The revitalisation of China's media industry

China has recently decided to lift its ban on foreign investment in its television and film production companies. So what can this all mean? By Alysha Webb

In March, Sumner Redstone, CEO of media giant Viacom, announced, with much fanfare, that Viacom had signed an agreement with Shanghai Media Group to form a joint venture to produce children's programming for the China market. Hot on the heels of that announcement, Walt Disney Television revealed it was in negotiations with several media groups regarding the possibility of forming a joint venture production company. More such announcements will surely follow. 'All the major media groups are looking for joint venture deals in China at this point,' says Marcia Ellis, a Hong Kong-based attorney at Paul, Weiss, Rifkind, Wharton & Garrison. 'Television production is a very hot topic.'

The surge in activity is no coincidence. After years of hinting, in December the Chinese Government finally said it would allow foreign investment in Chinese television programming companies. As is common in China, the regulation hasn't actually materialised yet. Indeed, foreign investors are relying on one line in an opinion by the State Administration for Radio, Film and Television (Sarft) that reads: 'It is permitted for foreign powerful and influential film and television production companies and domestic state-owned television programme production units to establish programme production joint ventures with the Chinese party holding a controlling stake.'

Not much to go on. But if a joint venture can secure approval from Sarft and the Ministry of Commerce now, it is unlikely to be shut down even if not strictly in the bounds of the regulation that is issued, says Ellis. 'There is a danger between now and the point you get your actual licence that you will waste your time. Once you actually get approval to operate this business, you are fine. This has happened in other industries,' she says.

The potential rewards make it worth the risk. China's advertising revenue grew by more than 30% in 2003 compared to 2002, to $14.5bn, taking into account the discounting that is common in China, according to Nielsen Media Research. Of that, 75.6% went to television. And that's with the mainly insipid programming offered by China's state-owned production companies.

All that TV advertising appeared on terrestrial TV. Cable TV, where most of the joint venture programming will appear, is almost non-existent in China, which had only 400,000 cable-receiving set top boxes installed as of the third quarter. That's a tiny portion of the 100m households with connections to the cable. 'If deployment continues at the current pace, or is ramped up significantly, we will have many millions of set top boxes in a very short period,' says says Simon Davies, CEO of the Hong Kong-based Cable & Satellite Broadcasting Association of Asia (CASBAA). 'China is on the cusp of launching one of the largest pay TV platforms in the world.'

There is a caveat. Chinese law does not allow advertising on pay TV networks other than promotions for the network itself. 'It is unclear if and when this regulation will be changed. It was only issued in November of last year,' says Ellis. 'However, it may be necessary for some advertising to be permitted in order to fund the development of digital pay TV.'

Digitalisation is already occurring in major metropolitan areas, which is driving the need for more and better content, says Davies. 'When you get a digitalised network, it creates an enormous amount of shelf space. To create an economically viable environment, you have to have content.'

Foreign production companies seem willing to ignore the issue for now. Disney, which would be producing at least some programming for pay TV, side-stepped the question of revenue. 'Our strategy has always been to understand the market and its audience and work on a business model that best suits the characteristics of the market. That's what we're doing in China right now so it is still premature to comment on the possible revenue stream,' said Doug Miller, executive Vice President of Walt Disney International and Walt Disney Television International.

CASBAA's Davies admits that just how much the market will open to foreigners is still unknown. Despite all the optimism about liberalisation, until we've seen the proof in the pudding we won't know,' he says. 'But the signs are very positive.' He cites the deregulation of landing rights - the right to broadcast to a certain market - for foreign satellite signals broadcasting to the Guangdong province as another sign of liberalisation.

Even where broadcasters have penetrated China's market, though, the rewards have been slow in coming. In July 2002 rival Hong Kong company ATV received landing rights. But its agreement with the Guangdong Administration for Radio, TV and Film limits ATV to 25% of the advertising revenue generated in nine cities and 50% of revenue from provincial cable networks.

That hasn't discouraged others from knocking on the door. Hong Kong's Television Broadcasts (TVB) is talking with several Guangdong media groups about taking a 49% stake. TVB has proposed an advertising revenue-sharing scheme for any joint venture. TVB has a bigger game in mind, however. The proposal also includes co-production and distribution of programmes, Internet content and publications.

The station is reticent about the deal. 'TVB has applied for Landing Rights in the Pearl River Delta (not the whole of the Guangdong province). We expect to be granted these rights in reasonable time. As our talks are at an early stage, we are not able to disclose any details at this point in time,' said a spokesperson.

Ironically, TVB is already the number one station in southern China. But it doesn't have permission to broadcast into China, and thus can't legally sell advertising space. Local cable operators have therefore simply excised TVB's advertisements and sold the space for themselves.

The actual liberalisation of the media sector after years of talking about it is being driven by several factors. The Government cites China's WTO entry, though programme production isn't included in the agreement. China has pledged to open wholesale and retail sale of books and publications, allow foreign service providers to set up co-operative businesses that distribute audio-visual production, and build cinemas, though foreign investors are limited to 49% of the total.

The coming of the 2008 Olympic Games to Beijing is likely to be another factor behind the push, says attorney Ellis. 'They need a really good TV infrastructure by the time of the Olympics,' she points out. Not all foreign media companies are welcome, however. 'The foreign company should be famous and strongly influential on the global scale,' SARFT official Tong Gang said in March. 'They want to bring in the cream of the crop,' says Ellis.

Tight control

The Government is still keeping tight controls on editorial content, and that is unlikely to change, says Zhao Xiaobing, President of Beijing-based Global China Media Consulting Co. 'In the future, China's media sector won't reach the level of openness found in the West,' he says. 'Any foreign investor who enters the China market with this expectation is bound to fail.'

But the restrictions apply to Chinese companies, too. And foreign production companies 'aren't looking to do political programming', points out Ellis. Disney, for example, anticipates producing 'children and family programming that meets Chinese tastes', said Miller.

China is upping the ante in the censorship game. SARFT is asking foreign broadcasters like CNN and HBO beaming programming into China's hotels to 'bear any responsibility and loss' if the censors find their programming objectionable, according to the newest contract.

Definitions of 'objectionable' are often vague in China, however. An example: in mid-May SARFT issued a rule banning 'queer' dressing and 'colourful' hairdos by television personalities. 'The rule intends to reduce the negative impact of such behaviour on youngsters,' a SARFT official was quoted as saying.

Regardless, don't expect to see foreign investors backing down. 'People have been lining up for a decade' to produce programming for China, says Davies. 'We are willing to work within whatever constraints SARFT wants to impose.'

Alysha Webb is a business journalist based in Shanghai.