I have to comment on this ‘Google quitting China’ fiasco that has been percolating the news reports over the last week. Not because if it happens (emphasis on if), it would bring ‘ a loss for the Chinese people’ (Wired Magazine, 1/15/10), but because of the global attention given to the announcement overall.

At the very least, it has gone far past my expectations as a Chinese native – and when asking my 15-year old nephew in China about this, he’s never even used the site to begin with.

Back in 2008, News Corporation’s quiet exit (closing of China’s headquarters for Star TV) didn’t make much ripples amongst the other news happening all around the world. While News Corp’s did not fully exit from China, it was a good indication that News Corp was stopping their efforts to build out a national TV station in China after trying over 20 years when Rupert Murdoch first visited China (and giving free distribution rights of 50 movies to CCTV as a ‘gift’).

Now, back to 2009 – the sharp contrast of Google’s potential exit is what surprises me most. While there is the argument to be made that there is a vast difference between News Corp and Google (one being a media company, the other a technology company), to the eyes of the Chinese government, they are one in the same. In the mind of the Chinese government, these two companies are positioned exactly the same way – a publisher / media agent.

Search Engine Illusion

Baidu, Google’s direct competitor in China with over 70% market share, obtained a News Publisher License in 2007, the same year when Google was busy defending itself from piracy issues with Sogou’s Pinyin. It may seem odd that Baidu attained a news publishing license considering Baidu’s core business is in search engine, it was Baidu’s deep understanding of how to play ‘nice’ with the Chinese government’s thoughts that a search engine portal is nothing more than a collaboration of news and information. To date, Google has still to reach that mutual understanding with the government.

Google’s Next Steps

While no one really knows what Google’s next steps might be, some due diligence on News Corp’s China history may give us possible options for Google.

History on News Corp.’s in China

• 2001: SARFT (State Administration of Radio, Film, and Television) was founded, planning on cooperating with western media groups.

• 2001: Star-TV (owned by News Corp.) is one of the first 3 foreign media groups who obtained the Landing Right (SARFT-proved right for a media company/TV station to put its own TV channels on air) in GuangDong province only.

• 2003: Star-TV formed a joint venture with local and national TV stations in China to produce 1-2 hour program blocks every week.

• 2005: News Corp made an aggressive move by acquire programming and advertising rights from QingHai provincial Statillite TV station who had a national coverage. This allowed News Corp to take control of all the programming and advertising for the primetime programming slots on QingHai Statillite TV station. At that time, News Corp. produced over 1000-hour program per year for Chinese audiences. However, after 3 months post-acquisition, their strategy was considered to be an unauthorized move to obtain ‘landing rights’ on a national scale and forcing SARFT to halt any further broadcasting of News Corp’s programs through the QingHai Satellite TV. It was said that News Corp lost over $50M (USD) in the ordeal. Shortly after, SARFT mandated that all non-China media groups will cease any further ‘landing rights’ agreements with the exception of Guangdong province.

• 2007-08: News Corp stopped producing localized programs for mainland China, and moved their China headquarters from Shanghai to Hong Kong.

News Corp in China Today

It’s not an unhappy ending for News Corp in China. In fact, they are the perfect example of ‘making lemonade out of lemons’ since dealing with the Chinese government for over 20 years. While News Corp had their public 2008 exit out of China, it was just the beginning of alternative strategies to make good and penetrate this marketplace.

Control of Distribution
In November 2007, China Broadband Capital Partners, a private equity company (whose major investor happens to be Murdoch), became the largest shareholder of Asia Union New Media, a Hong Kong-based media company. Almost immediately, China Broadband Capital Partners replaced most of the senior management team of Asia Union New Media with new members since governmental restrictions for foreign investments in production companies do not apply in Hong Kong. More importantly, Asia Union New Media happened to have the exclusive rights to run programming and advertising sales for HaiNan Satellite TV Networks. To sum it up, (indirectly) Murdoch controls distribution through HaiNan Satellite TV.

