ProSiebenSat.1 Media AG Annual Report 2002

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"Good Programming is the Cornerstone of our Business"


	Urs Rohner, born in 1959, studied Law in Zurich, Switzerland, between 1978 and 1983 and was called to the Bar in 1986 in the canton of Zurich. Between 1983 and 1999, the former competitive sportsman (hurdles) worked as a lawyer, specialising in media and entertainment law, capital markets and fair trading law. In addition, Supervisory Board Member at a number of Swiss companies. Appointed Chairman of the Executive Board at ProSieben Media AG in 2000 and following the merger with Sat.1 was elected Chairman of the Executive Board at ProSiebenSat.1 Media AG. Management segments: Sales and Merchandising.


	Question: The television advertising market has been suffering from a severe recession for two years now. Is this just a persistent crisis in business conditions, or something more deep-rooted? Urs Rohner: It's simply a problem of business conditions. Unlike earlier years, obviously this time the television advertising market can't disconnect itself from general economic developments. On the contrary - the persistently weak economy is having a particularly damaging impact on the advertising market. Germany's logjam in political reforms is reinforcing the negative trend. While advertising spending has gradually begun expanding again in other European countries and the United States, Germany has not hit bottom yet. The market is now below 1998 levels. Private television companies like the ProSiebenSat.1 Group have a hard time finding ways to counter this situation, because comparatively high fixed costs, especially for programming and materials, are a basic characteristic of the television business. Unlike other sectors, personnel expenses, for example, are a relatively minor consideration, at roughly eleven percent of total expenses. But unlimited savings on programming are not an option. Good programming is the cornerstone of our business.


	Question: How will the advertising industry's spending for television evolve in 2003? Urs Rohner: Nobody can give any meaningful prediction at this point. Visibility in the television advertising market remains as low as ever. Clients are booking on shorter and shorter notice. You have to fight hard for every euro in revenues. The only clear thing is that the first quarter of 2003 will certainly be even worse than the first three months of 2002. The industry is now projecting that an upswing may gradually set in during the second quarter of 2003. But a real recovery is probably unlikely until the second half, at the very earliest. The outlook for the full year remains uncertain. It's especially hard to judge how the war in Iraq will affect the German economy and consumer confidence. We've worked out worst-case scenarios if it becomes clear during the first half that the downtrend in the television advertising market will keep up again this year.


	Question: Can cost cuts make up at all for further revenue losses if the advertising market contracts again in 2003? Urs Rohner: Our rigorous cost management will enable us to make up - at least in part - for further revenue losses caused by a weak market. But I also have to say that we have less leeway than before. In the last two years we've responded to the recession in the advertising market with a rigid policy on costs. Today we can see that we changed course relatively early, even if the full effects of the cost-cutting measures we adopted don't always show up right away because of the long lead time in the programming and television business. Back in 2001, we already cut costs by around EUR 150 million compared to our original multi-year plans. After adjusting for exceptional effects, we pared back our entire cost base by another roughly EUR 54 million in 2002. A number of structural measures - like integrating the SevenOne Intermedia multimedia firm, our plans to merge the merchandising companies MM Merchandising München and SevenOne Club & Shop, or combining all service companies under a single Director of Operations - will enhance our organization's efficiency still further. So in that sense, the ProSiebenSat.1 Group's expenses will be down significantly again in 2003.


	Question: The ProSiebenSat.1 Group still generates over 95 percent of its revenues from television advertising. Are you planning to expand other lines of business strategically to reduce dependency on advertising money? Urs Rohner: Our strategy is clear - we're concentrating on our core business, which is commercial television, and closely related activities like merchandising and multimedia. We also hold a major stake in Euvía Media AG & Co. KG, whose Neun Live and sonnenklar TV stations have established two very successful transaction TV channels in Germany. For the time being we see no need to add other emphases to our lines of business, despite the current weakness in the advertising market. But there certainly will be additions to our business. All the same, commercial television is basically still a highly attractive and promising business, even if the days of double-digit growth percentages are probably a thing of the past. Once the current advertising crisis is over, in fact, our considerably smaller cost base will enable us to improve the ProSiebenSat.1 Group's profitability considerably over our former results.


