Rising Dragon

China media keeps getting bigger and, in most instances, better. Yet, for the most part, the government and a controlled private sector are helping build the mainland media edifice without the assistance of the major international media companies.

 

In general, foreign capital inflows into the domestic media sector remain restricted, especially in content-sensitive markets such as television broadcasting. However, international investors have been more active of late in the digital and out-of-home media segments with online advertising and Internet video assets proving most attractive for private-equity firms and strategic investors. (In February, for example, Providence Equity Partners said it would invest $50 million in the new ad-supported online video portal being developed by search-engine giant Baidu.)

 

There remain plenty of prospects to go after. The latest analysis from Media Partners Asia (MPA) shows that the media advertising pie is expected to grow at an average annual rate of 11 percent over the next five years, to reach $35 billion by 2015.

 

After a stellar Olympics-­­driven 2008, the advertising market saw growth decelerate from 20-percent-plus norms to 6 percent. There has been a notable recovery since September 2009 as the domestic economy goes from strength to strength. The economy is expected to grow by around 9 percent to 10 percent in real terms over the next two years while the net advertising pie is expected to expand by 13 percent this year to reach $24 billion. Key events in 2010 include Expo Shanghai, Auto China in Beijing, World Cup soccer and the Asian Games, each expected to have some positive impact on the ad market.

 

In November, state broadcaster CCTV hosted its 2010 prime-time advertising auction and saw an 18.5-percent year-on-year growth in sales to $1.6 billion. According to leading media buyer GroupM, improved advertiser confidence helped boost the CCTV auction. Another key factor, said GroupM, was new regulation from the State Administration of Radio, Film & Television (SARFT) to shorten commercial-break times. This, combined with rate-card rises from provincial satellite TV stations, made CCTV’s bidding resources more competitive.

 

Satellite TV stations have also seen a significant recovery in ad sales, with Hunan Satellite TV leading the way. One potential dampener on satellite TV ad growth comes from new SARFT regulations. Ad breaks are not allowed to run more than 12 minutes each hour, and are not expected to run over 18 minutes between 7 p.m. and 9 p.m. Infomercials during the breaks of TV series cannot exceed 90 seconds and no TV shopping commercials are allowed on satellite TV channels between 6 p.m. and 12 a.m. In response, a number of satellite TV channels are expected to raise advertising prices by 20 percent to 30 percent this year.

 

Broadly, CCTV’s market share in TV advertising has been declining, from about 30 percent at the start of the decade to approximately 23 percent today due to increasing competition from provincial and local stations. In terms of TV viewership, however, CCTV still dominates. CCTV owns 18 nationally-distributed channels, including foreign-language channels and one HD service. Provincial satellite channels number close to 270 with national free-to-air satellite TV channels Dragon TV and Hunan Satellite TV among the most popular. In addition, there are 850 local city TV channels. 

 

TV advertising is worth about $9 billion per year in net terms and is likely to reach more than $14 billion by 2015, with a 38-percent market share versus 41 percent today with broadcast networks likely to lose share to online and out-of-home media. Online media’s share of the ad market is likely to grow to a 19-percent share by 2015 versus 10 percent today. The slow shift to online has meant that a number of TV networks have launched their own Internet video sites, including Hunan Satellite TV, Shanghai Media Group (SMG) and CCTV.

 

Besides CCTV, TV groups with large content-production capabilities include SMG and Hunan, which have emerged as the largest in terms of market share with a combined TV advertising share of more than 15 percent. SMG launched another national channel in 2010, joining up with Ningxia Satellite TV to beam SMG’s specialist business news channel, China Business Network (CBN), across China.

 

The announcement follows a similar deal in another western province between Hunan TV and Qinghai Satellite TV, in which Qinghai will air some of Hunan’s most popular programs. Hunan’s ultimate plans for the new platform are unclear, but some believe it will provide a vehicle for a twin offering to Hunan Satellite TV.

 

In addition to a raft of channels distributed locally, each of China’s provinces and autonomous regions also operate one satellite channel that can carry advertising with near-national coverage. Al­though many satellite channels act as promotional vehicles for their respective provinces, others, such as Hunan TV and Dragon TV, have drawn viewers with a more populist approach. Now both broadcasters are looking to repeat that success.

 

Internet users and broadband connectivity continue to accelerate at a rapid pace, reaching 385 million and 150 million users, respectively, in 2010. All of this creates fertile ground for the growth of online video.

