China Mass Media (CMM.NYSE) is essentially a middle man, reliant on a few key relationships: with state TV provider China Central Television, from which it buys advertising slots; and the clients it sells the slots to, including Samsung, McDonald’s and China Mobile.
China Mass Media generates more than 90% of its revenue from swaps of this ad space; the remainder comes from producing programs, CCTV public service announcements, for example.
In the past few years, China Mass Media’s net income has dropped off sharply. Meanwhile, competitors SinoMedia Holding (no relation to China Economic Review’s publisher) and Charm Communications posted fairly steady growth in net income since 2007 – excluding a downturn in 2009 during the financial crisis.
The cause of China Mass Media’s dwindling profits was once the company’s greatest strength: its relationship with media behemoth CCTV. China Mass Media’s CEO, Wang Shengchang, was previously employed at CCTV, and his personal contacts generate most of the company’s business. But these connections have become less vital as CCTV has systematized some of its ad business.
From 2008, for example, CCTV started selling China Mass Media ad slots in blocks at a fixed rate, rather than based on client demand. The company began recording the purchase of these slots as a cost of revenue, causing its annual profit to plunge.
In 2009, CCTV then switched to an auction-based sales system that left its former favorite China Mass Media scrambling to compete. The next year, China Mass Media was outbid for the 2010 New Year Gala program, the country’s most-viewed program, for which it had been the exclusive ad agency from 2004 to 2009. This single contract had previously accounted for almost 10% of its annual revenue.
China Mass Media has also seen an increase in prices for ad slots – in 2009, the media fees for CCTV4 programs rose by over 40%. However, intense competition among agencies means they are unable to pass on all of these costs to clients.
SinoMedia Holdings and Charm Communications were able to keep growing their profits in this new world order. So why not China Mass Media?
One major factor has been the company’s failure to diversify its business. Charm Communications has gained footholds into satellite TV, internet and outdoor advertising, while SinoMedia Holding recently announced an agreement to sell ad space for MediaCorp, Singapore’s largest media company.
China Mass Media benefits from a healthy balance sheet – it currently holds just over US$100 million in cash and short-term investments, with little or no debt. To boost revenues, the company should reconsolidate and diversify its business.