China’s media industry: internationalisation, innovation, and challenges

Michael Keane

 Centre Fellow

Australian Research Council Centre for Excellence in Creative Industries and Innovation

Queensland University of Technology, Brisbane, Australia

ABSTRACT

 From an outsider perspective China’s media organisations are protected species within a walled garden. Direct competition from within China—and particularly from international media—is limited. One view among observers in China is that if full market competition were unleashed the resulting ‘gales of creative destruction’ would result in thousands of bankrupt media institutions. While there are many advocates of greater competition within China’s media industries, few want an open playing field. This is unlikely to occur. Rigid organisational forms will continue to coexist with flexible and unorthodox business practices.

 This paper discusses the evolution of media industries from China’s first media advertisement in 1979 to Hunan Satellite TV’s much discussed reality talent contest Super Girl (chaoji nüsheng) in 2005. I briefly discuss how industry structure has evolved and the impact upon the dynamics of commercialisation. In doing this I note three evolutionary stages: the hierarchical period (—1990s), the proto-media market (1990s), and the network media economy (2000—now). This macro-perspective then moves to an examination of how enterprises make profits from media in China.

Does China have a competitive media industry? The answer would seem self-evident: 1.3 billion people in need of entertainment, enlightenment, and escapism; international companies talking up the potential ‘world’s biggest audience’; and a government keen to grow national media champions. But what sort of industry is it?  How competitive is it really? Is it profitable? Who is making money? Is it open to competition? Does it follow international benchmarks and rules?

 At present, our knowledge of China’s media industry is as fragmented as the many business practices that prevail. A lack of reliable knowledge is due to emphasis. State information control dominates discussion in most accounts of Chinese media. Industry dynamics are rarely addressed. Reports emanating from the financial and trade press, on the other hand, typically concern market entry, successes or failures of international companies in the Chinese market, and changes in government regulations.

 Stereotypes perpetrated by the international press lead to fundamental misunderstandings of China’s media reforms. The media in China are not monolithic and they are not just ideological watchdogs. A range of industries—media, creative, cultural, content, copyright and service industries—are converging. While the idea of ‘media industry’ has yet to be fully endorsed by the Chinese Communist Party, particularly in relation to ‘mass’ broadcasting, the media industry has found support within academic and business communities. It has particular relevance to the survival of ‘narrowcast’ media, which are mostly privately invested.

 A key issue is how responsive the old media industries are to innovation. In other words, will ‘actors’ within the Chinese media ecology break out of non-competitive low-cost business practices?  Sunk costs are low in Chinese media and revenues gained from rights are insignificant compared to ancillary income sources. Will a vicious circle of dependence on low-cost models continue to undercut the potential of China’s media industries? How do Chinese media make money, if not through the exploitation of rights? Furthermore, given that the global media bases its profitability on rights, what prospects are there for some normalisation of copyright compliance? Examples come from television, film, animation, print media and digital media.

 In the paper I suggest that new media is providing new commercialisation models, assuring greater returns on rights, while challenging the hierarchical models of industry organisation that have largely prevailed since the 1950s. Michael Porter’s idea of competitive advantage, although criticised in many places, provides useful frames of reference. Porter initially sought to understand industrial environments, including fragmented industries, emerging industries, industries undergoing a transition to maturity, declining industries and global industries. All of these descriptions apply to China’s media industry as it attempts to compete while serving its public responsibilities. In particular Porter nominated cost leadership, differentiation and focus as types of competitive advantage.[i] I shall return to these themes later in several case studies of innovative practice.

 Media industry: fundamentals

 The usual way to approach the media industry is via media sectors: broadly speaking, print based products (books, newspapers and magazines) and electronic products (film, TV, radio, music, Internet and mobile content). Media industries first and foremost provide content, and so we often hear the term ‘content industries’. This content may be news, entertainment, sports, or data. In most models, and in most countries, content is provided for a price to audiences or readers: sometimes it is free, and sometimes it is premium, charged according to perceived market value. The most important idea about the media industries, as distinct from the automobile or the textile industries is that media content is a public good; in other words, it is not used up in consumption and it can be reused without incurring additional production costs. Also, the success or failure of media industries depends on the quality of the information or the program. Is it compelling content? Does the story sell newspapers?

 Media is risky business, compared with manufacturing components or widgets. Most media rely on advertising. Demand is uncertain, chance often plays a role in success, and differentiation is important when similar media products are offered at the same price. But because of high sunk costs many media products are based on formats and genres. Consequently, under-capitalised media industries tend towards conservatism—following the leader, copying, making sequels, prequels, spin-offs and reversions. When media is public funded, as in the case of public broadcasting, this is often justified as a mandate to take risks and be innovative in the context of systemic market failure. For all these reasons the media are atypical industries. But, for a number of reasons more to do with ideology and national stability, the fundamental ideas of competition and risk do not carry as much importance in China. Until recently, China has valued content for its use value rather than its exchange value (to use a standard Marxist line).  

 As China moves steadily forward on its road to modernisation, adopting and adapting global best practice to the realities of a chaotic and fragmented marketplace, it seeks to engender new processes. The acceptance of the importance of new processes is evident in the state-sponsored concept of innovation chuangxin (创新)—literally creating new ideas.[ii] In the broader national industrial context, innovation is a necessary antidote to the duplicative excesses of socialist planning. In relation to media industry competitiveness globally innovation is a critical success factor with ‘offline media’ such as newspapers and magazines losing readers (and users) to online media. The relationship between producers and end user is also becoming more direct and personalised in the online world. We see evidence of this trend in China. China’s young generation have less time for watching television and little need for newspapers. New online media are satisfying their needs.

