Advertising and Media in China

At the 52nd Annual ARF Convention held in New York on March 20-22, 2006, the highlights came from a contingent of researchers from China.  For the record, here are the speakers from China and the titles of their speeches:

In the below, I am producing my notes on the talk by Professor Hu Zhengrong.  Please remember that these are the notes that I took, and therefore they may not accurately represent Professor Hu Zhengrong's intentions.

The talk began with an explanation of the Chinese media structure and market.  For people from the western world, this will seem very strange.  The central fact is this -- the media outlets in China are state-owned organizations.  In other words, there are no privately owned media outlets.

The media outlets can be characterized in terms of the government-level by which the ownership is effected.  At the top of the pyramid are the national media outlets (such as CCTV, People's Daily, China Youth Daily, etc).  Then there are the provincial media outlets (for provinces such as Guangdong, Hunan, etc).  Then there are the city media outlets (such as Shenzhen, etc).  And then there are the small county/district level media outlets across the country.  These media outlets function independently of each other (that is, People's Daily operate independently of Shenzhen Economic News, etc).

Different government authorities organize different media sectors.  Here are the government authorities which control the five media sectors:

- State Administration of Radio, Film and Television
- State Administration of Press and Publication
- Ministry of Culture
- Ministry of Information Industry
- State Council's Information Office

The domain of the first two authorities should be obvious.  The Ministry of Culture supervises performance arts, etc.  The Ministry of Information Industry oversees telecommunications, mobile telephony, etc.  The State Council's Information Office oversees online media and the Internet.

The above structure describes the lines of authority and supervision.  In terms of financing, though, the state-owned media outlets depend significantly on advertising revenue.  There are 1,926 newspapers, 9,041 magazines, 282 radio stations, 314 television stations, 1,915 radio & television stations; 2,262 television channels and 1,934 radio channels.  Please note the distinction between channels and stations -- CCTV is a television station with multiple frequency channels (CCTV-1, CCTV-2, etc).

In terms of users, there are 111 million Internet users, 400 million mobile phone usesr, 4 million digital television subscribers and 267,000 IPTV users.  The number of digital television subscribers has been soaring across the country in recent months.

At the beginning of the reform, there were fewer media outlets and they depended almost exclusively on state subsidies or consumer purchases (e.g. newspaper subscriptions).  In recent years, the percent of subsidies has dropped down to an average of fewer than 10%.  Advertising is now the principal source of revenue for the media outlets.

The media outlets are also going a phase of conglomeration, as multiple media outlets become grouped under the same organizational umbrella.  An example might be the Southern Daily group, which has entities such as Southern Daily, Southern Metropolis Daily, Southern Weekend, Southern People, etc.  These larger conglomerations are then able to raise capital through overseas stock market offerings (such as in Hong Kong or NASDAQ).

However, the conglomeration process does not follow the logic of economy of scale.  First of all, the state has erected cross-regional boundaries.  Thus, the Southern Daily group cannot easily start a newspaper outside of Guangdong province (note: an exception was Beijing News, which is a joint venture between Guangzhou's Southern Daily and Shanghai's Guangming Daily).  Second, the state has erected cross-sector boundaries.  For example, CCTV is not allowed to operate newspapers.  In other words, there is no equivalent to multimedia empires such as Time-Warner or Viacom.

At the core of any 'business decision,' the key concept will always be about maximizing political function, instead of maximizing market share or return on investment.  This is what makes the Chinese media 'market' so different from other markets in the world.

There is now a set of reforms planned for the cultural system.  Roughly speaking, the cultural system will be partitioned into two main sectors: those that are public service units (namely, those units engaged in providing 'hard' news (politics, current affairs and commentary)) and those that are business units (namely, those units engaged in providing 'soft' news (entertainment, sports, fashion) and other types of entertainment and services).  The various sector regulatory agencies will be merged into a single Bureau of Culture.  The changes will not happen overnight, and may take more than three years to implement step by step.

The Bureau of Culture will retain control on ideology, personnel and policy, but the forces of marketization will rule in the operation of business units.

The most urgent problem in Chinese media today is the shortage of content.  Television stations are only about 70% self-sufficient with respect to contents, and so the other 30% has to be filled in by exchange with other television stations or program suppliers.

The other major problems are
(1) the lack of market research information, or the lack of knowledge to use what is in existence
(2) the lack of management skills appropriate for a modernized media outlet
(3) the lack of content creativity as the pool of good independent creative talents is very small
(4) the lack of business models on how to run a successful media outlet

Within the same session, Paul Wang from CSM Media Research showed some hard media data.

In terms of advertising expenditures, the markets shares are 76% for television, 16% for newspapers, 5% for outdoor, 2% for magazines and 1% for radio.

Historically, the three decades from 1949-1978 can be characterized as a long political revolution.  From 1979-2008 (the year of the Beijing Olympics), the three decades can be characterized as a long economic revolution.  Two covers from TIME magazine were shown: Deng Xiaoping at the start of the economic revolution and Super Girl Li Yuchun most recently.  When asked, Wang respectfully declined to speculate on the political implications of the Super Girl contest (and it would have been speculation).

The hot topics in the Chinese media landscape are the explosive new media: mobile television (subways, buses, taxis, etc); mobile telephones; public place LCD TV (in elevators, subways, gas stations, airports, shopping malls, etc); sports sponsorship; branded entertainment; etc.  These new media are characterized by sophisticated delivery mechanism, highly targeted audience, explosive penetration and revenue growth.  The example of Focus Media was offered -- US$5 million in revenues but a NASDAQ valuation of US$2.5 billion.  What will Focus Media do with all that capital?  There aren't enough buildings left to install LCD TV's!  So it is likely that Focus Media will diversify into other forms of businesses.

Were these good speeches?  Well, if you are a Chinese media expert, there is nothing much new here.  However, this is a different but very important audience.  Here are the captains of industry of those multinational marketing giants (Procter & Gamble, McDonald's, Pepsi Cola, etc).  But their level of understanding of China is not very high.  The luncheon keynote speaker Jun Kao offered a couple of examples of culturally inappropriate advertisements -- the paint ad with the sliding dragons and the Japanese automobile ad with the saluting Chinese lions -- and this audience was filled with "ooohhh's" and "aaahhh's."  

The underlying theme of both these talks is the rapid speed of growth of advertising and media in China.  In the luncheon keynote speech, Jun Kao spoke how about how the  advertising industry has been struggling hard to keep up with the actual economic development.  Within a few short years, China was able to achieve what others took much longer to attain.  For example, I can sense that they think that they understand television and now they have to grapple with the new media (especially mobile telephony).  Here, it will do to remind people that the first channel planning tool appeared in the United States in 2005 (see The Latest Advertising Industry Buzzwords: Channel Planning).  But already, the Chinese are facing up to the same set of problems and in fact quite ready to move beyond them (e.g. my 3G mobile telephone is crippled in New York City and this shows how far ahead Hong Kong is from New York City).

In the luncheon keynote speech, Jun Kao offered an example of the tobacco industry.  Twenty years ago, the most expensive cigarettes were American imports.  Today, the premium cigarettes are Chinese products.  There was a cultural shift in that cigarettes became a gift product rather than consumption product, and it is simply inappropriate to give foreign cigarettes.  During the Chinese spring festival, a carton of Chinese premium cigarettes can command as much as US$300.  So the Chinese can easily move down a completely unanticipated and irreversible path of development if the western marketers were complacent and arrogant about their so-called inherent superiority.