Control of Advertising
In August 2008, Asia Union acquired Blower Investments Limited and made one of their subsidiaries, Zhong Guan Group, an indirect wholly owned subsidiary of Asian Union. At the same time, Asian Union announced that Zhong Guan Group has entered into an advertising agency agreement with Guangdong Television to be the exclusive advertising agent of the Guangdong Satellite TV for a period of three years from 2009 to 2011. In short, (indirectly)Murdoch controls advertising for Guangdong Satellite TV.

Control of Programming

Before 2007, only few of News Corp’s Star-TV programs were produced in conjunction with local TV stations in China. But in Jan 2009, Asia Union formed a new joint venture and announced producing program blocks in collaboration with six local networks, including Beijing, Shanghai, Fujian and Chong Qing (and planning for 20 by the end of 2009). In summary, (indirectly) Murdoch controls programming for major markets throughout China.

Multi-platform Play

Like the majority of large media companies in the United States, News Corp had plans to develop a multi-platform business models to follow the trends of where the Internet was headed. MySpace first landed in China in 2007. Despite Myspace’s lack of huge success in China (ranked six in the market), it was a bold move by News Corp to help diversify their portfolio within China.

Implications for Google

So, looking at News Corp’s positioning in China, I ask myself why Google still intends to be labeled as a ‘search engine’ company in China. Why not learn the mistakes News Corp had made and create a more active strategic move to win over the Chinese through their other business entities (i.e. Gmail, Google Maps, Android, etc.). Make strategic investments in local companies (we all know Google has enough cash on hand), form joint ventures with state-owned companies, but don’t lose out because Google is just a ‘search engine’ model.

In all the absurdity after this announcement, Google really has nothing to lose at this point. The public announcement is forces the issue and the all-mighty media spotlight are burning heavily on Google’s next steps. However, if Google were to just look at their numerous predecessors’ trials and tribulations, the path to China would be a simpler one.

Source: METAN Development Group

http://www.metandevelopmentgroup.com/assets/newsletter/64/pdf/64.pdf

With China’s media industry evolving at an unprecedented rate, the worlds of content and advertising are quickly converging together into one. The lines are blurring between programming and brands in entertainment as advertisers become more involved in the creation and ownership of content. From online to television, new opportunities in advertising are arising for marketers and companies alike.

Mr. Namer’s session will examine the present and future media advertising landscape with an exciting 360-degree look at branded entertainment and the major shifts that are shaping China’s media industry today. He’ll discuss the trends in branded entertainment and how they will increasingly impact marketing strategies in the region.

The event is scheduled for Tuesday, January 26, from 4-7 PM, at Kerry Centre Hotel in Beijing.  http://www.amchamchina.org/event/494

Boasting over 38 years professional experience in cable television, live events and new media, Mr. Namer is the co-founder of E! Entertainment Television, a company now valued at over $3.5 billion USD, and the creator of several successful companies in the United States and overseas.

Among those companies are Comspan Communications that successfully introduced Western forms of entertainment to the former Soviet Union and Steeplechase Media that served as the primary consultant to Microsoft’s MiTV for developing interactive TV applications. In recent years, Mr. Namer has become recognized as one of the leading experts on new technology and how it fundamentally is changing the business of world media and entertainment.

A cable industry pioneer, Mr. Namer began his career in 1971 at Time Incorporated Manhattan Cable, and served as vice president and general manager of Valley Cable Television (VCTV) in Los Angeles, the nation’s first 61-channel two-way cable system. His vision and direction garnered VCTV several Emmy and Cable ACE award nominations, as well as recognition by Forbes magazine as the national model for local cable television programming. In 1989, he was awarded the prestigious President’s Award from the National Cable Television Association.

