China Central Television’s annual ad auction begins at 8:08 am exactly. The timing is superstitious, but the “Super Bowl” of China’s advertisement industry doesn’t seem to need much luck. The total revenue CCTV generated at this year’s auction, held on November 8, was 12% higher than last year, a growth rate that outpaced both that of China’s overall GDP and of consumption.
To understand this demand, it’s important to know what TV advertisers could not buy as well as what they could. Among the TV programs not on offer for 2012 was “Super Girl,” a wildly popular “American Idol”-style reality TV show. In September, regulators cut the program from the lineup of CCTV’s nearest competitor, Hunan Satellite TV.
For the last six months, China’s TV regulator, the State Administration of Radio, Film and Television (SARFT), has been on the warpath to clean up TV morals. “What we’re seeing right now is clearly a tightening phase of a regulatory cat-and-mouse game that has been ongoing for as long as I’ve been in the industry,” said one executive at a TV consulting company who spoke under the condition of anonymity. “It’s the Party line versus the bottom line.”
After axing “Super Girl,” SARFT issued an edict requiring China’s 34 provincial satellite broadcasters to begin airing no more than two entertainment shows during prime time hours (7:30 – 10:30 pm), likely beginning in January. Reality shows will be limited to 10 per year, to be replaced by documentaries, “ethics building” programs, and of course, syndicated CCTV news.
These changes have happened under the guise of moralizing regulation. But in the kaleidoscope of China’s TV industry, what appears to be censorship for ethical or political reasons has in fact been the byproduct of complex, behind-the-scenes turf wars – among various regulatory bodies and among companies. These conflicts are sure to transform the industry, but no one is quite sure what it will become. How far will vested interests and the political elite allow commercialization to go? How will online TV – or internet, IPTV and mobile TV, for that matter – impact broadcasters and advertisers?
No one knows the answers to these questions yet, but one thing seems certain: In China’s TV industry, the big broadcasters will only get bigger.
Rebels with a cause
SARFT was created in a bureaucratic re-shuffling in 1998, at a time when China’s broadcasters were highly de-centralized and fragmented across city, provincial and regional levels. The revamped regulator set out to consolidate local-level broadcasters, a drive that resulted in beefed-up provincial broadcasters and big new conglomerates – big enough even to challenge the country’s most powerful station by far, CCTV.
CCTV, the only broadcaster with national purview, is controlled directly by SARFT. Every local-level cable network operator is required to run CCTV1, the broadcaster’s most popular general-purpose channel, although they often run many more CCTV channels. The most crucial component is news: While local stations cover local news, CCTV’s nightly program is the only one with a mandate to propagate SARFT’s carefully-calibrated message across the nation.
Of the post-consolidation provincial broadcasters, two stand out as by far the largest: Hunan Broadcasting System, whose satellite TV arm has a wide reach in central and south China, and Shanghai Media Group (SMG), whose Dragon TV Satellite also has an expansive network. Others in Zhejiang, Jiangsu and Anhui also command big audiences in their respective regions (see map on next page), but the trio of CCTV, Hunan and SMG account for 45% of total television industry revenues.
These provincial broadcasters have a much looser relationship to SARFT, and they operate much more like commercial broadcasters worldwide. Their aim is to generate more advertising revenue by creating popular programs, which are usually edgier or more mindless than CCTV’s fare. There’s a lot of money at stake: China’s total TV and radio broadcasting industry pulled in RMB210 billion (US$33 billion) in 2010, with Hunan and SMG both taking home more than US$1.57 billion apiece.
In other words, provincial broadcasters have every incentive to push the envelope until SARFT pushes back – and they regularly do.
In China, there is often more than one way to interpret TV regulation because there is effectively more than one regulator. SARFT is divided into central and provincial departments, and shows created by local broadcasters are vetted by provincial-level SARFT, whose moral rigor varies significantly by region.
