Shanghai Media Group: The Most Capitalistic Chinese Media Group

Article  by  Pierre-Yves LOCHON  •  Published 22.04.2011  •  Updated 02.05.2011
In less than a decade, Shanghai Media Group has become a giant in all sectors of the audiovisual and media at national level, with a dynamic sprawling of global development of the Chinese group.

Summary

Shanghai Media Group: The Most Capitalistic Chinese Media Group

Shanghai Media Group is the second audio-visual media operator in China. A dependent of the Shanghai government, it was awarded in 2002 a monopoly over radio and television broadcasting in China’s largest megalopolis. With its supervisory authority’s blessing and under its new boss Li Ruigang’s guidance, China’s most capitalistic media group has signed a long string of partnerships to develop in the fields of information technology, communications, and content production. Today, Shanghai Media Group (SMG) is about to become (partially) publicly traded and to start investing in foreign markets. Its goal is to become the privileged middleman for foreign groups willing to penetrate China’s promising audiovisual market.
 
This market is highly fragmented (over 4,000 channels) but enjoys exponential growth, and Shanghai Media Group holds a central position in it. SMG’s influence extends beyond its channels and production activities.
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A Subsidiary of the Largest Media Group in China


 
SMEG, SMG, and SFG are strictly state-owned corporations under the authority of the Shanghai government. They form a tentacular galaxy whose sales figures and results have been carefully kept secret for nearly ten years. In 2003, SMEG and its “stakeholder/supervisor”, the Government of Shanghai, have decided to appoint at the helm of the Shanghai Media Group a 37-year-old Shanghainese, an English-speaking Shanghai TV journalist who graduated from Columbia University. This decision and, mostly, its results, quickly proved to be groundbreaking.
 
In a matter of years, thanks to innovations and partnerships, Li Ruigang has transformed the group out of its historical sectors and natural boundaries. SMG is not simply a radio/TV broadcaster anymore. Its sphere of influence now extends beyond the Shanghai area to reach China, Asia, and even the world. Like its city, SMG has an appetite for conquest. Its president’s roadmap is simple: to make SMG one of the largest media groups in China and worldwide. In a press conference from July 2009, Li Ruang summed up his strategy in these words: “It is time to expand SMG’s focus from local to national and from television to multimedia” (On Screen Asia, 1 August 2009).
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Shanghai’s Digital ORTF

In China, radio and television broadcasting is a government monopoly, so channels are operated only by national companies such as CCTV (TV) and CRTV (radio) or local/regional companies. Like France’s ORTF, SMG holds the monopoly for the 16 million residents of Shanghai and the surrounding area – China’s economic capital. SMG edits:
 
- 10 regional Hertzian TV networks, 3 national TV networks, 90 digital TV networks (both regional and national), accounting for 65-70% of Shanghai’s TV audience (see Table 2)

Hertzian TV networks operated by SMG 


- 10 regional Hertzian radio stations and 20 regional and national digital radio stations (90%+ of local radio audience)
 
Hertzian radio stations operated by SMG
 

Across all its antennas, SMG is broadcasting daily 252 hours of TV programming and 234 hours of radio programming. 60% of its TV channels’ programming and 95% of its radio content is still produced internally.
 
SMG also owns five sports teams and their training facilities, two magazines, and numerous websites (among which Eastday, one of China’s top 10 websites). Finally, the group is also one of Shanghai’s cable company’s three stockholders and the sole stockholder of the Shanghai Pearl Tower, a Hertzian broadcast center and an emblematic figure of the city. All these operations involve over 6,000 collaborators.
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Over 40 Partnerships in 7 Years

Building on its monopoly, teams and historical operations, Li Ruigang managed to transform SMG through technology and partnerships.
 