Metan Development Group – Launched in February 2009, Metan Development Group LLC (Metan) was created to develop and distribute entertainment content and media specifically for international markets. The company’s founders are entertainment industry veteran Martin Pompadur, E! Entertainment Television co-founder Larry Namer and Amerilink founder Jean Zhang.

www.metanmedia.com

In the past few weeks, we have seen a flurry of news articles about how online platforms are jumping on the bandwagon to invest in licensed content. First came the report of the new SARFT mandate to regulate and restrict P2P downloads of illegal content. Unfortunately for many online viewers, this ultimately means an abrupt goodbye to hit US shows like Heroes and Lost. However, these turn of events also means many online video sites need to radically change their business models – a balance between playing ‘right’ with SARFT and getting the content they need for the viewers.

Ku6 and Sohu came out of the woods first with their pledge to allocate a $10M fund to license content. Tudou upped the ante with a $40M raise at the end of December which they claim is to be utilized to also license programs. Now I will admit that when the cynical side of me first read these reports, I chalked them up as public relation pieces to ease investors that the platforms were playing by the rules. However, the biggest news this week switched my mind with Baidu, China’s top online search company, linking together with Providence Equity to invest a total of $70M to develop a video online channel to the likes of US site, Hulu by the first quarter of 2010.

I have one word to describe what this means to me: wow. Wow for Baidu championing themselves with Providence Equity (Note: although this was reportedly inked with Providence Equity in Hong Kong, Providence Equity was still involved with the original investment for Hulu). Wow for Baidu taking a leap of faith into online videos. And, most importantly, wow for content providers and brands looking at this as the ‘sign’ to enter into China.

IMPORTANCE

Although all the reports with online platforms paving the way to set-up funds are all landmark moves in the online marketplace, to me, Baidu’s news sets precedence to indicate really where this market is headed towards.

Piracy No More

On a very macro level as starters, this could very well be the beginning of the end of online piracy. China has been plagued by piracy issues ever since the advent of the Internet, but this is great news for content providers and brands alike that are looking to China as a legitimate marketplace that takes their assets as value. For what it seems to be ages, content providers have felt slighted to how their content was treated in China.

I will say that this is by no means an easy or fast transformation for the online platforms. From a cultural perspective, the Chinese actually think quite highly of content; however, this ‘knowledge’ is a privilege and should be shared with everyone thus the rampant and liberal share of content. This transformation will take some time and certainly will have its ups and downs before everything is settled. Despite the uphill climb ahead, this is the right first step for everyone.

From Search to Online Videos

From an outsider, this $70M venture is a stretch from its normal lines of business. After all, Baidu is at its core, an online search company – not an online video channel. However, looking west to its counterpart in the US, Google, this move should not be a huge surprise considering Google’s $1.65B acquisition of Youtube in 2006.

The real question is what will Baidu do with their new Hulu-esque site? Any savvy investor can look into Google’s financial statements to realize that, despite all of Youtube’s eyeballs and potential, they are still bleeding money and have yet to make a profit. For me, I’m most interested in Yu Gong, the appointed new CEO of the site. Why you ask? Gong was a former China Unicom executive which might shed some light to where this Chinese Hulu might be headed to… Not making any speculations here, but I definitely like where my thoughts are.

When reading into the Baidu / Providence deal, I noticed one very apparent absentee in the equation – the content providers. This deal is not a joint venture with content providers as it was with Hulu (with ABC, Fox, and NBC). Like the other online platforms that have started their own funds to license content, Baidu is in the very same boat as they are right off the start. This bears the question…

WILL IT WORK

Before I dive right into the thick of things, let me preface this section by dissecting this into two parts of the question:

What is China willing to pay? And…

Is it too late?

What is China willing to pay?

For starters, we had already talked about how philosophical differences between how to treat content will inevitably draw out long-winded negotiations between that of content providers and the online platforms.

Content providers will need to decide what they will accept as reasonable license fees. After all, getting fair market value will be a tough pill to swallow for any online platform dealing with the sheer size like China.

And for online platforms that continually bleed cash due to high bandwidth costs, how will they take on another burden of licensing content to an already stacking outflow of money?

Now, while I don’t anticipate a standstill in negotiations, I do think there will be a significant amount of time to make sure this gets done right. Especially this early in the paradigm shift, these meetings and negotiations will set precedence for the online video market for the foreseeable future.

Is It Too Late?