For example, SARFT branches in northern cities close to Beijing are said to be more uptight, while those in south and central China are more tolerant of purely commercial content – possibly because local governments are keen to develop strong local brands.
The most “pragmatic” are in southern Guangdong province, where officials are mindful that over-regulating local Cantonese-language content simply pushes viewers to watch Hong Kong broadcasters. Besides, SARFT knows CCTV’s clout weakens the further it gets away from Beijing: “A CCTV show that pulls a rating of 1.3 or 1.4 in Beijing and Tianjin might be lucky to pull 0.3 or 0.4 in Guangdong,” noted Andrew Carter, Shanghai-based president of investment at GroupM, a media buying agency.
Protecting their own
Central SARFT intervenes when provincial programs become too “lowbrow.” This has become a catch-all term for content that pushes the boundaries of Party taste; however, even TV executives admit programs sometimes get out of hand. A producer at SMG who spoke with China Economic Review on condition of anonymity acknowledged that provincial channels’ widespread copying of foreign reality shows has become overused and monotonous.
Another reason for intervention is that the popularity of such shows threatens to steal market share from CCTV. In such cases, CCTV is widely thought to lean on SARFT to put the upstart in their place. Not that it’s entirely unjustified. “CCTV’s argument is that, look, we were created for a reason, and we can’t fulfill that purpose if people are devoting an increasingly larger proportion of their total viewing time to other channels,” said Mark Natkin, Beijing-based managing director at Marbridge Consulting.
This knife cuts both ways. CCTV cannot become too commercial or inflate its prices too high, lest it be accused of abusing its monopoly position for money-grubbing, says Weng Dexiang, CEO of SMA Media, a Shanghai-based ad buying agency. Rumor has it that there will be no product placement at this year’s Spring Festival Gala due to a popular uproar over ill-disguised marketing last year. (The Gala, the world’s most widely watched TV event, has no commercial breaks but usually references sponsors in its skits.)
On the other hand, CCTV’s moralizing messages are curtailed by the Propaganda Department’s broader desire to keep people watching television. Beijing vastly prefers to have all eyes on the television, rather than on the internet where the sheer volume of content and rate of change makes censorship efforts seem like one big game of whack-a-mole. Dating shows might not be as salubrious as documentaries, but if they keep eyeballs on TV until the mandated (CCTV) evening news time slot, regulators may see them as a necessary evil.
Buying in an inflationary market
For advertisers, regulation presents a problem because it effectively limits the supply of available ad spaces (known in the industry as “ad inventory”). Zhou Wei, CFO of Charm Communications, one of China’s biggest ad buying agencies, notes that this creates both inflationary and disinflationary effects. The scarcity of ad inventory for popular entertainment programs drives up prices for hot shows. But broadca
sters also need to constantly fill holes left by cut programs, and ad prices for unproven replacements must be heavily discounted.
Still, ad agencies are keenly aware that prices overall are spiraling upwards. “It’s clearly an inflationary environment,” said Seth Grossman, managing director of Carat China, a media buying agency. The bottom line is that supply of ad inventory is limited, but demand for advertising is climbing as China’s consumer economy develops – and advertisers know that with a 97% household penetration rate, TV remains by far the most effective media platform in China for reaching mass audiences.
For companies looking to advertise on a truly national scale, CCTV remains the only viable option: None of the provincial satellite TV broadcasters can touch it in terms of sheer reach. This is reflected in the makeup of sector ad spending at CCTV auctions: alcoholic beverages, followed by financial services and consumer electronics – industries which distribute on a nationwide scale, with little product variation by region.
For those companies looking to convince China’s wary middle class of their bone fides – think pharmaceuticals, health products, food and chemicals – CCTV also lends an aura of credibility. For example, Mengniu ran an aggressive CCTV ad campaign to recover from its toxic baby milk fiasco in 2008; even today dairy products is one of the biggest-spending sectors on CCTV ads. Research by Nielsen, a media research outfit, suggests that this halo effect is greatest in second- and third-tier cities, where TV ad spending acquires a signaling function: If a company has money to buy expensive ads, it probably also has enough money to ensure quality control.
