[VIEWPOINT]Media Tax Audit Was a Policy Blunder

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[VIEWPOINT]Media Tax Audit Was a Policy Blunder

Reaction was split when the tax office announced Wednesday that it would assess 23 media organizations more than 500 billion ($390 million) in back taxes. Major newspaper companies were all against the audit and accused the government of trying to tame the media. But broadcasting companies generally sided with the government. It almost appeared that broadcasters had not also been subject to the audit.

As a person who once ran a small newspaper, I can name a few factors that inhibit transparent operations in media companies.

The lesser problem lies in advertising. There is a huge difference in the way broadcasting and newspaper companies solicit and sell advertising. Broadcasters do not have to solicit advertising since ad slots are allocated by KOBACO, a quasi-governmental organization. There are no discounts, as market forces do not apply. Nor do broadcasters have to worry about uncollected revenue, since KOBACO does the job on their behalf. Weaker cable networks get around the fixed pricing system by offering bonus free air time to advertisers - as much as five or 10 times above what has been paid for. Deregulation was supposed to have begun this year, but results are not yet apparent.

In newspaper companies, the situation is totally different. There is free competition ruled by the market forces of supply and demand. The official advertising price list is similar for all the newspaper companies, but the weaker ones offer discounts of up to 80 percent. This alone does not create any problems as the market determines the price efficiently. Thus any advertising reforms are needed only in the broadcasting sector.

The marketing and distribution system is what keeps newspaper companies from moving forward. Distributors are separate entities, and they do not disclose their subscriber lists to the newspaper companies. The subscriber lists are considered a "trade secret" of the distributors. As a result, newspaper companies cannot establish any kind of database of their customers - in this Internet age. This backward system also prevents companies from selling regular subscriptions - say, six months or a year - directly to customers.

A further problem in the distribution system is the way revenue is collected. Since the distributors collect the subscription fees from their secret list of subscribers, the number of actual paying customers is uncertain and may be negotiated between the two parties. Newspapers often end up getting less than the actual revenues distributors collect. This should be regarded as an additional marketing cost to newspapers.

A large number of free copies are passed out by distributors as a marketing tool, thus increasing the gap between the total number of distributed newspapers and the revenues collected for them - it is larger still for the weaker papers. The Tax Office has included these free copies in its revenue calculations. This is illogical: The difference should be considered as marketing and distribution expenses to be offset against revenue. This whole system is quite complex, and no matter how the tax office determined the perceived revenues, it is highly likely to be unfair to the newspaper companies.

Having said this, it is not clear what objectives the government has achieved now that its audit is over. Although individual names and amounts have not been made public, it is likely that just a few major dailies and their owners were assessed the most tax. If it wanted to help the companies become more transparent, the government should have taken a different approach. It will take major effort and money for the companies to overhaul the distribution and marketing system. With their additional tax burdens, it is unlikely that any of the dailies will have the funds to restructure any time soon. Further, it will be difficult for the government to avoid the criticism that it is oppressing the major dailies. It is a real policy and PR blunder.


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The writer was formerly CEO and president of the Kids Herald.


by Nayoung Chung Mathiesen

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