Setting up housekeeping (Corporate Dealmaker)

Setting up housekeeping

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Can your average corporate dealmaker learn anything from watching "Life Masters"? You might not think so. For one thing, the TV show - which features a couple of perky hosts offering advice on how to handle household challenges - is broadcast in Mandarin.

Yet the program does have a message for corporate development mavens. Shown on News Corp.'s Xing Kong channel to cable viewers in China's prosperous southern province of Guangdong, "Life Masters" represents one of the multiple strategies being employed by Western media giants seeking to build a presence in China's fledgling commercial television market. As China's economic boom rolls on, News Corp., Time Warner Inc., Viacom Inc. and other players such as CNBC and Bloomberg LP are using varying mixes of politicking, investment and dealmaking to try to participate in it. For inspiration, they need only look at, say, Procter & Gamble Co., which could sell $2 billion worth of soap and toothpaste in China next year and recently paid $1.8 billion to buy out the joint venture partner that helped it get established.

In an authoritarian state still leery of free speech, it's no accident that the likes of P&G and General Motors Corp. are better established than foreign media companies. But the government's increasingly relaxed media policies have led to a flurry of activity. Since 2001 Beijing has awarded five foreign TV companies the right to broadcast in Guangdong, a laboratory for liberalization. And in December 2003 Beijing decreed that foreign companies can own up to 49% of production houses in China. The change set the stage for Viacom's announcement in March of a joint venture with Shanghai Media Group, wherein its MTV and Nickelodeon units will co-produce original content with SMG - a milestone in the long courtship of Chinese officialdom by Viacom chairman Sumner Redstone and other executives. Says Charles Chau, MTV's managing director for North Asia, "The officials look for friendship, trust and partnership."

The media companies, meanwhile, are looking for growth on a scale not available anywhere else. In late 2003 there were about 400,000 set-top boxes for cable television in China; the count by the end of this year could be 4 million. The country has an estimated 100 million television households, most of which still have limited viewing options, and with an economy expected to grow more than 7% a year over the next decade, that number is sure to soar as well.

So far News Corp. has built the strongest position, with its 100% owned Xing Kong channel the prize property. Time Warner made a significant bet in 2000 when it bought an 80% stake in China Entertainment Television Broadcasting Ltd., a Hong Kong-based entertainment channel. But with the channel's losses approaching $20 million a year, Time Warner switched tactics last year and sold a majority of CETV to a local partner. Viacom, meanwhile, is coming on strong. Last year its MTV unit gained broadcast permission in Guangdong. And Redstone has indicated that a second production joint venture is in the works.

News Corp. may be hard to catch, though. Chairman Rupert Murdoch, who has had the help of his mainland-born wife, former News Corp. executive Wendi Deng, has been working for more than a decade to figure out what formula can succeed in China. Besides Xing Kong, News Corp. has half of Phoenix Channel, an entertainment station it started with a former high-ranking military officer. Like Xing Kong, Phoenix has Guangdong broadcast rights. News Corp. also has limited distribution for its Star Group Ltd. satellite network. News Corp. took full ownership of Star in 1995, completing a two-stage acquisition that cost it a total of $871 million.

One of Murdoch's key lessons had to do with the limits on free speech in China. Beijing banned the BBC beam from Star TV in 1994 because of the U.K. current events channel's Western-style news shows. Now Xing Kong and Phoenix are careful not to rile Beijing. All the players, of course, work hard to win the trust of the government. Viacom's Redstone has been visiting China for a decade, and Viacom hosted the U.S. tour of an 80-piece Chinese state orchestra two years ago.

Viacom's China ambitions are large. "We have always been open and honest with the Chinese government about our desire to see MTV distributed as widely as possible in China," says Hong Kong-based Chau. Viacom hasn't disclosed the amount of the investment it will make in its joint venture with Shanghai Media Group, but it's reasonable to peg its investment in China to date in the tens of millions.

In partnering with SMG, Viacom has connected with a favored joint venture partner for many foreign companies, including Universal Music Group and Japanese advertising behemoth Dentsu Inc. Created in 2001 through the consolidation of Shanghai's state-owned media enterprises, SMG is one of China's biggest conglomerates, with holdings ranging from television stations to sports teams. It's run by Li Ruigang, a young, Columbia University-educated executive handpicked by the Chinese government.

Time Warner has found a strong partner as well - albeit in the course of a retreat. Last year, for $6.8 million, Time Warner sold a majority position in CETV to Tom Online Inc., the China-focused media company controlled by Hong Kong's richest tycoon, Li Ka-shing, retaining a 35% stake.

Tom's team is executing a big tactical shift. Robert Xie, Tom's chief investment officer, says CETV will use the business model Tom is applying in magazine publishing: turning control of content over to locals. "If you want revenue," he says, "what do you need ownership and editorial control for? We will just focus on advertising." In the past four years, Tom - a product of Hong Kong's late 1990s Internet boom - has acquired more than 35 companies in China, mostly outdoor billboard advertising firms.

For all the media companies, the opening of China's market is an exciting prospect. Still, they must keep a couple of caveats in mind. One is simply the possibility of China's economy overheating. The other is an awareness of why Beijing is liberalizing investment into the sector. As Vivek Couto, executive director with Media Partners Asia Ltd., observes, this is no World Trade Organization-imposed obligation. Beijing wants to nurture Chinese companies that can control the production and distribution of Chinese-language content domestically - and all over the world. - Alexandra A. Seno

The story so far
Time Warner	Regrouping. Bought majority of Hong Kong-based CETV in 2000. In 2003 sold controlling stake to Hong Kong-based Tom Online, retaining a 35% stake.
News Corp.	The clear leader. Over next four years, expected to invest another $100 million in 100%-owned Xing Kong, the top Mandarin-language channel in Guangdong. Phoenix Channel (50% owned) also has Guangdong rights. Star Group satellite TV (100% owned) reaches parts of China, too.
Viacom	Coming on strong. MTV unit won Guangdong broadcasting rights in 2003. In March formed joint venture with Shanghai Media Group to produce original Chinese shows under the Nickelodeon and MTV brands. Another joint venture expected soon.
Source: The Deal