory limited by new legislation, advertisers are worried, and the fallout will touch every aspect of Russia's advertising industry.
In July 2006, Russia's Law On Advertising reduced the number of minutes of ads per hour on TV from 15 to 12. The law's second stage will squeeze ads into nine minutes next January.
"That is a big drop in the amount of supply available, and you can see that demand for television advertising is already outstripping supply," Vasiliev says. "The rise in rates reflects this." He adds that this second stage will force an 80 per cent drop in the amount of primetime minutes available on national television. "That's because all the ads are already crammed into primetime, so that is the time segment that will be most affected by the limit reduction."
From next year, the cost per contact via Russian national television should average around $3 - still much cheaper than Western Europe, where it averages $8-$10, Vasiliev says.
Most ad agencies say they have been preparing clients for the bad news for months. "Our clients know that prices are on the way up and are re-examining ad budgets in that light," Anastasia Nikiforova, the media director of Mediaedge:cia, says.
"We are trying to fight inflation by being more targeted, by optimising the channel mix - using the networks and channels like MTV, more multimedia and the internet, and more emphasis on getting the creative right."
Ekatarina Selyavina, the chief executive of Movie, a Moscow media buying shop, says the changes are mainly affecting her smaller clients. They are "optimising their ad programmes, but most are not willing to increase their TV budgets by 80 per cent, so they are considering reallocation".
One such client, the canned food manufacturer Glavprodukt Group, has spent its $1 million budget almost exclusively on TV, she says. Now, it is considering moving below the line.
Another, the vitamin company Unifarm Vid Natur, has left TV for radio, and markets through pharmacies.
Clients with larger budgets ($10 million-plus) are unlikely to make such dramatic exits from TV, however.
Alla Sapagina, the head of corporate advertising at Volvo Russia, will reallocate her $40 million budget next year. "In comparison to other markets in which we operate, TV is more important in Russia, so we won't be cutting back from it entirely," she says.
Less expensive regional TV, the internet and outdoor are expected to be beneficiaries of the channel planning shift. Arsen Revazov, the general director of IMHO, VI's digital media arm, points to increased spends on internet display advertising and the arrival of new brands such as Danone, Procter & Gamble and Wrigley.
Broadband penetration is increasing rapidly in Russia, with deals for unlimited access in Moscow for as low as 169 rubles ($6.50)/month. Internet adspend grew by 87 per cent in 2006, according to Group M, and is expected to maintain similar growth rates in the next few years, Mark Opzoomer, the chief executive of Rambler Media, says. Rambler claims to be the biggest company in internet display advertising, although rival Yandex is bigger in search marketing. The business information portal RBC is another player.
Salim Tharani, the general director of Gallery Media, Russia's second-largest outdoor media operator, says he's noticed a similar migration to outdoor as a result of the new TV advertising laws.
"I think TV will retain its market share, because it is too important a medium in Russia to be ignored by the big brands," Tharani says. "But having said that, we are now seeing brands that were exclusively on TV come outdoors now." These include Johnson & Johnson, L'Oreal and Unilever.
There are opposing predictions as to whether print will benefit from growing TV rates. Natalia Gandurina is the general director of Conde Nast Publications, which prints Russian editions of titles such as Vogue and GQ, and is soon to launch Tatler. She claims ad revenue growth across her titles.
And a first-quarter rise in print ad revenues of 26 per cent in 2007 points to magazines' growing popularity with advertisers. Some of the biggest are 7 Dnei, Cosmopolitan, Elle, Vogue, Liza, Glamour and Expert.
Komsomolskaya Pravda, the nation's biggest daily paper, saw ad revenue increase by 50 per cent in the first quarter. What's more, most of the top ten newspaper advertisers were new, including the property developer Capital Group, brewer Baltika and broker Renaissance Capital. Other major papers include Moskovsky Komsomolets, Sport Express, Sovetsky Sport, Izvestiya and Rossiiskaya Gazeta.
But others are now convinced that it's the print industry's structural problems themselves that are deterring the advertisers.
"There isn't the same culture of magazine and newspaper reading in Russia like in the West," Alexei Pashkov, the corporate development director of Aegis Media, says.
"When I was young, there were only two or three newspapers, like Pravda and Komsomolskaya Pravda, and they carried the same communist party news," he says. "So they were using these newspapers in the toilet when there was not enough toilet paper, and in the Soviet Union, toilet paper was always in short supply."
