In the Hutong
Yes, dear, toast is dinner
Earlier this month, I was honored to sit on a panel on the future of China’s cable television industry sponsored by the American Chamber of Commerce, joined by my friend Kris Kender from CMM Intelligence (the guys who publish the China Media Yearbook & Directory), Leo Austin of Augus Partners, and Tao Libao of China Multimedia Networks. The panel was expertly guided by Jeremy Goldkorn of Danwei.org.
139 Million What? I’d Like Some of That…
On the minds of many of the people in our audience was when and how it would be possible for foreign companies to make some money on the 139 million cable TV subscribers (that’s households, not people) in China.
The hopes of the industry are pinned upon some valid commercial and economic truths:
– After nearly two decades of development, cable TV in China is little more than basic cable, a depressing collection of 40 or so look-alike channels with content that is occasionally superb but more commonly mediocre;
– Cable operators make a pittance – maybe RMB 14 per month per subscriber on average;
– Getting cable operators out of this low-end rut means adding more and better programs, new channels, more services, and putting in the systems that will allow operators to charge for them;
– The country (i.e., the nation’s cable operators, taken collectively) has invested billions of dollars on fiber-optic and cable networks, and would clearly want to get the most economic value out of all of that wiring;
– Chinese people love home entertainment.
All of this would seem to spell endless opportunity for companies, both foreign and domestic, seeking to make fortunes selling networking equipment, head-ends, set-top boxes, software, expertise, and even programming to China’s cable industry.
Funny, It Didn’t LOOK Like a Mirage
There is only one problem:
Cable TV in China is not an industry.
At best, it is a highly regulated utility.
At worst, it is a technological laboratory for engineers.
Chinese law and policy state emphatically that foreigners cannot own or control cable TV stations or channels – that is reserved of Chinese organizations, and only those so authorized by the State Administration for Radio, Film, and Television (SARFT).
Some of the world’s largest media organizations – News Corp. and Viacom not least among them – have repeatedly attempted to work around the letter of the law, only to find themselves each time face-to-face with the law’s intent in the form of agitated, vengeful aparatchiks.
The vast majority of the air time and cable bandwidth available to the operators remains unfilled, hampered by party-enforced restrictions on the local creation of programs and import of content. And value-added services? Cable is rapidly losing out to the Internet and mobile.
Indeed, with operators eking out an operational living from the narrow, shallow stream of subscription revenues and their shares of advertising, they can barely contemplate investing in the network upgrades that would enable them to provide the premium content and value-added services that not only don’t exist, but are unlikely to leap into existence as long as the industry is constrained from taking outside investment.
Are there experiments taking place in high-definition television, IPTV, digital, and premium channels? Sure. But these experiments and others like them have been going on for over a decade. And the government seems content to allow experiments to continue, but commercial rollouts have yet to happen.
There is more to it, of course, but that’s the gist.
The painful consensus of the panel was that among the multitude of Chinese national treasures we evil foreigners want to get our claws into, the cable TV business is not only among the least accessible, it is also among the least appealing.
Jeremy Goldkorn asked me if I had money to invest in cable television in China, what would I invest in. I wasn’t much of a sport. I told the truth: if I had money to invest, the last place in China I would invest it is cable TV.
The End of Cable
Cable television will continue to lumber along for some time in the future, for a couple of reasons. First, the growing appetite for television advertising time – ANY television advertising time – will ensure that revenues continue to pace economic growth. Second, China’s urbanization plays right into the hands of cable operators, although returns will decline as they make investments to service the growing urban working class.
But unless something significant changes about the way the sector is regulated, at some point in the future, things are going to turn ugly for the operators. With no means at their disposal of significantly improving revenue streams or financing the hardware that would enable new revenues, cable will become what radio and terrestrial television are today – lowest common denominator entertainment. It’s what everyone will have, but everyone will want more.
From a macro-policy level, the course of action that makes the most sense, that will allow the country to get the most out of its cable networks and to use them the way they are most needed, is a radical one:
• Set a basis for fairly valuing the networks.
• Have the local municipalities and the provinces sell them to the telcos after the anticipated round of telecommunications industry restructuring is complete.
• Separate out the channel production and advertising sales functions, spinning them into independent entities that will continue to be regulated by SARFT and the Party.
• Lay out must-carry regulations that ensure that current channels have grandfathered carriage.
• Let the telcos invest in the networks as both programming delivery and service delivery systems, parallel with other broadband but aimed at consumers who want alacarte services, not raw Internet coming into their TVs.
Is this a radical solution? You betcha.
Will it happen tomorrow? No.
Is this the likely eventual fate of the cable networks? Absolutely.