 The model in which the media has sold the value of its audience to advertisers (relying on industry supported accounting techniques) is changing globally as subscription services, multi-channelling and niche media products displace mass media. In China the viability of mass media (television, popular magazines and press) relies primarily on income derived from advertising. In online news and entertainment media, however, subscription models are emerging, supplemented with ancillary merchandising. These new industries have the potential to renovate the non-competitive landscape of traditional media. Despite these changes, it is important to emphasize that media businesses essentially deal in human attention. As Philip Napoli points out, ‘human attention represents a much more abstract, elusive and intangible product than, say, steel, insurance, or legal services’.[iii] Producing content that consumers want in the face of stiff competition from Taiwan, Korea, Hong Kong SAR—and even the U.S. media—is a key to a competitive Chinese media environment. If innovation is the mantra of competitiveness in the age of media volatility, how does China innovate in its media?  Where do we find innovations in China’s media industries?

 
Media industries: China

 In the early 1990s the media industry concept first captured attention, a result of Chinese communication scholars’ exposure to translated academic accounts of capitalist media. Of course, a Chinese media industry existed prior to that time. Programs, books, and newspapers were sold to consumers and advertising was introduced as a basis for such transactions in 1979. But the stipulation that the media were the mouthpiece of the Chinese Communist Party prevailed, overruling reformist aspirations. In 1993 the Beijing Broadcasting Institute research journal Modern Communication (xiandai chuanbo) published a controversial article ‘Who is the god of television’, in which the author raised the question of why the media industry had hitherto escaped academic enquiry in China.[iv] The article suggested that prior to the initial stage of commercialisation of China’s television during the mid-1980s, China’s ruling elite—a stratum representing 2 percent of the total population—had assumed a mandate to decide what was appropriate television consumption for the remaining 98 percent. The author went on to say,

Before the beginning of the 1990s, the Party and the government was undisputed god of television due to the fact that it provided almost all of the economic support for television. . . . Today mass media has become the central concern and it is as if the masses are the new god. But just who are the masses of the mass media? [v]   

By the mid-1990s the number of television stations in China had climbed to over three thousand and the viewing audience had reached almost a billion. Consumers had access to multiple channels at cheap prices due to the master access television (MATV) system that allowed distribution of cable signals through apartment buildings. The resultant economies of scale resulted in a supply of cheap programming. In the print media, state funding was removed in 1992 with all but a few flagship newspapers forced to become self-reliant.

 During this decade the economics of media became a legitimate topic, accelerated in 2001 by the nation’s entry into the World Trade Organisation. Media was business, even though most media businesses were state owned, subject to censorship, and insulated from market forces. Since 2003 the Chinese Academy of Social Science has published the Blue Book of China’s Cultural Industries; and this has been supplemented by a Blue Book on the Media Industry since 2005. The media industry reports contain purportedly fine-grained analysis of industry trends and consumption, although there is a tendency to provide a mass of statistics that suggest that sectors are experiencing boom times, when in actual fact, most media outlets are far from profitable.

 Accounts from the Chinese Academy of Social Sciences stress that the media industry is embedded within the reform of China’s cultural industries (wenhua chanye). The cultural industries were designated into existence in 2000 and would seem logical to include the media. However, the important point is that the old mass media remain under tight state control and are barred from foreign investment. Periodicals, magazines, animation, video games, mobile content applications and SMS are diversifying their market scope, targeting niche markets more than mass consumption, and finding ways to respond to their most valued demographic, the urban youth market.

 The new industry perspective adopted by the Chinese Academy of Social Sciences places an emphasis on economic value, the media professions, employment within the media industry, and the value-adding functions of media industries. This four-tier classification system was approved on 6 January 2005 (wenhua ji xiangguan chanye zhibiao tixi kuangjia). The core media industries: journalism, books, newspapers and periodicals, audio-visual products, electronic publishing, radio, television, and cinema are, by this reasoning, core cultural industries. Non-core cultural/ media industries include the Internet and advertising.[vi] If we accept this logic, we note that the core industries in China are those whose business models are normally based on rights. In the normal sense of rights, these include not only a legal piece of paper defining who owns what, but also the concrete output resulting from a creative process—a book, a script, an article, a film tape, a digital file. However, the dependence on rights normally associated with these core media industries, is lacking in China. Instead media businesses, both state-owned and private find other ways to make money.

 The actors in China’s media reforms

 Broadly speaking we can address media reform in China through three historical frames: the period of formal hierarchical media production (prior to 1978), the evolution of the media industry (1979—2001), and finally the advent of the networked economy (2001--). Each of these periods reflects certain basic socio-economic and political attributes: the types of order envisaged, the behaviour of agents, mechanisms of operation, and types of overall co-ordination or governance.[vii] While the following section addresses each historical frame, I do not attempt to present a linear history of China’s media or to map a comprehensive narrative of policy reform. The emphasis rather is on process innovation; for instance, how media firms develop business models and utilize alternative practices to address change or to deal with systemic impediments to profitability. In China during the past two decades of reform the major impediment has been regulatory bottlenecks that constrain content creation and efficient distribution. This will become more apparent in the penultimate section that looks at several case studies.