Advertisers also use CCTV as a benchmark for negotiating prices with smaller broadcasters. Lately, however, industry insiders say that prices for local stations have outpaced even CCTV. For example, Weng of SMA Media says that prices for ad places on SMG are dramatically outpacing similar spots on CCTV. He attributes the rise to local stations’ monopoly positions.
In response to rising prices, advertisers are taking a harder look at value for money. Audiences, especially young people, are increasingly ignoring the oligopoly of traditional television in favor of online sources, perhaps providing a cheaper opening for advertisers.
“The easiest way to describe China’s television audience changes is fragmentation,” said Jesse Goranson, senior vice president for media and telecom at Nielsen.
Although audiences are moving to non-traditional platforms such as internet television and mobile TV, most eyes are on online video sites. Nielsen’s research indicates that online TV is cannibalizing traditional TV viewing among young users, a trend few doubt will accelerate as internet use becomes more widespread and more online content becomes available on demand. Online TV remains very small compared to the market for traditional TV – almost two-thirds of Chinese people still lack any internet connection. But it is closely watched as a harbinger of things to come.
In theory, online TV could seriously alter the landscape for advertisers, regulators and broadcasters. Advertisers could benefit from better audience targeting and lower prices, thanks to a break from the stronghold of TV suppliers, though reaching the target audience may be trickier (see box).
SARFT could see its power seriously undermined: It can dictate prime time content to protect social mores on traditional TV, but not online. CCTV’s lack of competitive ability in a commercial environment is obvious; CCTV offers its same content online at cntv.cn, but most online video watchers eschew the site for the entertainment programs, many from provincial broadcasters, that are available at will on portals like Youku and Tudou. In turn, these shows are forced to compete for attention with big-budget Hollywood shows, often uploaded with Chinese subtitles just hours after they air.
“It’s not inconceivable that CCTV might have to restructure in the future [to face these changes],” said Harjinder Singh-Heer, managing director of Heernet Ventures, a media industry consulting firm.
Younger viewers will carry these preferences back into the traditional TV market, exacerbating the tension between what is popular and what is deemed “healthy.” With the added option of online television, “younger people are still watching TV, but it’s getting harder to reach those people,” said Carter of GroupM.
“So now, rather than buying a cheap cost-per-mille [a common ad metric] where the engagement factor is like wallpaper, you have to target the shows you know [young people] are still watching, like entertainment programs. That’s why ad space for these premium entertainment shows is becoming like gold dust.”
This influx of competition in a highly regulated industry may in part explain why industry insiders widely expect China’s TV industry to follow the formula set by the telecoms industry: Government-driven consolidation may create a handful of massive conglomerates, which then fill their pockets by listing on international equity markets.
Investors: watching and waiting
To compete in the changing environment – one which might include more foreign competition – Chinese broadcasters will need capital, and a lot of it. With more capital, they can buy slicker content, wider distribution networks and better online portals to compete with Youku, Tudou and others. Such improvements bring in more ad revenue and investment, creating something of a “Matthew effect:” The big broadcasters get even bigger, with small broadcasters forced to consolidate.
Skeptics need not look far to see potential stumbling blocks. Consolidation of the television industry is proving much slower and more painful than in telecoms, because many more bureaucracies are involved – regional governments and SARFTs are intensely protective of their home turf. And online television could yet prove a disruptive force that accelerates beyond regulatory and broadcasters’ control.
But the overarching market dynamic should not be forgotten: Look beyond their occasional tussles, and China’s broadcasters make a killing because they are an oligarchy under the aegis of a political elite with an overwhelming interest in cultivating and controlling a few national champions.
A struggle between the Party line and the bottom line it may be, at least on the surface. But if and when China’s TV broadcasters come to the market, investors would do well to remember that in China, the two are rarely so separate.