Attracted by Shanghai’s economic dynamism, seduced by SMG’s younger team, and at times scared of the excessively bureaucratic and politicized CCTV, the world’s major communications and IT groups have visited Shanghai, met with SMG managers, and signed more or less ambitious agreements. Between 2003 and 2010, SMG has signed over 40 cooperative agreements. And, as Li Ruigang acknowledged  in 2006: “If you have a hundred partners, then you can learn a hundred different things from them”[+] NoteThe New York Times, 16 January 2006X [1].
 
Largely supporting itself on these partnerships, SMG’s new team tackled three priorities: contents, the international market, and most of all technology.
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Betting on Internet Protocol Television

Upon his arrival, the new president knew what Beijing expected: China would abandon Hertzian TV broadcasting by 2015. The promising first steps of Now/PCCW in Hong Kong helped him foresee the potential of Internet Protocol Television (IPTV) and inspired him to throw his group into this new battlefield. His plan unfolded in three stages: multiply technological cooperative agreements (with Alcatel, Intel and Microsoft, among others) to quickly learn how IPTV works; convince the Chinese government to grant him a first experimental license (obtained in May 2005), and; partner with China’s largest telecom operator to very quickly launch an experiment (in June 2005, in Harbin, with China Telecom). Five years later, SMG, via its subsidiary BesTV, is China’s largest IPTV operator (3 million subscribers) and Shanghai has the largest number of subscribers (over one million, on a national market of 5 millions).
 
Opting for IPTV made an indirect victim: Shanghai’s cable company, of which SMG is one of three stockholders. The largest municipal cable company in China and the world (with almost 5 million subscribing homes), Oriental Cable is also the cable operator showing one of the smallest digital conversion rates, with less than 1.5 million homes (less than 30%). Yet, the opportunistic SMG has created one of the two national digital pay TV platforms distributed by the country’s cable companies. The goal was to offer 60 new channels to cabled homes equipped with a digital decoder, i.e. over 70 million homes in June 2010 (40% of 173 million cable-subscribing homes).
 
Less than three months after launching IPTV, SMG also launched the first Chinese experiment in mobile TV, through a partnership with leading operator China Mobile. The group has also comprehensively developed its content distribution over high-speed Internet, partly with support from Intel who invested $12 million in software development for SMG Broadband. SMG has become the largest TV content aggregator and provider across all supports. This puts the group in a strategic central position in the distribution of both Chinese AND foreign content. Thus, SMG is now the obligatory gateway to reach the Chinese, no matter the television reception mode.
 
TV Distribution in China


Source: Sarft, Media Partners Asia, Sinapses Asia ltd
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More Attractive Programs Across All Networks

SMG knew that, to feed content to all these new networks and justify a higher subscription fee ($6/month for the IPTV package instead of $3 for analog cable), it had to enhance its offer of attractive contents and not simply rely on its own productions. Cooperation with international content providers proved to be crucial. Through the years, this cooperation has taken various guises. A few months after his appointment in 2004, Li Ruigang rushed through the breach opened by Beijing, who had just approved the creation of joint TV production ventures with foreign groups (foreign equity being limited to 50%). SMG quickly signed an agreement with Viacom for the production of youth and music programs, plus the launch of a youth channel, but the company (owned at 25% by Viacom) never finalized a single project. Scared by the tidal wave of American companies – Warner, Disney, News Corp, and Viacom – the SARFT (the Chinese audiovisual regulatory body) closed the door it had cracked open a few months earlier. International agreements now have to be less all-encompassing and, mostly, less visible.

 
 
Therefore, SMG sought partnerships with foreign groups in order to move forward in three directions. To exchange content, SMG developed relationships with CNBC and Sky News Australia for its financial channel CBN, and with Australia Network for its English-speaking channel ICS. To acquire strong programming, SMG struck deals with NBC for ICS, with Discovery for its documentary channel, with the NBA and MLB for American basketball and baseball games, with FIFA for Internet and mobile broadcasting rights of the Soccer World Cup, and with American studios for VOD and Internet broadcasting rights of their movies. In co-producing programs or Chinese versions of global formats, SMG deals with several partners: Televisa and MBC for series, Discovery and Nat Geo for documentaries, Disney for the series Amazing Race.
 