Figures from VI show print adspend comprised 48 per cent of the total in 2000, but only 25 per cent in 2006.
"There are no real ways to measure audience - it's a very opaque, fractured market. The only good quality research is performed by TNS Gallup, but they cover only a small fraction of the titles published, which are pretty much restricted to Moscow and St Petersburg, so thousands of regional titles aren't taken into account at all," Pashkov says.
Many publications have huge distribution problems, especially for subscription sales. Many supposedly national magazines aren't seen in large swathes of the country. Vasiliev points out that the rates for glossy magazines are up to ten times the cost per contact of television ads.
The shifting of ad budgets caused by the change in TV laws may be the most far-reaching industry trend, but it's by no means the only one. Pashkov says just as important is the move by advertisers into the regions: "The regions is where a lot of the consumer growth is, and that's where a lot of companies want to fight the battle."
According to figures from VI, regional TV budgets have risen from 19 per cent of total TV adspend in 2000, to 30 per cent last year.
"Moscow is the centre of the Russian advertising industry. But you can see from the fact that more and more advertising agencies are opening offices in the regions, that regional media is becoming more important than it used to be," Pashkov says.
But research on TV audiences in the regions is paltry. TNS Gallup says it will improve this by increasing the number of cities covered by people meters from 53 to 70 next year.
Another trend is the movement of advertisers away from the two major national networks into niche stations. Eleven new free-to-air channels have started up since 1996, including Sport, Culture, Domashnee and MTV.
According to VI, these have improved audience share, from 2 per cent in 2000 to 13 per cent last year, at the expense of the big national networks First and Rossija, whose combined audience shares have fallen from 62 per cent to 53 per cent.
Although solid audience research is lacking, cable and digital channels are included in this trend. TNS Gallup estimates that some 33 per cent of Russian homes in cities with populations over 100,000 have access to at least one non-broadcast channel.Satellite and cable operators' audiences are on the increase, as they continue to roll out access across the country. "It will be a positive trend for advertisers, since cable and satellite audiences tend to be wealthier and generally more attractive to advertisers," Mary Kallaher, the country manager for emerging markets at Discovery Channel Europe, which will run advertising in Russia next year, says.
She expects the channel to soon be benefitting from the decrease in terrestrial ad inventory. "Advertising spend can now be more rational and targeted," she says.
For some advertisers, negotiating Russia's archaic media infrastructure is the biggest challenge in reaching their audiences. An example is in the fledgling but fast-growing mutual funds business. Here, companies are targeting wealthy audiences, but most are finding this is no easy task in a country as large and diverse as Russia.
Renaissance Capital Investment Management - one of the country's largest mutual fund providers - wants to reach the two million Russians who earn more than $100,000 per annum.
The RCIM director of marketing, Alexei Karahan, says he is advertising in Moscow in fitness centres, business centres, at the airport and in cinemas, as well as in elite country houses.
But around half of the targeted audience of wealthy individuals lives outside of Moscow, where RCIM's ad campaign doesn't extend.
It's a big problem for similar advertisers, since many regional areas are quite wealthy. The oil-rich town of Khanty-Mansiysk, in North-Western Siberia, for instance, has the highest income per capita in the country, according to Uralsib Bank. Yet its isolation means few publications make it through, especially in winter, when temperatures can plummet to minus 60 or less. Worse, it is one of the many small places that don't receive all the terrestrial TV channels.
Other finance companies chasing rich Russians have followed RCIM's example. Maxwell Capital advertised its high investment returns on squash courts, and on the Moscow metro's red line, which runs through some of the most prestigious neighbourhoods in the city. Uralsib advertised mortgages on the back of water bottles and cereal boxes, and Citibank has sponsored the handrails in the courtesy buses at Moscow's Sheremetyevo Airport.
These are strategies that foreign advertisers looking to Russia would do well to take note of, as they join the chase for high-net-worth Russians.
RUSSIAN ADSPENDS 2007
MEDIA Revenue % share % change
(USdollars billions year on year
Television 4.200 50 28
Out-of-home 1.400 17 20
Magazines 0.874 10 24
Newspapers 0.474 5 26
Radio 0.430 5 23
Internet 0.330 4 77
Source: Group M June 2007