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

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