SMG also started co-producing feature films with Disney (the Chinese remake of High School Musical) and the Japanese company Toei. Between technology and services, SMG also launched the Oriental Shopping Channel (“Dong Fang CJ”) in 2004, China’s largest shopping channel, a partnership with the Korean company CJ Shopping, which holds 30% of the venture. The channel holds the only national shopping channel license and penetrates in over 10 million Chinese homes.
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Heading: China and the World

SMG’s goal is to reach an audience beyond the megalopolis of Shanghai and broadcast its channels and content far beyond its local boundaries. From now on, its market extends to China and the world. Since it has increased its programming budget and bought popular foreign formats (Star Academy, American and Mexican series), SMG’s general-interest channel Dragon TV has expanded its penetration to 700 million Chinese homes and increased its national ratings. Dragon TV is now among China’s top regional-origin national channels, alongside Hunan TV (the producer/broadcaster of the Chinese versions of “Pop Idol” and “Ugly Betty”). Dragon TV is already broadcasting in Hong Kong, Japan, Europe, and the USA, and as such it should be easier to export to Asia and the world, especially to the Chinese diaspora.
 
SMG has signed several partnerships with website operators in order to capitalize on the growth of web-based video consumption among youth (over 300 million Chinese Internet users are watching on-line video on a regular basis). The group is offering its programs to these operators, creating web relay operations for hundreds of its own shows (especially reality TV shows), and even (co)producing exclusive content (series) with them. In 2008, SMG transformed its music channel into an English-speaking general-interest channel with Chinese subtitles. International Channel Shanghai/ICS is therefore competing with CCTV9, which, until then, had been the only English-speaking channel broadcasted over the whole Chinese territory. With its enriched international content - thanks in particular to NBC, ICS could serve as SMG’s – English – bridgehead to Asia, Europe, and America.
 
To better broadcast its content abroad, SMG has also partnered with AOL in the USA and Orange in Europe. And the group has created in 2004 Wings Media, a subsidiary that sells its catalogues on the global market. In 2010, Wings Media co-produced with National Geographic a first international documentary on the history and recent renovations of Shanghai’s famous Bund Boulevard.
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A Validated and Amplified Strategy

After 6 years of successful implementation, president Ruigang’s strategy has been validated by the government in not one, nor two, but three of its key aspects: technical, commercial, and capitalistic. On the technical front, in July 2010, the Chinese Government launched its “Convergence” program aimed at bringing closer together television, mobile phone, and Internet services. Shanghai was selected as one of the pilot cities and, in August 2010, SMG obtained its own Internet TV and mobile TV licenses. In regard to the commercial aspect, in 2009 the Chinese Government invested 45 billion yuans (5 billion euros) in an expansion of the major Chinese media. Press and audio-visual groups (like SMG) are being encouraged and supported to step out of their borders, like the New China agency did when it created in July a Chinese version of CNN), called CNC World, broadcasting in English. What the Chinese President calls “soft power”. On the capitalistic evolution front, the Chinese Government encouraged TV production companies and even news websites such as Eastday to restructure and open to private equity, once in 2009 and again in 2010.
 
Central authorities have even protected SMG and its national competitor CCTV by preventing the creation of a new, private giant of the new screens. The projected fusion between Sina (the biggest web portal, ever more present in video broadcasting) and Focus Media (which operates thousands of flatscreens in public spaces watched by over 100 million Chinese daily) was stopped in early 2010. The total market capitalization of both private companies (on the HK and NY stock exchanges) would have been over 6.5 billion dollars.
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Two-Stage Restructuring Prior to Initial Public Offering