 This truncated account of reform utilises a systems-level evolutionary perspective. Systems-level characteristics concern structure, dynamics, and performance.[viii] Structure refers to divisions of labour and organisational boundaries; dynamics concern how different actors engage across boundaries in order to incubate and develop ideas; while performance accounts for the effects of structure and dynamics on the quality of outputs. While the S-D-P model initially suggested unidirectional causal effects, more recent accounts have pointed to the importance of strategic interactions between firms, typified by what many now call the ‘creative industries.[ix]

 
(i) The hierarchical period

 Print, cinema, and broadcasting served China’s revolutionary cause to great effect during the Maoist period. These ‘traditional’ media were able to operate with great efficiency due to several factors. First, there was an absence of major structural change or disruptive technologies during the early period of media expansion (1930s – 1990s). Second, resistance to change was reinforced by excessive vertical integration and bureaucratic control over who was allowed to be a media professional, the content that was allowed to be disseminated, and the form it was allowed to take. Third, media industry scope was domestic, directed at an imagined national community, identified as ‘the people’ (renmin) or the ‘masses’ (renmin qunzhong).[x]

 The hierarchical period overlaps from the Maoist era well into the reform era (1979—2000) presided over by Deng Xiaoping. In differentiating between the command era and the reform era, albeit in relation to the macro-economy, Xielin Liu and Steven White note three generic layers of ‘actors’: primary and secondary actors, and institutions.[xi] During the command era the interaction among these layers impacted mostly in a negative way upon the dynamism of the economic system. The primary actors are frontline players. In the media industries these include producers, writers, developers, animators, production companies, end-users (audiences), training institutions (such as the Chinese Communication University), TV stations (CCTV, Hunan Satellite TV), media groups (Shanghai Media Entertainment Group), and print organizations (nanfang zhoumo (Southern Weekend). Secondary actors are organizations that affect or influence the behaviour of the primary actors. In most instances these are organisations responsible for planning and mandating particular behaviour. For instance, the State Administration of Radio Film and TV (SARFT) directly influences the kinds of material viewed on Chinese television; the Ministry of Information Industry (MII) provides licenses for digital content industries; the State Administration of Press and Publications (SAPP) regulates the print media. The third level is the institutional level, and this refers to ‘practices, rules, and other disembodied organisations that guide or constrain actor’s behaviour’ (Liu and White 2001 1005). Such institutions include practices endemic to the system, such as propensity to cooperate rather than compete and to imitate rather than innovate.   

 Liu and White’s analysis is useful in examining China’s media industry reforms. Indeed, the most noteworthy disruptive effect on competition in the past was the structure of media organisations. The hierarchical order applied across many sectors of the command economy but was arguably most closely supervised in the media. Divisions of labour and administrative boundaries for media distribution existed under the former planned economy, continuing well into the 1990s. These resulted in efficiencies and rigidity. People were appointed to jobs not necessarily on the basis of skill, but because there was a need to fill positions. Appointment decisions in the media industries were often made by bureaucrats far removed from the production process.

 In addition to the perfunctory division of labour and administrative boundaries, structural duplication was widespread, a direct result of the political need to replicate designated models media production throughout China. Each province and autonomous region would have its own Propaganda Department, its own State Administration of Radio Film and TV Bureau, as well as other regulatory authorities, all guided by the central body . The dynamics of innovation were subsequently reduced because work units (Chinese production units) were unable to compete across organisational boundaries or cross into different media—key determinants of the success of global media. Nor were there always clear divisions of responsibility. What Lieberthal has termed ‘fragmented authoritarianism’ led to regulatory profusion, and often confusion.[xii]    

 With the benefit of hindsight and lessons learnt from international joint venture companies China’s media policy makers now accept that the most negative outcome of the planned system was performance criteria. Prior to the 1990s producers, artists, and writers produced what was required by political masters with little attention to economic efficiency, sales, ratings, and reader/user satisfaction. From the 1940s to the early 1980s the media were conveyers of messages from the Chinese Communist Party to the broad masses. In every sense this was a one-to-many model of media dissemination. Propaganda was directed towards inculcating values of collectivism and egalitarianism, rather than individual enterprise.

 
(ii) The proto-market period

 During the 1980s gradual media reforms began to reshape the rigidity of the hierarchical model into different configurations. Decentralisation of administration,[xiii] led to a proliferation of primary actors: TV stations, print media, and schools of journalism. While the mouthpiece principle remained constant, the reality was that politicisation of content increasingly alienated audiences who were tuning to imported popular culture—television, music and novels. Standards of living were rising, especially in the bigger coastal cities, and an increase in people’s mobility saw the emergence of travel journalism supplements and magazines dedicated to lifestyle.[xiv]

 Fundamental distinctions began to emerge between the official media and new actors financed by local capital. The official media were state subsidised and were about the business of propaganda. Officials within industry development portfolios of China’s regulators (SARFT, SAPP) quickly realised that propaganda is not a good business model—except in times of crisis or nationalistic celebration. Whereas in the previous decades the official media were mainstream by default (they had no competition), by the late-1980s principle Party organs were suffering the fate of diminishing readerships. And while most media received support from the state, mostly in infrastructure, or in the case of television to produce approved historic television dramas, by the time Deng Xiaoping made his much publicised southern tour in 1992, ushering in the socialist commodity economy, the media were embracing the market. Television had already seen the effect of blockbuster television dramas in 1990 with the 50-episode serial Kewang (Expectations). In 1991 the theme of the commercial media markets found expression in the popular TV serial Scenes from an Editorial Office (bianjibu de gushi), a satire on the clash of values between middle-aged propagandists and young entrepreneurs. 

