• Opportunities for investment likely to be minimal
• Convergence will take place slowly but will not be spurred by competition

China is a high-growth market that will largely remain out of reach to investors

It is likely that the very substantial growth in the China television market that should continue for some time will not be a phenomenon financed by and paying returns to foreign investors. Television, regardless of the delivery vehicle, will continue to be viewed by the PRC government as too strategic to be left in the pay of foreigners. We expect that China television market will grow from an estimated commercial revenue level of RMB7.0 billion (US$0.9 billion) in 1995 to RMB59 billion (US$6.5 billion) in 2005. This translates into a 10-year nominal CAGR of 26.7% and a real CAGR of 18.0%.

Cable and terrestrial television are likely to dominate

Apart from policy arguments concerning free trade in services, the only real lever foreign media companies have with respect to China’s pay-TV industry is technology. But for now, the Chinese government is encouraging the development of technology joint ventures between PRC parties and overseas companies - in essence, just turnkey contracts. With China less likely to permit market forces to dictate the form and rate of its television-industry development, China is also able to control its appetite for capital - removing the other substantial lever that foreigners could apply. Nevertheless, China’s free- and pay-TV industries are likely to follow a relatively high-technology path, with cable and terrestrial television likely to dominate, despite the geographic and income-density logic of satellite television in mainland China.

(A$ Bils)

(A$ Bils)

(A$ Bils)

Real CAGR (%)

Real CAGR (%)

Real CAGR (%)

Television Industry Commercial

6.98

23.70

59.26

21.7

14.3

18.0

(%)

(%)

(%)

CAGR (%)

CAGR (%)

CAGR (%)

Telephone VOD

0

0

0

NM

NM

NM

100

100

100

28

20

24

(%)

(%)

(%)

CAGR (%)

CAGR (%)

CAGR (%)

Viewing Fees

0

0

0

NM

NM

NM

China Commercial Revenue

100

100

100

28

20

24

Micro & Macro Outlook

All components of growth equation are operative here

It is hard not to be overwhelmed by the underlying demographic numbers characterising the China market. Beyond the sheer size of the population is the already large number of television households (estimated to be 210 million households) and multi-channel households (estimated to be 50 million households). Of course, what is most appealing is the growth in income and consumption that is expected over the next decade. This will spur all the components of the television industry growth equation - penetration, viewing minutes, ad revenue and subscriber revenue.

Revenue growth fuelled by rising viewing likely

About 84% of the population is passed by terrestrial transmission. In the three main cities of Guangzhou, Shanghai and Beijing, average household television daily viewing is approximately 174 minutes. The normal development of viewing should increase this number, implying increased ratings points (mostly in fringe time) and potentially advertiser revenues. We expect that the level of private consumption will rise at a 14.5% nominal rate over the 1995-2005 period. This, combined with increased television penetration and viewing, should spur growth in television advertising expenditures from the 1995 level of RMB4.5 billion (US$0.5 billion) to RMB41.1 billion (US$4.5 billion) in 2005, or a 10-year nominal CAGR of 24.7% (23.6%).

Provincial markets will be valuable markets in their own justify

The figures mentioned above are national averages. Looking at China as a conventional national market draws attention away from a key point: China’s regional markets, particularly in the south and east, are well on the road to becoming significant markets in their own right for the generation of advertising and subscription revenue by 2000.

Current Services

China’s television system dates from 1958, when China Central Television (CCTV) was founded. CCTV has a national network of 36 provincial stations and 728 local stations that broadcast its four free-to-air channels. In addition, CCTV has four "pay-TV" channels broadcast by satellite for rural and cable consumption. One of the four pay-TV channels, an international channel, is targeted at Mandarin speakers around the world.

China has a multi-layered TV industry

CCTV actually sits atop a pyramid with four layers. There are nearly 1,000 other channels at the provincial, country and city levels that beam separate programming into their respective domains.