In anticipation of its eventual initial public offering, SMG extensively reorganized itself into 8 “content units” that can transversely manage different media: finance, sports, fashion & trends, documentary, fiction & cinema, children’s & animation, TV shopping, and news. Under than model, the “economy/financial information” unit manages the TV channel and the radio station, but also the magazine, the website and the events. This restructuring of the group has reached a new stage. Since, according to Li Ruigang, this is the only way “to overcome the barriers that prevent [media organizations] from realizing their full market value (On Screen Asia, 1 August 2009), SMG announced in October 2009 that its national supervisory authority had agreed to the group splitting itself into two entities:
 
-          News content production, technology, and public service duties will be taken out of SMG and regrouped into “Shanghai Radio & TV”, in which the Government of Shanghai will remain the sole stockholder.
-          Non-news theme units, advertising, sales, and TV shopping operations will remain with the new “SMG”, now rechristened Shanghai Oriental Media Group, and shall be opened to private equity, on a per-level basis.
 
This reorganization revamped the group’s structure and renewed its relationship with its supervisory authority, the Shanghai Municipal Government.
 
SMG’s New Structure

Source: Caijing.com / 6 novembre 2009
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A First Step in the Market

Now restructured, SMG can step into the public market. And its management team is frantically preparing for it. Their priority poles for opening their capital seem to be:
-          The IPTV platform (one industrial already holds 40% of equity);
-          “Enjoyoung”, the “youth brand” that regroups the Young Channel, a website and the Chinese version of the British magazine OK
-          “Toonmax,” regrouping two channels and the production, co-production, and licensing operations of the youth/animation sector
-          The TV shopping service Oriental Shopping
-          The sports unit Greatsports
-          CBN, the pluri-media economy/financial news producer and broadcaster (although this section seems still too editorially sensitive to be opened to foreign investment).

In August 2009, Li Ruigang stated that “to have SMG listed is definitely our ambition and one of my obsessions” (retraduction de « la cotation de SMG est définitivement notre ambition et une de mes obsessions », citation source introuvable en utilisant la référence donnée) (New York Times, 5 October 2009). And the president added: “This will be an example for all broadcasting media in China.” (Asia Media Journal, 15 September 2010). A year later, on the 12th of July 2010, SMG submitted its first market introduction request and announced its first listing in late 2010 or early 2011.
 
In January 2011, SMG announced its first step on the Shanghai stock exchange. The group will buy back 37% of SVA Information Industry’s stock for $300 million. SVA I.I will buy back two of SMG’s technology subsidiaries (including IPTV operator BesTV) for $185 million and sell its non-TV historical operations for nearly $500 million. After this financial pirouette is completed, a pirouette authorized by Shanghai and Beijing, SMG will become the first stockholder of a technology company listed on the Shanghai stock exchange and valued at over $650 million. This should prove to be the perfect vehicle for developing its technology operations and acquiring other players in the sector.
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Financial Transparency a Requisite

To reassure future investors, SMG needs to improve its financial transparency, or at least disclose part of its accounts. Its revenues have grown from 1.8 billion yuans in 2001 to 7.5 billion yuans ($1.1 billion) in 2009. And for the first time, the audiovisual group disclosed a profit of $100 million for 2009. And this 10% profit margin can only increase with the exponential growth of the advertising market and the Chinese economy as a whole. Over the same period, the group’s revenues distribution changed significantly: in 2001, 93 % of total revenues came from advertising; 82% in 2005, and 75% in 2009. The remainder is being generated by TV shopping, programming sales, and other commercial operations. This successful diversification can only further increase, thus ensuring a more harmonious growth for SMG.

Evolution of SMG’s Finances



If SMG has to quickly get into battle position and offer new content, media supports and services to advertisers, it is mostly to profit from the exponential growth (16% in 2010) of the Chinese advertising market and the very large share of television in advertising expenses (over 62%). This is also the only way SMG has to attack the strong position of its main competitor, CCTV, which attracts 10 to 15% of all TV advertising investments in China. Restructured, diversified and consolidated by fresh monies from stock market investors, SMG can also start its world takeover.
 