 A legacy of the prevailing system of structural duplication was that many primary actors were unsure of how to be competitive, how to break out of the dependencies of the command system, and how to exploit the value inherent in creative content (copyrights). Nevertheless, the early 90s were heady times for many in China’s broadcasting and print industries. Following the post-Tiananmen period, a period of innovative programming ensued in the early 1990s, a kind of mini-flowering of diversity. Then normal service resumed and the state clamped down on risky programming and tabloid journalism with the result that writers and producers more often sought to convey their ideas through historical allegory rather than through direct criticism.

 
(iii)  The network economy

 One way of understanding change in national media industries is to focus on the nature of linkages, alliances and networks. Perhaps the key to understanding China’s current wave of media reforms is the shift to cross-geographical and cross-platform alliances. The media are entering into new forms of associations, including mergers and licensing arrangements with other media and telecommunications providers, as well as joint ventures with international companies (subject to approval on a case by case basis). Nevertheless, the media remain legally state-owned and operated, even if the level of state support has diminished, and in many instances simply includes the provision of licenses. More entrepreneurial practices are emerging, even in older conservative media like television.

 The complex Chinese mediascape has for some time been undergoing a transition from state-funded institutions (shiye) to profit-seeking industries (chanye). The shiye model describes the public interest function of media in China, and can in some respects be compared to the public broadcasting systems that have long existed in Europe, UK, Japan, Canada and Australia. Public broadcasting was adopted in these countries for a number of reasons, ranging from a desire to maintain control of content in the name of nation building to the more pragmatic concern with limited bandwidth; that is, if there were to be limited entrants, it was necessary to have a statist voice. In Western markets the core argument for public broadcasting is about the public interest maintaining a plurality of voices; in China the argument is also expressed as public interest, but as one of guiding and educating the masses, who are generally regarded as ethically incomplete.

 In reality, the situation in China is more complex and needs to be viewed within a macro-economic frame. Provinces and municipalities have been asserting their autonomy for more than a decade in range of industrial settings (as other speakers attest). Despite the central supervision of media industries we observe a greater propensity to innovate the further from Beijing. We also note a tendency to imitate as actors in each province, city or locale reproduce successes. However, the regional nature of production and distribution is beginning to break down as economic logic dictates that returns on investment are greater in the national market. Network effects dictate that services become more valuable as more people use them, and this applies to media reform in China as organisations and companies attempt to break out of restricted markets. For this reason the latest stage can be called a network economy. The integrated hierarchical network of the past regulatory regime was controlled by a single regulator (for example, the SARFT in broadcasting, the SAPP in print media). In the past several years, coinciding with the profitability of new media, this hierarchy has fragmented into a loose and often interconnected web of networks run by different operators with control shared between local authorities (province, city). While the core purpose of the media industry is public enlightenment (in accordance with government supervision of content), the reality is that media institutions are separating their administration into shiye and chanye, that is, both public service and commercial self-reliance. The more money that comes from commercial media, the more likely the media organisation is to set up a network of associated enterprises.  

  
Making money in the Chinese media

 The question of how money is made from media industries in China is convoluted, as the follow examples will demonstrate. The black market absorbs much of the available revenue, more so in analogue and ‘manufactured’ forms of media. In most developed media economies content generation begins with the core IP, for instance the creative work of authors, journalists, producers, songwriters, or independent artists. These rights are then sold based on a variety of deals (up-front fee, share of revenue, license fee, package deals and revenue sharing). The next stage is packaging, whereby the final product is produced (the book, magazine, TV program etc). The pricing principle then determines how this is marketed. Options include cover price, free to air TV, subscription, or free distribution. Finally, the delivery to the end user is mediated by distributors, marketing agencies and advertisers.[xv]

 The content generation and distribution process in China is far removed from this model. First, the notion of exclusivity in relation to ownership of rights is widely ignored and misunderstood. Copying prevails and piracy undermines returns on creative investment. A disincentive to produce original content is a legacy of the role of cultural worker (wenhua gongzuo zhe) whereby the artist, writer or journalist was employed by the state. The emergence of independent artist as entrepreneur is a recent phenomenon in China and there have been a number of instances, particularly in book publishing where authors have sued, or attempted to sue over alleged copyright infringement.

 
Book publishing: second channel models

 The principle of authors’ rights is probably most observed in publishing due to the practice of manuscript fees allocated to authors, usually for the number of characters produced. With the market success of popular authors like the Beijing writer Wang Shuo in the late 1980s and early 1990s, manuscript auctions were a short-lived phenomenon. Leading writers offered their manuscripts, TV drama scripts, and screenplays to bidders. [xvi]Following these breakthroughs, royalty payments of between 8 and 10 percent became more common.

 However, it should be pointed out that despite a massive volume of output, the book publishing industry in China remains incredibly protected. Publishing relies on book licenses (shuhao), which are effectively permissions to produce and market. These are dispensed to state owned publishing houses by the General Administration of Press and Publications. Apart from large publishers that have the resources to manage all aspects of the value chain, most publishing houses rely on an outsourcing model. Editors within publishing houses can sell their book licenses or negotiate services with private unlicensed workshops (gongzuoshi). These are often run by editors working in the state owned sector. While these so-called second channel activities provide mechanisms for the rapid generation of content, there is a lack of accounting in the industry. Publishing houses remain unprofitable, propped up by state funds. In fact, the most profitable and accountable form of book publishing remains academic publishing. 