	Question: The ProSiebenSat.1 Group's family of stations lost audience share in 2002. What's your strategy for helping your stations regain ground in the market? Urs Rohner: Sat.1 and ProSieben did in fact fall behind our performance expectations for part of last year. There are a variety of reasons. In the case of ProSieben, audiences lost interest in afternoon daytime programming and repeats of international series in prime time. At Sat.1, prime access and weekend prime time programming was unsatisfactory. Additionally, Sat.1's highlights coverage of the World Cup in Japan and South Korea drew only moderate ratings because far more viewers than expected were watching the live broadcasts of the games on ARD and ZDF in the morning. It also turned out to be difficult to recover lost audience share points quickly. But we're on the right track. Both stations' performance has improved significantly since last fall. In 2003, we'll especially focus on further optimizing prime access on Sat.1 and afternoons on ProSieben. Both stations are now very stable in prime time. Additionally, Sat.1 will focus even more than before on the core audience between ages 25 and 49, while ProSieben has been attracting especially strong acceptance among 14 to 29-year-olds. The systematic, complementary positioning of our two flagship stations will safeguard our lead in the advertising market.


	Question: What was the impact of the KirchMedia insolvency on the ProSiebenSat.1 Group and on the programming supply for Sat.1, ProSieben and Kabel 1? Urs Rohner: The past few months since KirchMedia filed for insolvency in April 2002 have certainly not been easy for us, either, even though ProSiebenSat.1 Media AG is a listed, independently financed company and not involved in the insolvency proceedings. Business went on pretty much as usual, but of course we had to deal not only with normal operations but with the potential risks the insolvency posed for us, along with the bidding procedure for the sale of KirchMedia's stake in ProSiebenSat.1 Media AG. Our risk review focused mainly on whether we could in fact make use of the programming rights we had acquired from KirchMedia. But our attorneys assure us that the rights should be secure. Additionally, in 2002 we signed several three-way programming rights agreements directly with US film studios and KirchMedia, so that even if KirchMedia were to cease payments in the future we could still use the rights.


	Question: Has the long search for a new principal shareholder adversely affected the ProSiebenSat.1 Group? Urs Rohner: We realized from the start that given the overall circumstances, the process of searching for a new majority shareholder wouldn't be a short one. It was also clear that the faster we got back to a stable shareholder structure, the better it would be for the ProSiebenSat.1 Group. For that reason, we did all we could to support the process of selling our stock to potential investors. Under confidentiality agreements, for example, we gave potential buyers a chance to carry out a comprehensive due diligence analysis of the ProSiebenSat.1 Group. We were also available to answer investors' questions. That's why we're especially glad that on March 17 of this year, the Saban Group signed to acquire 36 percent of our capital stock, thus bringing the selling process to an end. The agreement is supposed to be put into effect within two months.


	Question: What do you expect from the involvement of US media entrepreneur Haim Saban in ProSiebenSat.1 Media AG? Urs Rohner: As far as we're concerned, the Saban Group is a very welcome partner. In Haim Saban, we have a strong majority shareholder who has lots of experience with television and excellent relations with the international film and television industry.


	Question: Two of your stations, Sat.1 and N24, are currently running at a loss. What's the outlook for those two companies? Urs Rohner: Station Sat.1 has the Group's greatest potential for enhanced profitability. In the past two years we've cut its cost base back significantly - around EUR 73 million. We'll be continuing that work this year. If the television advertising market doesn't deteriorate further in 2003, Sat.1 will return to profitability at the operations level, which all by itself is likely to improve the Group's results by around EUR 100 million. But frankly, at the moment we can't be sure the market will behave that way. The situation at N24 is a bit different. The station has only been on the air for three years, and is evolving roughly as expected. But the television advertising market has changed fundamentally since we decided to found N24. In 1999 and 2000, financial service providers, telecommunications companies and IPOs - which preferred to advertise in news and business contexts - were stilpül the biggest growth drivers in the TV advertising market. Today they've lost importance. Audiences are also less interested in broad-based coverage of the stock markets and business news. We responded to that in December 2002 by introducing a documentary line of programming at N24. The change was a success. It not only sharply improved the station's performance among the important 14-to-49 audience segment, but offers the advertising industry an additional attractive setting, and one that's much in demand, alongside news and business. So we assume that N24 will achieve operating profitability in 2005.