Evolution of the Chinese Advertising Market


Source: Group M China / China Media Forecasts / October 2010
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Conquering the World: CMC and SMG

On the 10th of August 2010, China’s media landscape was shaken by a small earthquake. After financing them at a loss for 15 years, Rupert Murdoch transferred the control of his three Chinese networks and his film catalogue to CMS, a media-devoted sovereign wealth fund created in April 2009 and chaired by SMG’s president.
 
So China Media Capital completed its first operation by buying back Xing Kong and Xing Kong International (two general-interest channels), Channel V (a music channel), and 750 feature films. As explained Li Ruigang, “this transaction is purely financial, and the fund will continue to invest in Chinese and foreign media.” (retraduction de « cet achat est purement financier et le fonds va continuer à investir dans les médias en Chine et à l’étranger », citation source introuvable en utilisant la référence donnée). (Press release, Reuters, 9 August 2010). A month later, information published by the press in Hong Kong and Shanghai (Shanghai Daily, 30 September 2010) reported that CMS had made an offer to buy TVB (Hong Kong’s largest Hertzian broadcaster with an audience and advertising share of 75%) for an amount between 900 million and 1 billion euros. This investment has been strongly criticized as an attempt to “nationalize” medias of the Chinese zone, but it is now compromised, since Hong Kong laws prevent one of its Hertzian channels to be owned by a foreign company, and – in this case – Continental China is considered foreign territory. In January 2011, TVB’s owner Run Run Shaw announced it was selling its shares to the US financial company Providence Equity Partners, in partnership with a pool of industrials, among whom the president of Taiwanese group HTC.
 
Following this failed attempt, other newspapers are now evoking a possible agreement with Disney to finally launch a Chinese version of the Disney Channel. SMG (via the CMC), could be a natural partner in this venture, since Disney’s first theme park in China will open in Shanghai in 2014.
 
The CMC fund will have the means necessary for its investments and developments, since its five public founders (including two banks and SMG) have committed to allocate to it at least US$1billion. This made it possible for its president to announce “3 to 4 acquisitions before the end of 2010.” “We are not limited to investments in China,” added the fund’s director of investments Michael Tung (Chinaventure.com, 22 June 2010). Mr. Tung also predicted that “China should have four or five huge media groups to compete with News Corp. and Time Warner” (The New York Times, 5 October 2009). 
 
Shanghai Media Group is strongly supported by its municipal and national supervisory authorities, ready to open itself to private equity, and already the obligatory gateway to China. It could also become the main international development tool of the Chinese media and Beijing’s “soft power” (some call it “media geopolitics”). Its young president – dubbed “the Chinese Mogul” by the American media – has the economic and political means to fulfill his ambitions. At age 42, solicited by the global media world, recently appointed at the board of directors of WPP, the largest advertising group worldwide, Li Ruigang also has time on his side!
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10 Years of Partnerships


T: Technology   C: Content F: Finances
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Chinese TV - Key Figures

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References

Richard SIKLOS, “With a Mogul’s Touch, a Chinese Media Man Connects to the West”, The New York Times, 16 January 2006.
 
Don LEE, “Shanghai Media Group Blazes Trail in China’s Fledgling Market”, The Los Angeles Times, 13 May 2006.
 
George CHEN, “Shanghai Media plans English news channel in China”, Reuters  18 September 2007.
 
“SMG Launches New Channels”, CRI English, 30 January 2008.
 
“SMG Launches ENJOYOUNG multimedia brand”, On Screen Asia, 1 August 2009.
 
David BARBOZA, “China Yearns to Form Its Own Media Empires”, The New York Times, 4 October 2009.
 
“Chinese mass media building int'l communication capabilities”, xinhuanet.com, 31 December 2009.
 
“China Launches First Media Industry PE Fund”, Chinaventure, 22 June 2010.
 
 
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Translated from the French by François Couture
Photo credits : Pierre-Yves Lochon
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  • 1. The New York Times, 16 January 2006
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