The media industry is one of the most sensitive and highly regulated sectors for foreign investors in China. The reason is straightforward – the central government exerts tight control over the media because it is regarded as an important tool for running the country. Nonetheless, there have been signs of loosening restrictions. For example, while domestic media investments were previously restricted to government bodies and some state-owned companies specialising in the media sector, state-owned companies in other fields are now allowed to make investments in the media industry as well.
Many foreign companies have been keeping a close eye on the China media market for opportunities in relatively less sensitive areas, and some have already made significant investments. Bertelsmann, for example, now has seven companies operating in Mainland China, either in co-operation with domestic partners or on a wholly foreign-funded basis. There are also now several Chinese versions of international magazines. And, in late 2001, AOL Time Warner and News Corporation gained rights to broadcast Chinese-language channels in Guangdong province.
These foreign companies have not been able to enter China's media market on their own terms – all activity by foreign companies is based on good communication with the government, the right partnerships with local companies and other strategic arrangements.
Television Within the policy framework set by the central government, foreign companies have generally adopted four modes of entry into China's television broadcasting market:
-foreign satellite television channels received directly through dishes or antennae
-co-operation with Chinese partners
-foreign cable television channels via local networks
-Sino-foreign joint ventures.
So far 27 foreign satellite television channels have gained official broadcasting rights in China, including Phoenix TV and CNN. According to the rules and regulations, broadcasting of these foreign channels is restricted to three kinds of locations: two-star and above hotels allowed to accommodate foreign tourists; office buildings and residences for foreigners; and institutions that need information from foreign channels for their work. No Chinese television station is allowed to carry foreign channels without government approval. Likewise, all Chinese households outside Guangdong are barred from watching foreign channels.
Despite these restrictions, foreign television channels have made their way into millions of Chinese households via antennas or local cable networks. For example, about 42m Mainland households currently have access to the Phoenix Chinese Channel.
Although some institutions and residential areas have illegally installed satellite receivers, the Chinese government did not take any action until December 2001. At that time, the State Administration of Radio, Film and Television made it clear that, without official approval, hotels, universities, institutions, residences and households were not allowed to install satellite receiving facilities or view foreign television programming. If these regulations were enforced, they would significantly affect the penetration rate already achieved by some foreign television channels. However, enforcement seems to be lax. For example, several months after the announcement, households in Beijing could still access foreign channels such as Phoenix.
Some foreign media firms have linked up with Mainland partners to explore local production and distribution opportunities. For example, MTV, a subsidiary of Viacom, is co-operating with Chinese television stations to produce four programmes, reaching about 40m households. It is much easier to have a foreign programme broadcast on Chinese television stations than to run a foreign channel in China. Realising this, through co-operation with its Chinese partner, MTV had one of its programmes branded 'Nickelodeon' and broadcast in Beijing from October 2001. Though Nickelodeon is a fully-fledged channel in the US, rebranding it as a programme has allowed the material to enter China. Viacom believes it will start to make a profit in China within two to three years.
Just prior to China's accession to the WTO in December 2001, a few foreign media groups made significant breakthroughs. In October 2001, Phoenix TV received government approval to send its signal into China through cable networks, making it the first foreign firm to gain legal broadcasting rights. Phoenix TV's flagship Chinese Channel is to be distributed through cable networks in the Pearl River Delta, while the Phoenix TV Movie Channel will be allowed restricted carriage in Guangdong.
In the same month, AOL Time Warner signed a cable television agreement with China's state television network, CCTV. AOL's 24-hour Mandarin-language channel, CETV, will be carried on CCTV's commercial networks in Guangdong, in return for AOL's broadcasting of CCTV's international channel (CCTV-9) in the US.
In December 2001, Star Television, CCTV, China International Television Corporation and Guangdong Cable-TV Network signed an agreement under which Star will distribute its general entertainment channel to cable systems in Guangdong.
In November 2001, British media and education company Pearson announced that it had set up a joint venture with CCTV to explore media opportunities. The Beijingbased joint venture, Pearson CTV Media, is 50 percent owned by Pearson Broadband. CTV Media, the Shanghai-listed multimedia and production arm of CCTV, holds a 40 percent stake, while broadband and telecommunications services company Cyber Solutions holds the remainder. The joint venture will offer education and consumer content for television, broadband services and publications in China. It will produce television programmes and supply 10 hours a week to the science and education channel CCTV-10 and the sports channel CCTV-5.
However, the Pearson venture seems to be an exception rather than the rule for foreign investment in this sector. According to the newly published Catalogue for the Guidance of Industries for Foreign Investment, foreign investments in production, publishing, distribution and broadcasting companies are still classified as 'forbidden'. It will take some time to see what impact the Pearson venture may have on the opening up of this sector.
For the past decade, foreign involvement in the magazine sector has been a legal grey area. The only clear government position is that sole foreign ownership of any publication is not allowed. Otherwise, there are no clear rules or guidelines on the level of government tolerance on foreign involvement in a magazine business.