Online video leader Youku currently generates a modest $30 million in annual revenues, about 90 percent derived from ad sales. A number of players with deep pockets have launched online video services in recent months, including TV networks (CCTV, Hunan TV, Shanghai Media Group, Zhejiang TV), major portals (Sohu, Sina, NetEase, Tencent), online search leader Baidu (through a joint venture with U.S.-based private-equity firm Providence) and gaming specialist Shanda Interactive.

 

New players won’t drive ad rates down, however, as broadcast budgets continue to shift from traditional to online, but content costs are expected to increase. Youku plans to add more premium, paid-for content (film, music, sports, special interest) to generate subscription revenues in the short term. The site currently licenses most of its content on a non-exclusive basis. To fund this goal, Youku recently secured $40 million from existing private-equity investors and total private-equity money raised since its 2006 launch now stands at $110 million. It is now seeking a further $40 million from new investors.

CCTV has already injected $30 million into its online channel, CNTV, which launched in December 2009. The move should help legitimize the industry, and help promote online ad growth. CCTV is working with AdChina, an ad network, to establish online video ad standards. Media agencies have also formed the China Online Video Standardization Committee (COVSEC) to drive traditional ad dollars to online video.

 

The multichannel TV market remains large, with more than 170 million homes available through cable, DTH and IPTV. At the end of 2009, total digital-cable households numbered close to 65 million, but barely 7 million of this total subscribed to tiered pay-TV programming services. The remaining 58 million digital-cable TV users are essentially paying higher fees for a basic program package featuring free retransmitted channels already available on analogue and a selection of “free” digital pay channels.

 

The low pay adoption levels are largely due to poor marketing, limited investment opportunities for pay content; and tight controls for foreign content. Complicating the issue is the fact that there are 40 million to 50 million “illegal” or “grey market” homes that receive foreign “overspill” satellite channels, limiting consumer appetites for legal pay TV. HBO and National Geographic are among the few international program providers who legally license content to Chinese pay channels (movies and factual programming, respectively). With the disappointing take up of pay TV, cable operators are under in­creasing pressure to monetize investments in digital infrastructure by developing HDTV, value-added services (i.e., VOD and DVRs) and broadband access.

 

The market for global media still remains modest. MPA analysis indicates that the market for foreign TV content providers in China is currently worth about $600 million in annual advertising sales, licensing and subscription fees; this compares with $1.3 billion in India.

 

News Corporation has been the most aggressive global media investor in China over the past decade. However, over the past three years, it has refocused capital towards growth-oriented markets that encourage foreign investment and content—examples include India (the cornerstone of STAR’s business); Korea and Japan (big building blocks for Fox International Channels) and Indonesia. News Corp. has scaled down its staff and management in China over the past 18 months.

 

Phoenix Satellite Television, now 18-percent owned by News Corp., legally distributes content to more than 40 million homes on a 24-hour basis and generates more than $150 million in annual sales. News Corp. also owns Xing Kong, a Chinese entertainment channel with landing rights in Guangdong and a grey market audience outside that province. The company has been unable to monetize its grey market audience outside Guangdong.

 

Disney has created a distinctive entry into the Chinese marketplace through an agreement to build a theme park and through the local production of films specifically for the Chinese audience. Disney released its first locally produced Chinese film, The Secret of the Magic Gourd, in 2007. It has also entered into several successful programming block agreements and generates incremental advertising and licensing fees. Disney has also entered into online and digital partnerships to develop new content and games with players such as Shanda.

 

Viacom entered into a co-production deal with SMG and Beijing Television to co-create music programming for the Chinese marketplace. The company currently has a 24-hour MTV China on the air in Guangdong, but is limited from broadcasting this network to Chinese homes throughout the rest of the country.

 

Viacom is also attempting to follow in Disney’s footsteps by participating in a planned theme park in northern China, near the city of Tianjin. The company also has several partnerships with Internet and mobile providers, including music agreements with Baidu, ku6, China Mobile and China Unicom. In 2009, Viacom established a potentially valuable beachhead with a co-branded Nickelodeon website with CCTV (nick.cctv.com). Nickelodeon’s shows, such as SpongeBob SquarePants), already attract sizeable audiences on CCTV.

 

Viacom is also pursuing the local adaptation of some of its formats in China—as are a host of other companies. Disney-ABC International Television signed a deal with SMG for The AmazingRace, and ITVStudios Global Entertainment is working with Hunan Satellite TV on entertainment formats. For international content owners, thus far limited to program blocks and licensing relationships, formats and co-productions will be key areas of growth.