ANALYSIS: Television - Shanghai throws rate curve ball. China's TV costs could rise nationwide if monopolies emerge from the revamp

It was initially believed that the size and diversity of China would shield advertisers from the excesses of the Government's campaign to reshape the sprawling television sector through consolidation. But the arbitrary way in which the Shanghai Media and Entertainment Group (SMEG) cancelled contracts and hiked air-time rates suggests that this was probably a rose-tinted take on things. If anything, the ride will get bumpier for advertisers and media agencies - at least in the short term. SMEG blindsided the industry with the swift and conclusive way it introduced its rate equalisation policy - a nice touch for what was essentially a unilateral rate hike. Advertisers may have been expecting rate increases, conditional selling practices even, as station numbers are whittled back. Few, though, would have seen a rate hike coming this late in the year. If was of course only a matter of time before China's merged TV entities flexed their newly-acquired muscle. With more than 90 per cent of Shanghai's TV output under its control, SMEG was the first to do so for several reasons. Home to a number of multinational advertisers, Shanghai is China's most developed advertising market. Plus, the speed at which the cartel organised the merger and the firepower it assembled got SMEG off the block first. Set up in April this year, SMEG has more than 60 media companies trading under its banner. Among them are Shanghai Television and Shanghai Oriental Television, as well as radio broadcasters, film studios, internet companies and newspaper groups. In all, a Shanghai TV spokesman estimates that SMEG has assets of about US$2 billion. The concern now is that SMEG won't be the last to attempt to change trading terms when it pleases. By ordering TV stations in its 240 cities to merge, China is providing fertile conditions for TV monopolies to emerge. It had been speculated that the bulk of the mergers would be nothing more than a cosmetic coming-together. That view may be about to change. "Our biggest concern as an industry is that major mainland markets will look to Shanghai as an innovator," says Aaron Wild, general manager of Universal McCann China. "If the changes are accepted, the Government call for stations to merge may gather greater momentum." Media chiefs say China's consolidation campaign "has created a monster". One adds: "The implication is that the TV stations will become very powerful. If Shanghai is what we can expect, then we are looking at TV stations which are not interested in logical trading but in short-term fixes." The sector is ripe for short-term fixes. For the first time ever, TV stations are unable to meet revenue targets. The slowing global economy - including a newly-revised government directive limiting adspend by state-owned enterprises to eight per cent of total sales - have hurt the bottom line. ACNielsen says adspend for the first half of the year rose by 18 per cent, but agencies believe that it's down or is static at best. Adrian King, regional research director of MediaCom Asia-Pacific, doubts that the revision to the two per cent limit will help TV stations. "Whether it's two or eight per cent it's irrelevant. It's not going to make up for the shortfall from pharmaceutical companies - traditionally the biggest spenders. They would spend up to 30 per cent of their operating revenue on advertising." Despite agency claims that stations are hurting, Shanghai TV insists that it's not behind on revenue targets. "The ad volume meets our target, but the money we receive from our clients does not meet target," says its spokesman. "Before the merger, we had different payment terms - 30 or 60 days after an ad is aired. The different payment terms have affected our income flow because some of the advertisers have still not paid us after a year." A more effective bill collection system would perhaps have achieved better results. "What SMEG has done is to get its calculators out and it has realised that in order to hit target it would need to increase the cost of air-time - that is by levelling discounts," says a media director. The general consensus is that the rise won't minimise the shortfall. "They've taken a completely contrary tactic. In a soft market when demand is down, you drop prices; you don't raise rates," says King. There's also the matter of the size of the hike - 10 to 20 per cent depending on advertisers' contracts - and its timing. "Marketing budgets are under a lot of pressure this year, and we are already through August, so I am not sure where any extra budget will come from," says Chris Walton, chief executive of MindShare China. Simon Woodward, executive director of broadcast for Carat China, adds: "It's a substantial increase in costs for our clients who enjoy the discounts we secure based on the business we have given the station in the past and our client's buying history." The hike has sparked a scramble to secure some form of rate protection for advertisers. This isn't proving easy. A media agency director who declined to be named says SMEG has refused to budge. It has also dropped hints of conditional selling benefits, which will affect Shanghai Educational TV, a non-SMEG member. "They have said that if we accept the new rates there will be benefits in 2002. But if they don't honour deals this year, what is there to hold them to their promise next year? "They have also hinted that if we use Shanghai Educational TV, we won't get any benefits. This means we can't recommend the station even if it's relevant to our clients' marketing activities," he adds. Making matters worse, SMEG made no mention of programming improvements to soften the rate blow. "I'm concerned that if there is revenue coming from the increase, it will all go towards meeting the revenue target and not towards programming improvements, which would allow our clients to reach their audience more effectively, while also satisfying the needs of the TV station," says Woodward. But it's the precedent SMEG may set that is keeping agencies up at night. Walton believes otherwise: "The potential for such a scenario being repeated in other markets is not as great as in Shanghai, which is almost indispensable to many clients, and where almost all TV viewing is concentrated on stations controlled by the same group." Beijing, though, could fit the bill for a merger SMEG-style. On the flip side, rate equalisation should benefit international agencies despite the initial scramble it has caused. Woodward says: "If rate equalisation across all buyers becomes reality, then media value attributes will shift in the long term. Currently,cost differentials are a point of focus for some advertisers. Should advertisers all buy at the same rate, then tactical planning and effective strategic planning skills will become the new differential." However, having lived through TV consolidation in the UK, King is relaxed about the overhaul's longer-term impact on advertisers. Competitive pressures, he believes, will have some bearing on the way stations conduct business. "What is happening now is a step back, but in the longer term it will be good once we get through this initial rocky period." - Additional reporting by Christy Liu. CHINA'S TV OVERHAUL: THE STATE OF PLAY BEIJING Beijing Television Station and Beijing Cable Television merged on July 1. The merged group comprises the existing channels of both stations, which include three wireless and four cable channels, covering news, general programmes, education, movies, finance, sports and lifestyle. The consolidated entity has indicated an average rate increase of 15 per cent will be introduced either by year- end or early 2002. It's the cost of primetime that will be onerous - a 30 per cent rise has been proposed. GUANGZHOU Market is too fragmented to follow Shanghai's lead, particularly as Hong Kong stations provide an overlap in this Cantonese-speaking city. GUANGXI Guangxi Television has merged with Guangxi Cable TV. The merger brings together six channels and the partners plan to establish a seventh. The new channel will offer general programming, news, lifestyle, sports, entertainment, finance and education, according to the stations.

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