 
Film and TV: drama studios, Cellphone and Supergirl

 New models are also being tested in the television and cinema market. In the former, advertising time has been the central model in lieu of paying license rights. In other words, the broadcasting station provides the producer of the television program an amount of time within the broadcast period. The producer can then ‘fill’ that time with advertising to recoup their investment. However, larger networks like China Central Television (CCTV) and Shanghai TV are increasing the value of their cable and pay-TV channels, not only by buying more diverse offerings, but by investing in co-productions, made for television movies, and new dramas. In 2004 CCTV established a new initiative for the production of television drama. Four producers, Yu Shengli, Lian Zhenhua, Zhang Lujie, and Wu Zhaolong were assigned a ‘studio’ (gongzuoshi) under the umbrella of the Television Cultural Development Company.

 This initiative was designed to incubate and produce new and interesting quality television drama, with an emphasis on independence from existing marketplace practices such as bartering content for advertising space, the constraints of trading exclusive rights to CCTV, or having to include product placements for a range of sponsors. The studios comprise a producer, a studio president/ chair, and a person responsible for scripts. What we can observe is a move to professionalize production by integrating international practices. The objective of a studio approach is to increase the quality of the product so that rights can be sold rather than traded for advertising time. Furthermore, there is no obligation on the part of the producer to sell exclusive rights to CCTV if more lucrative offers are made. This development increases pressure to clarify rights management issues, particularly in the context of co-production deals.[xvii]

 Investors in the first of these studios include Huayi Brothers, whose production investment company, Huayi and Taihe Film Investment Company, produced Feng Xiaogang’s 2003 hit movie Cellphone. Feng Xiaogang was associated with the successful television dramas Scenes from an Editorial Office (bianjibu de gushi 1991) and Beijingers in New Yolk (Beijing ren zai Niuyue: co-director 1993). These productions opened the door for new investment models such as product placement. In 2003 Feng’s hit movie Cellphone (shouji) adopted a novel rights strategy, one which may provide a way forward for film production finance in the face of heavy piracy. Cellphone received investment finance from a number of sources with major contributions coming from Motorola, China Mobile, BMW, and Mtone (a Chinese internet content provider). Sponsors received product placement and visible recognition in the film promotional messages. Music copyright delivered 8 million I2MB. In addition to securing financial support, the production company, incidentally the advertising agent for China Mobile, sought to ensure returns on investment by working with a Guangdong-based DVD maker to produce cheaper legitimate versions in efforts to limit piracy.[xviii]

 State ownership of media enterprises has over time created a culture of non-competitive risk-averse behaviour among Chinese television networks. However, since 1999 stock exchange listing has become a means of raising quick finance. The most successful commercial venture to utilise the stock listing model of raising finance has been the Hunan Television Broadcast and Media Company (Hunan dianguang chuanmei) network in southern China. Hunan TV, a provincial station, controlled 75 per cent of in-province advertising revenue by the late-1990s and subsequently used this advertising base to set up a shell company and list on the Shenzhen Stock Exchange market. The company issued 50 million A shares before its float on March 25, 1999. It was the first Chinese media company to incorporate private capital from the stock exchange into its funding structure. The stock issue raised some Rmb459 million.[xix]

 The Hunan network has grown a reputation for being among China’s most entrepreneurial content providers. In October 2005 Hunan Satellite TV in southern China broadcast the final instalment of its hit reality talent quest Super Girl (chaoji nüsheng).[xx] The show was a variation on—indeed, some would say a clone of the international Pop Idol format.[xxi]The economic benefits accruing from Super Girl make interesting reading for those trying to work out how to make money from media in China. Voters were charged one yuan RMB for the privilege (eight yuan equal one U.S. dollar). In the semi-finals of Super Girl each contestant received an average of three million votes. Although there was a limit of fifteen votes per day for each phone number, fans overcame this ruling by multiple voting on parents and friends’ phones.

 The company responsible for marketing the performers and aggregating ancillary rights such as merchandising, concerts, CDs, and guest appearances in shopping malls was the aptly named yule baozhuang gongsi (The Entertainment Package Company). It earned RMB 78 million (USD9.7 m.) in revenue. Telecom companies China Telecom, China Netcom and Telecommunications Operations Company recouped RMB 9 million (USD1.12 m.), receiving fifteen percent of each SMS call. The other eighty-five percent from SMS was apportioned among Hunan Satellite TV, the producers and other interests. Altogether Hunan Satellite Television, earned RMB 68 million (USD8.46 m.).

 The producer Shanghai Tianyu, a private company invested in by the Hunan Group, reaped RMB 27.5 million (USD3.42 m.). Other big winners were the Internet Service Providers, Tom.com and Zhangshang Lingtong, who provided constant updates and gossip to SMS subscribers. They recouped RMB 21 million (USD2.61 m.). A further one million was earned by companies who advertised on dedicated Super Girl web and chat sites.[xxii]  The biggest winner, however, may well have been the show’s sponsor, Mongolian Cow Yoghurt, whose income from its products associated with the TV show totalled RMB 550 million (USD68.4 m.).     