Foreign companies have accessed the market through three modes of entry:
-Sino-foreign joint ventures
-ISSN (International Standard Serial Number) rent-based co-operation with Chinese partners.
Exceptions to the existing rules banning foreign investment in Chinese publishing have been made for two companies: a joint venture publishing house run by the USbased publishing giant IDG and the Ministry of Information Industry's Electric Science & Technological Information Institute; and a publishing company set up between the Denmark- based children's entertainment and education company Egmont Group and Chinese partners People's Post & Telecommunication Publishing House and Beijing Newspaper & Magazine Distribution Co.
Copyright co-operation is the only form of venture between Chinese publishing houses and foreign magazines that is explicitly allowed under existing rules. Under this model, a Chinese publishing house takes care of areas such as editorial, distribution and advertising sales, while the foreign side provides content only.
The model of ISSN rent-based co-operation involves many legal grey areas in that foreign investors usually control their magazine businesses through legal Sino-foreign or foreign-funded companies
Under this model, foreign investors or publishers need to purchase the ISSN usage rights for a specified amount of time to legally publish their magazines. Theoretically, although the foreign investor/publisher can control the market positioning, editorial, distribution and advertising sales of the publication, the Chinese partners who own the ISSN have the final say in content. In practice, however, as long as the foreign investors/publishers do not take the risk of publishing sensitive content, Chinese partners generally do not get involved in publishing and management issues. The companies through which foreign investors control their magazine businesses are usually advertising agencies or some other type of companies in which direct foreign involvement is permitted.
Hearst, Hachette Filipacchi and Socpresse have all published simplified Chinese editions of some of their titles in the Mainland, including the likes of Elle, Cosmopolitan, Esquire, Figaro and Autoworld. Companies such as IDG and Haymarket are also involved. Prices for foreign publications are generally in the Yn10-20 range. It is estimated that there are more than 100 magazines currently published in China with some form of foreign involvement.
Despite stringent regulations and inefficient distribution, the Chinese magazine market presents huge business potential, underpinned as it is by growing consumer incomes and higher levels of education. The advertising revenue of magazines linked to foreign titles can be double that of domestic magazines, while distribution costs are also lower than in the West.
According to a survey by China Concept Consulting, magazines with foreign involvement enjoy relatively high levels of performance in terms of management, editorial, content resources, marketing and promotion, advertising sales, distribution, talent retention, government relations and financing (see chart on cover page).
Foreign involvement in the book industry has been very limited. To date, the main area of co-operation has involved the selling of copyright by foreign publishers to domestic publishers. The Chinese publishers translate the book content into Mandarin and sell in the local market. Such co-operation was first established with academic and educational books but has since spread across many sectors, including culture, leisure and fiction. Subject matter deemed sensitive by the State Press and Publications Administration cannot be published.
There is strong interest from foreign publishers in engaging in this type of co-operation and strong demand from the Chinese side. However, the main barriers to further development of the market are price and copyright concerns. The prices offered by Chinese publishers tend to be well below the expectations of foreign companies, which also have serious concerns over the protection of their copyright.
A survey of the market for foreign books announced at the Beijing International Book Fair in 2000 revealed that the types of foreign books most favoured in China were those on foreign languages and computers, followed by areas such as psychological self-assistance and finance. For other topics, such as medicine, law, literature and leisure, domestic material was preferred. Buyers of books from foreign countries were more highly educated than buyers of local books.
Bestsellers across all categories were invariably local. According to the research, 80.5 percent of all literary books sold were domestic. Just 7.1 percent came from the US, 3.6 percent from the UK and 2.8 percent from France. Russia and Japan recorded just over 1 percent each.
One company to have overcome the restrictions on foreign activities in China is Germany's media and publishing giant Bertelsmann, which, through co-operation with Shanghai Technical Books Corp, set up Shanghai Bertelsmann Culture Industry Co in 1995. In 1997 the Bertelsmann Book Club was established, offering discounted books, audio-visual material and other products to its members, who are required to buy at least one book a quarter to maintain membership. Reports suggest there could be up to 1.5m members.
From its base in Shanghai, Bertelsmann has expanded into Guangzhou and Beijing. A recent agreement with the Beijing Post Office stipulates that post office staff will deliver the books and accept payment once a member has made a telephone order. Co-operation with the Beijing Post Office will also extend to marketing the Book Club and setting up bookstores to sell Bertelsmann books.
Bertelsmann's early entry into the market has enabled it to build a clear lead over its competitors, and has caused other countries to lobby for their publishers to be allowed similar access. Meanwhile, Bertelsmann is exploring how its own web-based service, Bertelsmann Online, can be applied in China. Bertelsmann signed a letter of intent to establish a joint venture printing company with two other Chinese partners in early 2002, with Bertelsmann taking a 50 percent share. The company's next step is to enter the television, radio and e-commerce fields.
This is an extract from China Media Report: An Overview for Foreign Investors. It is published by China Concept Consulting, a China-focused consultancy that works with international businesses to develop their China operations. To find out more about the report, visit www.ChinaConcept.com.