Reports of Rupert Murdoch's demise in China are greatly exaggerated. Going by the defeatist comments the News Corp chief executive made at a conference in New York on September 16, you could be forgiven for thinking the media tycoon had written the country off as a bridge too far.
Complaining that his company had "hit a brick wall" in China, Murdoch rued what he sees as a retreat on the opening up steps made last year, telling his audience at the Clinton Global Initiative that the Chinese authorities are "quite paranoid about what gets through."
Context can never be over-looked, though. The comments were made in the wake of a decision by the authorities to put a stop to a joint venture between Star TV, the company's main Asia subsidiary, and Qinghai Satellite TV in western China.
However, while this closure may have blocked off an avenue into the lucrative mainland TV market, the venture represented only a small part of News Corp?s overall China strategy. The company remains one of the best placed in China of all the global major players, positioning itself to weather intermittent clampdowns by Beijing and deliver in the long term.
Given the efforts Murdoch has put into championing News Corp's cause in China over the past decade – past efforts to appease the Central Committee include the removal of the BBC from Star TV's schedules and the cancellation of a book deal with former Hong Kong governor Chris Patten – a degree of frustration at the failure of the Qinghai project is understandable.
Had the venture prevailed, Star TV would have broken free of current restrictions limiting its access to top hotels, foreign residential compounds and certain institutions. News Corp could have then gone to advertisers boasting about its access to an advertising market predicted to grow 12.4% year on year between 2003 and 2006, reaching a total value of US$10.9 billion next year. By comparison, the North American TV advertising market is only expected to see 4.8% year-on-year growth over the same period.
Dissecting the Qinghai deal
While complex in its construction, the Qinghai deal was simple in execution: use the provincial broadcaster's satellite television platform to reach cable systems across China and pack the schedules with Star TV content. What News Corp couldn't gauge for, though, was a sudden cooling in Beijing's attitude towards foreign media.
The venture was axed and, pouring salt in the wound, an investigation was launched into the company's alleged involvement in the illegal sale of decoders to mainland viewers keen to have access to Star TV. The government also reiterated its longstanding rule that foreign companies may not lease, own or operate television channels.
Looking at the Qinghai project in the light of these strict regulations, Kristian Kender, research manager of Beijing-based media consultancy China Media Monitor Intelligence, sees it as a fool's mission that even News Corp suspected would fail.
"Why go all the way to Qinghai, bring the son of the former minister of propaganda on board and tell no one about it? It's because you're not really supposed to be doing what you are doing," he said. "The rules are very clear. There would probably have to be a regime change before you saw CNN on CCTV."
There are signs, however, of creeping, incremental deregulation of the Chinese media markets which made News Corp?s. Qinghai play understandable, if premature. "It was fairly reasonable [to assume] that measured aggression by an ambitious player like News Corp would be rewarded rather than punished," argued Vivek Couto, an analyst with Hong Kong media consultancy Media Partners Asia. "However, I guess it may have created a precedent, and others like Viacom and Time Warner would have wanted to follow so the new regime got nervous."
All is not lost
Nevertheless, News Corp has plenty to fall back on. The company's mainland China strategy is a "multi-pronged" one, and while the Qinghai-Star TV venture failed, the other prongs – Phoenix Satellite TV, of which News Corp owns 38%, and Star TV's Chinese language incarnation, Xingkong Weishi – are in good health.
Phoenix is riding on the wave of Hong Kong's rapid integration with Guangdong, taking in advertising worth in excess of US$100 million a year from China, and stands out as the only non-Mainland channel generating substantial revenue in the country. Needless to say, "guanxi" (relationships) plays a role. Phoenix TV's access to local cable systems in, and increasingly beyond, Guangdong has no doubt thanks in part to former PLA man Liu Changle who holds a 37% stake in the company, as well as being its chairman and CEO.
For its part, Xingkong Weishi is said to have seen advertising revenue jump 180% in the fiscal year to June 2004, putting the channel within reach of the magic breakeven figure for all of China.
Through Phoenix Chinese, Phoenix Movies, Phoenix InfoNews and Xingkong Weishi, News Corp has a stake in four of the ten foreign channels with Guangdong landing rights. A further five channels have restricted mainland coverage, namely Star Movies, Star Sports, Channel V, ESPN and National Geographic, the latter two being 50% controlled by News Corp.
This led Lehman Brothers to conclude in its 2004 review of the Chinese media market that News Corp was the most advanced of the global major players in terms of China penetration. Indeed, the report pointed to the efforts made by News Corp's senior management, notably Murdoch himself, to win the government's trust as being key to the company's relative success in China. Note the use of the word 'relative': News Corp's China income is still nothing more than a drop in the ocean compared to its global revenues.
From the large companies' point of view, though, it is all about positioning themselves for the long term and taking small bites of the business where regulators allow. Last year, the State Administration for Radio, Film and TV (SARFT) announced that certain foreign companies would be able to hold minority stakes in TV and film production ventures, prompting a number of major players to set up production ventures with domestic operators.
Viacom approached Shanghai Media Group (SMG) with a view to producing youth programs as well as negotiating to put Nickelodeon content on CCTV and contribute music and entertainment shows to Beijing TV; the Discovery Channel entered discussions on supplying documentaries to SMG; Disney got in touch with several media groups, including CCTV, about providing content; and Warner Brothers revealed plans to set up China's first ever film production joint venture with China Film Group.
The subsequent sluggish progress of these ventures reveals the challenges foreign media companies face. As it stands, only Warner Brothers' movie venture is a done deal, while Disney is coming to understand that theme parks won't necessarily work as bargaining chips in a bid to get its own mainland channel.
Nevertheless, Kender believes that co-production is the way forwards for foreign companies on the Mainland, particularly given the expected rise in demand for China-related content ahead of the 2008 Olympics in Beijing, as domestic broadcasters seek overseas investment and expertise to boost their own industry. But for the foreseeable future, this cooperation may have to operate on a project to project basis as opposed to long term joint ventures.
A turning point could prove to be the rollout of digital services and pay-TV, as broadcasters tackle the daunting task of persuading Chinese people to pay premium rates for something previously available for a pittance. When CCTV launched a package of six digital pay TV channels last year, its plan was to draw customers from the existing analogue cable service which supplies 10 times as many channels to 110 million subscribers at half the price.
Needless to say, given this sparseness of content, subscription figures have so far been low. The success of Phoenix TV, which has a reputation for quality content, and keeps the regulators at bay by offering non-political entertainment-led material, shows how foreign broadcasters could help meet the need for compelling programming.
In January, movies from Warner Brothers' HBO Asia channel debuted on CCTV's cable service, and deals similar to this and beyond may emerge as domestic broadcasters are forced to wise up to life in a commercial TV market where consumers expect to get their money's worth.
The total number of digital cable TV subscribers is believed to be around the 700,000 mark, well short of SARFT's 30 million target figure for 2005. If China is to come close to meeting its 2015 deadline for switching off the analog signal, it needs all the help it can get from foreign broadcasters. As always in television, content is key.