 Hunan Satellite TV’s reality show is one of several highly profitable media experiments in China. It confirms without doubt that the Chinese media have a commercial orientation. Global business practices are providing valuable lessons in prosperity for China’s entrepreneurs. Indeed, experiments with reality TV—and in particular what media industry analysts refer to as shift ‘from inspiration driven to marketing driven content’—is a key feature of the low-cost Chinese media market. Indeed, the Super Girl experiment with reality programming is not new in Chinese TV. In 2004 Hunan’s Satellite’s sister Economic Channel had mounted a less than successful Chinese rendition of Big Brother, soporifically entitled Perfect Holiday (wanmei jiaqi). The previous year the same producer had attempted an ambitious version of Survivor, produced by Sichuan TV, and set in the foothills of the Himalayas. Incorporating sixteen regional stations in the production, this epic was called Into Shangrila (zouru xianggelila).[xxiii]

 
Animation: China’s Blue Cat

 In the mid-1990s the Sanchen Cultural Development Company was the beneficiary of central government investment targeted to develop youth programming in the face of perceived threats to the morals of Chinese youth from international media including Disney. In 1998 the Sancheng Audio-visual Product Network was established to operate an online audio-visual product hire service. The company compiled a catalogue called The New China Stage: Selections of Audio-visual Art (xin zhongguo wutai - yingshi yishu jingpin xuan), which was eventually edited into the Sancheng Audio-visual Archive. In 2000 Sanchen and Hunan Eastern Cartoon Cultural Company established the joint-based Hunan Sanchen Cartoon Archive Development Limited Company, and entered into the animated cartoon production business. Their product was Mischievous Blue Cat’s 3000 Questions (lanmao taoji 3000 wen). With the distribution support of television stations on the lookout for content approved by the national government the ‘blue cat’ soon became a household name. The Sanchen Cartoon Group became one of the leading youth programming content providers in China.

 Media industries operate in three markets: the content market, the advertising market, and the end-user market. In the first of these markets producers offer their content to stations. In the case of Sanchen, their content was the ‘blue cat’ and the ‘buyers’ were hundreds of TV stations in China. The end users were initially the consumers of the program—the youth of China. However, having exploited China’s television stations to build a loyal fan base for the cartoon character, Hunan Sanchen then experienced difficulty forcing stations to pay license fees to broadcast. Production costs were between RMB6000 and 8,000 per minute while the average fee paid by stations was between 5 and 10 yuan per minute.[xxiv] The alternative revenue source was advertising. Stations would allow Sanchen to promote Blue Cat merchandise in the program. This proved a much more lucrative model and the Blue Cat logo was quickly patented. The company then expanded their merchandising operations, extending the brand from audio-visual products to books, stationery, toys, clothing, shoes, hats, food products, beverages, cosmetics, bicycles, and household electronic goods.

 Altogether more than 6,000 items carried the ‘blue cat’ logo and the company quickly set up 14 specialist companies and 11 regional franchise companies to administer more than 2400 ‘blue cat’ outlets. This success established a new financial model for China’s cartoon and animation industry. By February 2003 the company had earned RMB60 million, but this success brought with it imitation of its brand and numerous fake ‘blue cat’ products. The company’s business plan of diversifying without necessarily differentiating further reduced their brand equity and focus. Having advertising spots (suipian guanggao) in lieu of program license fees was beneficial in so far as it provided value added for the expanding array of product lines. However, an inability on the part of Hunan Sanchen to control the practice known as ‘zapping’—replacing the company’s product advertising with local advertisements—led to recriminations. There were claims that Chinese TV stations were willing to pay license fees and observe legitimate industry practices with international animation companies while undercutting the value of Chinese champions such as the Blue Cat franchise. 

 
Print journalism: Caijing

 The high-profile financial magazine Caijing illustrates a different approach to advertising and marketing. It also demonstrates the important role of best practice if Chinese publishers aspire to build a credible international ‘brand’. In this sense, it operates according to an international model of practice while still maintaining strong ties with Chinese readers.

Literally ‘finance and economy’, Caijing is perhaps best described as a Chinese Economist, featuring macro-economic analysis of China’s market as well as in-depth reporting on government regulations and their impact. It also sells or exchanges information with Asian Wall Street Journal, South China Morning Post, Bloomberg, and Reuters. The magazine format was developed by an internationally educated editorial team—headed by managing editor Hu Shili—and is wholly owned by SEEC Media, a company incorporated in the Cayman Islands and listed on the Hong Kong stock exchange. SEEC Media is itself a subsidiary of SEEC Holdings, a group that harbours ambitions to become the largest magazine group in the country. According to the group’s Chairman Wang Boming, SEEC plans to expand its magazine portfolio from the existing five titles to between 30 and 50.[xxv]

Caijing’s clients include foreign companies coming into the China market as well as local business readerships—what its marketing manager describes as ‘a blue-chip’ market segment. The majority of Caijing’s readers are male and occupy positions of middle to high management; many are top executives while others are government officials. Forty percent work in financial industries such as insurance and investment banking. Publicly traded companies are one of the magazine’s principal readerships; in this instance Caijing is a trusted provider of knowledge about pitfalls and corporate governance issues. Caijing’s strategy has been to establish itself as a trusted source: both by developing relationships with government so as to maintain political credibility, and to provide quality audited information to the market.

 Caijing does not publish any ‘soft material’: that is, it doesn’t have a lifestyle section. This decision to avoid lifestyle, despite the obvious advantages for advertising sales, is part of its branding strategy—to be seen as a quality provider of financial analysis.[xxvi] In order to cement its credibility with clients, moreover, the magazine is confronted by the problem of training its sales staff to honour its rate card and not to offer discounts to clients. Pitching itself to Chinese and international business is therefore problematic, with the former often expecting concessions and kickbacks in returns for buying space. For Caijing to claim ‘prize’ international advertising accounts it realises it has a task of instilling international best practice amongst its advertising salespersons while at the same time resisting the temptations to make special (guanxi) deals with Chinese advertisers.