Cable systems are sponsored at many levels

Cable television has developed rapidly in China with an estimated 1,200 systems including premises, offices and factory distribution systems. The services of cable operators vary, with some simply re-broadcasting Hong Kong television channels and others broadcasting 30 channels. The Ministry of Radio, Film and Television (MRFT) compels cable operators to carry CCTV’s four encrypted pay-television channels.

Foreign satellite broadcasters finally making headway

Foreign satellite operators have also targeted the China market. STAR TV broadcasts four channels free-to-air in Mandarin for the greater China market. The services are picked up by (technically) illegal residential satellite dishes, official bodies, foreign compounds and hotels. Despite the ban on dishes, the MRFT granted STAR TV the right to sell set-top boxes in China. Recently, STAR TV’s Phoenix channel was permitted to be re-broadcast on some cable systems in Guangdong province. China Entertainment Television also beams two channels free-to-air in Mandarin with a "no sex, no violence, no news" policy. Hong Kong stations TVB Jade and ATV Home are also illegally re-transmitted in southern China through cable headends, often with the cable operators’ own commercials inserted.

Competition

Competing platforms actually co-ordinate quite a bit

With subscription rates to cable television very low, the prize for both pay and free TV is the increasing amount of advertising revenue. However, competition in China will primarily take the form of territorial disputes. With tight controls over content, there is little impetus "to give the viewers what they want". In our experience, we have found that most television providers in China that "compete," do not really do so. Schedules are co-ordinated so that significant programming does not clash. In addition, central and regional terrestrial and cable providers appear to specialise in different programming genres.

Government is disinclined toward DTH

Although direct-to-home satellite services are an obvious option on commercial grounds, there are several reasons why we do not think that DTH satellites can compete with terrestrial and cable. These include:

• the difficulty the government has in controlling reception and content on satellite services
• the desire of the government to promote the development of underlying industries that provide hardware to cable (and telephony)
• cable subscription rates, which are regulated by the MRFT, are in our opinion set low in order to promote the penetration of cable

We do not believe this will change significantly. Importantly, we do not think that subscription rates are likely to keep up with inflation. The low price to the household of this clear substitute makes any DTH satellite service extremely uncompetitive unless household hardware costs were wholly taken on by the operator.

One city, one cable system is being pursued and challenged

The policy of "one city, one cable system" is helping to propel consolidation of headends and SMATV operators. Despite consolidation, the desire to promote the development of cable is likely to increase the number of systems as more cities and towns develop multi-channel services. However, with cable systems being sponsored by governments at various levels, the issue of overlapping areas has already arisen and is unresolved. The most prominent example of this is the dispute between Guangzhou CATV (municipal) and Guangdong CATV (provincial) over whether Guangdong CATV can offer its services within Guangzhou.

Convergence

Incumbent telco has more to lose than gain from cable

The development of the television industry in China must be viewed within the context of the overall development of a national communications infrastructure. With telephony penetration rates relatively low, the government is undoubtedly looking to cable as one part of a set of services. To this end, the government has encouraged the laying down of broadband hybrid fiber-coaxial networks.

Large HFC systems still require substantive upgrading

Some of the world’s largest HFC cable systems, in terms of passed households, are being built in Shanghai and Beijing. However, these systems are still a long way from becoming effective broadband systems. The number of households per node in Shanghai, for example, is 10,000.

Aim is to develop local infrastructure

In effect, we expect "state-sponsored" convergence. The overall aim of this convergence would be less to capture ancillary revenue streams or cross-subsidisation opportunities for original cable or original telecom providers than it would be to develop infrastructure at the lowest national cost. The impact of consumer demand for Internet or proprietary networks will probably be muted by government control. Business demand for Internet or proprietary networks are likely to be promoted, but such connections are not likely to take place in large enough numbers to alter the economics of residential cable delivery.

Jurisdictional differences may hamper progress

As with most other dynamic industries in China, jurisdictional differences may work to slow down progress. Although test projects for cable telephony have been initiated, we understand that the Ministry of Communications does not yet allow cable systems to offer telephony. Since each ministry is also the sponsor of a commercial arm, there will continue to be a degree of tussling before policies that effectively promote convergence are put in place.