25 August 2005

China's Media Crackdown Stalls News Corp. TV Push --- Planned Joint Venture Dies Amid Government Concerns About Foreign Investment
The Asian Wall Street Journal
(c) 2005 Dow Jones & Company, Inc.

By Geoffrey A. Fowler in Hong Kong and Kathy Chen in Beijing

A backdoor plan by News Corp. to operate a prime-time television channel in China has unraveled amid a government crackdown on the media industry, setting back the media giant's efforts to establish a major presence in the world's biggest market of TV viewers.

News Corp., owner of the Fox broadcast TV network, the 20th Century Fox film studio and media assets across Europe and Asia, is already the biggest Western TV company in China. Over the past year, the company was hard at work on a plan aimed at securing a channel for its content that would extend its reach over a large area of China. Now, the Chinese TV channel involved in the venture confirms that the deal is dead.

That is a blow for News Corp., which is betting big on the potential of China's commercial TV business -- Nielsen Media Research estimates that advertisers spent $19 billion on the market last year.

The setback also comes as Chinese authorities are investigating a company connected to News Corp. for selling illegal access to satellite-television channels. That investigation prompted Chinese government officials to raid News Corp.'s Beijing offices in June, seizing TV signal decoders among other items, say current and former staff of the company.

News Corp.'s woes coincide with an ideological crackdown by Chinese authorities on the politically sensitive Chinese TV market -- a move that is hurting other big foreign media companies, too. But because it has invested more in Chinese TV than its peers, News Corp. might have more to lose if China continues to pull the reins on foreign investment.

Currently, there are only a few legal avenues for Chinese to watch foreign TV channels. Six broadcasters have permission to beam 24-hour channels that only reach southern China, plus hotels and special compounds elsewhere. Some other channels, such as Time Warner Inc.'s CNN International, are only allowed in hotels and those compounds, including universities and government offices. Under a 2002 rule, foreign channels must sell and transmit signals only through a state-run company, China International Television Corp.

Just half a year ago, News Corp. Chief Executive Rupert Murdoch exuded confidence when he told investors that his company had invested in a new Chinese venture, "where we'll have nearly 50% . . . of a prime-time channel, which will have, you know, access to well over 100 million homes."

Mr. Murdoch, whose Chinese wife Wendi Deng has served as a liaison between the company and authorities in Beijing, didn't name the venture at the time. But according to former executives and people close to the situation, the News Corp. chief himself approved a deal to spend tens of millions on a complicated joint venture to lease some operations of a local broadcaster based in Qinghai, a poor province in China's northwest. Qinghai Satellite TV Station already reached cable systems in northwest China and several major cities around the country.

The plan: Pump the channel with Chinese-language programming produced by News Corp.'s subsidiary, Star TV, and boost Star's revenue through sales of ads against that content. Star already produces that content for a channel that received rare government approval to broadcast in southern China.

News Corp. doesn't disclose Star's revenue. Media Partners Asia, an independent research company that analyzes the regional industry, estimates that Star had only $20 million in revenue from China in its last fiscal year.

The Qinghai Satellite deal was a bold initiative by News Corp. that pushed the envelope of existing restrictions on foreign investment in China's television market.

Too bold, apparently. Executives at Qinghai Satellite now confirm that the plan has been killed, and that the News Corp. affiliate involved in the venture has pulled out. After a brief window earlier this year when the channel was broadcasting racier News Corp. content, it has now mostly reverted back to its previous, more staid programming.

Behind the plan's collapse was an unexpected political shift. A high-ranking Communist Party official whose son was a consultant on the project was reassigned away from his position of influence, depriving the plan of key political support, say former News Corp. and other industry executives.

The Qinghai deal also faced pressure as other foreign media companies saw News Corp.'s programs begin to air on Qinghai Satellite and plied Chinese broadcast regulators with requests for similar "special treatment," says a former News Corp. official. "That put them in a real dilemma."

News Corp. declines to discuss Qinghai Satellite. "Everybody knows that you cannot buy out a TV channel in China," said Jannie Poon, a spokeswoman for News Corp.'s Star TV subsidiary. "We have tried to build up a nationwide distribution platform to reach a wider audience in China. We won't discuss it any further than that," she said.

Ms. Poon added that "it is business as usual in our China office," and that the company will work under the regulatory framework set out by China's government. "They are in the process of fine-tuning the whole regulatory regime," she said. "This is a process."

News Corp. has weathered tough times in China before. In 1993, Mr. Murdoch ran afoul of Chinese officials by proclaiming that satellite television would undermine totalitarian regimes. China reacted by prohibiting individuals from owning Star TV satellite dishes. To get back into China's good graces, News Corp. in 1994 dropped the British Broadcasting Corp. from the collection of channels it beamed into China because the Chinese didn't like some of the network's programming.

"News and Star have always proved flexible," said Vivek Couto, an analyst with Media Partners Asia. In the future, he added, they can grow through potential investments in other media and China's expansion into digital pay TV. News Corp. itself cites its 38% stake in independent Hong Kong broadcaster Phoenix Satellite Holdings as an important avenue for future growth in China.

News Corp. isn't alone as it copes with China's ambivalence toward foreign media. On the one hand, domestic broadcasters desperately need foreign production experience to upgrade their content and become more competitive in an increasingly commercial market. But on the other hand, Beijing fears foreign investment could undermine its political control over the media.

Government circulars this year suggest the state will tighten the reins. An August one stressed the need to protect "national cultural security." China's media regulator declined requests for comment on the circulars.

Other companies have felt the chill. Walt Disney Co. has yet to win approval to broadcast its Disney Channel on the mainland, even as its newest theme park opens in Hong Kong next month. In fact, the government has said that in principle, it won't approve any new foreign TV channels.

Last year, Viacom Inc. announced plans to produce children's programming jointly with the state-owned Shanghai Media Group. In April, it said the venture's shows would feature an on-screen logo with an orange "splat" around the word "Nick," just like Viacom's U.S. Nickelodeon network.

But earlier in the year, Chinese authorities issued a notice that forbade foreign branding on local broadcasts. Today, Viacom's joint venture still hasn't been formally approved, and that Nick logo isn't on the air, according to Shanghai Media. "Now there isn't any, and in the future there won't be any either," said Sun Wei, the company's executive director of international relations.

Viacom declined to comment, citing the issue's sensitivity.