 
Digital content: Moli Media

 Moli Media is a Beijing based digital content company. It was established by Jerry Wang in 2003 and now has twenty staff with an average age of twenty-five. Moli Media’s main venture is content aggregation. In 2003 it set up an annual event supported by Intel, initially known as the Intel creativity contest. In 2004 it became the Diggi Awards. Jerry Wang was at the time cultivating relationships with the Chinese Ministry of Culture and in 2005 the National Diggi Awards were officially recognised. In effect, from a commercial venture initiated by Intel in order to scout new talent and ideas within China, the Diggi Awards has turned into a government-supported digital film and animation competition.

 This enterprise model shows that government can play an enabling role in creative industries, even in China. The model is not dissimilar to the international pop Idol contest that has made handsome profits for Hunan Satellite Television. Moli Media establishes a network of relationships with talented developers who provide a stream of local content. While the company could have followed the normal Chinese practice of using in-house developers, it has chosen to aggregate content though an agency model. In other words, Moli Media is facilitating the Chinese developer’s community. Each winner of the contest signs a contract and contributes content. Moli then redistributes this through Internet channels, broadband, and mobile channels to consumers. In effect, the company provides infrastructure and expertise, and establishes e-payment channels to assist individuals to recoup financial gain for their creative labour.
 

Revenue: the official line and the international perspective

 As these examples show, revenue comes from multiple sources. But according to official statistics, revenue from media in China comes primarily from advertising (newspapers, TV, periodicals, radio), advertising companies, cable TV subscriptions, book, newspaper and magazine publishing, movie box office, audio-visual products, SMS messages, Internet access fees and gaming fees.  In 2004 the total recorded revenue from these segments was RMB 327 billion (USD40.7 billion), of which almost a third (RMB11 billion/ USD1.37 billion) was attributed to book publishing. Two points need to be made in relation to these figures. First, they do not contain revenue from licensing of rights. Second, there is incredible elasticity even in the most profitable sector, book publishing. Much book publishing activity is buried within ‘second channel’ activities. Within these figures audio-visual products (CDs and DVDs) account for just 0.8 percent of revenue, which is not altogether surprising considering that black market transactions account for as much as 90 percent of the market.

 While cinema, particular US big-budget productions, is saleable across cultural boundaries in Asia, profits in China are undermined by rampant piracy. The Motion Pictures Association asserts that its members reportedly lost USD718 million in revenue due to illegal piracy in 2003.[xxvii] Again these figures are extremely difficult to verify. Widespread discrepancies in the amounts of piracy parallel the high incidence of programme boosting that is evident in the ratings practices of Chinese media organisations; in other words, there is a palpable lack of transparent audited media research. The result is that international companies are often as culpable as Chinese companies of misrepresenting truth when it comes to reporting. In drawing attention to the issue of the black market, we should also note that piracy of DVD and other electronic media retards Chinese domestic industry development to a greater extent than it does the Hollywood ‘majors’, who have the capacity to absorb the damage of illegal copying. For domestic industries, piracy is poisoning their business models and their competitiveness[xxviii].

 Even taking into account massive piracy, China represents a huge market. While attempts to account for industry economics in China are hampered by a lack of a robust classification system, international trade journals and business journalism are equally complicit in misrepresenting value. Reports usually register activities of large media companies: for example between Viacom and Shanghai Television, between News Corporation and Phoenix or between China Central TV and News Corp’s Channel V. We find very little reporting in the English press of the influence of domestic programmes, genres and titles, unless these represent some form of international co-production or content licensing arrangement. Reports in the financial press also concern breaking stories and seldom provide a broader context.

 In many instances the content of stories is provided by the publicity department of the producing organisation. According to Granada, the Chinese remake of its TV soap Coronation Street series (xingfu jie) experienced a receptive market. This programme barely registered a ripple in the Chinese market. In many reports investment and sales figures don’t tell the real story—and they just don’t add up. Nevertheless, one academic claimed with the authority of Granada’s publicity that ‘The beneficiaries of British imagination now include the 400 million Chinese who watch Joy Luck Street, based on the UK’s most successful soap opera, Coronation Street’.[xxix] In fact, the only programme in China to reach anywhere near 400 million viewers, apart from the China Central Television (CCTV) national news broadcast at seven p.m. nightly, is Hunan Satellite TV’s Super Girl. The reality is that much of what is presented as evidence for success is in fact promotional spin, a perceived need to talk up the market.

 While there is recognition of the global profitability of the creative economy, industry processes rarely follow international best practice, resulting in frustration on the part of many international companies.[xxx] In general such failings not only retard the growth of national champions but also internationally exportable creative content. A report in the People’s Daily on 22 August 2005 lamented China’s ‘cultural trade deficit’, noting that in 2004 China imported nearly 1.2 million audio-visual products, the same amount as it exported. However the value of the exports was significantly lower. According a spokesperson from the Ministry of Culture, the market share of Chinese cultural products in the U.S. was close to zero (People’s Daily 22/8/2005). As I have attempted to demonstrate there are still significant challenges ahead for China if it wishes to build a truly competitive media industry.

 
Copyright: the key to unlock the door?

 As mentioned earlier, revenue is often accrued in the interface between state and non-state businesses. Audited records of sales, ratings, and consumption are rare. This differs from most developed media economies where adherence to intellectual property right drives profitability and where collecting agencies play a key role. In media businesses the dominant model until recently has been to identify high-potential creative talent and bind them to the company. This requires a high degree of sunk costs, which are subsequently amortised by generating as much revenue from rights as possible.  In China the playing field is structured differently. Less revenue is associated with sunk costs and there is less return on copyright. A vicious circle prevails. Risk taking is constrained because the system currently does not support the logic of copyright: in other words, the promotion of economic efficiency by optimizing allocation of scarce resources through the pricing system.

 In China the value of branding is uneven across the media industries. Copyright protection is widely misunderstood and barely enforceable. The intangible value of media assets is therefore difficult to calibrate. The media industry also is uncompetitive due to the fact that low-cost production attitudes permeate all elements of the economy. Notwithstanding this fact, we can identify an upward trajectory in China’s media industries in the past decade. This ‘bottom-up’ model is associated with the generation of ideas and content that can be sold in different markets through observing the fundamental premise of media, that it is a public good and is not used up in consumption. The low value model is not endemic to China. We find similar strategies in other developing countries. The key point is that China can harness the economic potential of its rich cultural resources and be more competitive in the global cultural economy if thinking and policy frameworks extend beyond restrictive understandings of innovation.

 
Concluding remarks

 China has positioned itself competitively as a low-cost producer of other countries’ creativity. Cinema, animation and TV provide the most celebrated examples of media industry outsourcing. Miller et al (2001) note the bulk of Hollywood animation is now outsourced.[xxxi]Cost advantage applies to animation factories, where low wages are paid. Even in China’s new media many developers work for international companies providing fee for service work. According to Jerry Wang of Moli Media, ‘In this model there is limited creativity’. This is the lowest position on the value chain.

 The term ‘isomorphism’ typifies the growth of undercapitalised media companies in China. The practice of copying derives from a culture of following the leader and has been a key element in the rapid growth of television industries in China. Widespread imitation is also an effect of globalization, which promotes flows of products in different continents simultaneously. When intellectual property is loosely administered, it is a simple matter to make identical or similar products and services. Cost advantage dominates product differentiation. Television formats have become conspicuous templates for replication in China, witness the extraordinary success of Super Girl and Dictionary of Happiness, CCTV’s clone of Who wants to be a Millionaire? Where this activity is unlicensed and opportunistic it exacerbates a cloning culture. And while follow-the-leader activity of this kind does provide economic benefits for under-capitalised producers, it produces diminishing returns as more and more take the same route. This applies at the level of the firm as well as the level of the country.

 Moving up the value chain from outsourcing and cloning leads to franchising. The anticipated pay-off from joint ventures with international production companies is the stimulation of local industries through training, employment, expertise, and infrastructure investment. Successful cinematic co-productions deliver economic value: attracting business and providing cultural capital through popular identification with a global commodity. In addition, co-productions and franchising drives adaptation and promotes differentiation and focus.

 The Hengdian Studios in Zhejiang take opportunities to produce a range of TV and film productions, ranging from low budget gongfu movies, Taiwanese TV dramas, to internationally financed films including Chen Kaige’s The Emperor and the Assassin. Here we see a massive complex designed to capture audio-visual production contracts. The town accommodates sets ranging from replicas of the Song Dynasty, ancient folk houses, Qin Dynasty palace compounds (The Emperor and the Assassin was shot there), streets in the Ming and Qing style as well as an old Hong Kong town. In order to attract production, governments provide a range of incentives: tax relief, waivers of location fees, equity investment and subsides. The location assets are reserves of surplus low-paid labour. For the off-shore location this race to the bottom can retard the development of local design and talent. The IP invariably belongs exclusively to the foreign company.

 One of the positive benefits of globalisation, however, is increasing trade between cultures and the ‘rediscovery’ of Asian culture. In the past East Asian content has been considered (mainly by English-speaking analysts) to be linguistically exceptional, isolated from mainstream circuits except for occasional breakthroughs and niches (Japanese pokemon, animation, Chinese 5^th wave cinema, Hong Kong action cinema)—and in the case of China, too permeated by ideology to be regarded as a serious contender in world markets. As protectionist barriers have fallen, exports have become a barometer of audio-visual industry success within East Asia. However, in contrast to culturally-specific content that brings rewards in domestic markets, export content must negotiate with tastes and expectations of foreign cultures. Export competitiveness necessarily builds on strengths in domestic production; it is valued—not solely for economic dividends—but because international success contributes to a sense of national identity. International success counters the rhetoric of protectionism; and it facilitates national industry development. It also supports development of content that can exploited in multiple markets through adherence to copyright protection regimes.

 The most recent strategy is clustering of media industries. Industrial clusters have now become almost mandatory in debates about regional economic development. Economic geography and business literature point to the renewed importance of clusters in the era of globalization.[xxxii] As economies push towards increased specialisation in trade and seek out high-value markets, policymakers target clustering as a competitive growth strategy.

 Conglomerates, such as China Radio Film and Television Group (CRFTG) and the Shanghai Media Entertainment Group, were formed to increase performance and to offset threats of international competitors. Numerous media clusters have been legislated into existence throughout China during the past few years. The problem with this approach, however, is that many of the higher-end management positions within these organisations are still filled by cadres and bureaucrats brought up on an inefficient system of allocating resources to preferred providers. Further, the increasing numbers of such clusters in response to each province’s need to feel represented in national planning in turn diminishes the effects of agglomeration and national distribution.

 China’s media industries are currently forced into diversified production by increasing competition. However, while low cost production dominates business practices there is unlikely to be real differentiation. Increasing focus on industry and consumer segments is now occurring, led by advertising industries. Competition and joint ventures with regional and international businesses are stimulating local production and government policies are assisting China’s media to become more profitable, despite the difficult of measuring profit and loss.