One of the first business jargons I learned during my MBA: first mover advantage. Definition: An advantage gained by the first significant company entering into a new market. For a predictive new online video market, the first mover’s advantage will play a big role in the definition of pecking order amongst the online platforms.

So, the question is: with all these online platforms all going after the same goal, who has first mover’s advantage? And, more importantly, is it too late for a company such as Baidu to enter the game on the same playing field as the rest?

My personal thoughts are not too late at all. Unlike the US market, the China market is big enough to sustain fairly good competition. In the US where there is Youtube and everyone else, in China, there are plenty of options of online platforms that all fair well in their own respect (i.e. Youku, Tudou, Ku6, Sina, Sohu, etc.). For Baidu, they are right in the mix and I feel they will perform well amongst its new peers of online video sites (granted they have lots of work ahead of them if they are to launch Q1 of 2010).

WHAT DOES THIS ALL MEAN

At the end of the day, this is great news all the way around as it pertains to online platforms, content providers, and advertisers.

For content providers, all these raised issues are good problems to have. After all, you’re going from questioning whether to expand into China at all, to a business model of getting license fees for your content.

For brands, this is a brand new playing field that everyone should be seriously looking to. All-of-a-sudden, programs such as Heroes and Lost can feasibly be available for brands to attach themselves to. Regardless, this opens up a myriad of new opportunities for brands and just might be the missing key to opening the floodgates for online spends. Quality of content will be vital, but as a brand advocate, we should all rejoice in this new dawn.

Source: METAN Development Group

http://www.metandevelopmentgroup.com/assets/newsletter/63/pdf/63.pdf

Political Context

After pampering you with marketing and media news for the past few months, allow me to begin this newsletter with a much-needed dose of politics, of the international persuasion.

Back in 2007 the U.S. Trade Representative brought a case against China in the WTO focused on three primary concerns: first, China’s restrictions on importing foreign entertainment materials such as books, CDs, movies, and DVDs; second, China’s restrictions on distributing foreign books and music electronically; and third, China’s lengthy government-mandated review process for foreign television shows, movies, and music distributed domestically.

These three distinct but interrelated issues riled U.S. and Chinese trade officials for the better part of two years, with other more run-of-the-mill disputes thrown into the mix (Chinese tires?!).

This December, the WTO ruled against China’s appeal, thereby validating the U.S.’s complaints against the Chinese government’s restrictions on foreign entertainment distributed on the Mainland.  After the WTO’s Appellate Body adopts the measures decided upon by the Organization’s officials, China will have 30 days to respond with what amounts to a plan of action to acquiesce to international demands.

Was that so painful?  Perhaps, but to the extent it helps us understand the current state of China’s online media marketplace and where it might be headed, I think we can stomach it.

China’s participation in international organizations means it must, in theory, protect the intellectual property of both domestic and foreign enterprises.  The Internet has long been a haven of shanzhai (copied) content readily available to even the least-savvy wangyou (literally ‘web friend,’ or internet user).  Video sites have often ignored international copyrights and posted versions of currently broadcasted TV shows and movies still showing in theaters.

Overview of Online Media Marketplace in China

A few giants dominate China’s online content universe.  Besides the online chat kings QQ and MSN, China’s web portals (Sina, Sohu) and online video sharing sites (Tudou, Ku6, Youku, 56.com, Tencent) reign supreme.  Many of these portals and video sites have locked horns over copyright disputes over the past few months, with mixed outcomes.  (

http://www.media.asia/searcharticle/2009_09/Youku-files-dual-suits-against-Sohu/37169).  The competition is fierce for dominance in the marketplace.

Earlier this year, Chinese online gaming giant (and NASDAQ listed company) Shanda Online Gaming Interactive agreed to acquire Ku6, one of China’s up and coming online video sites.  The acquisition marks the first time a Chinese online video sharing site finds itself listed on a Western stock exchange, an interesting conundrum for a firm in this space.

The online video ‘law of the jungle’ necessitates that sites will post content which attracts the most page views and maximizes advertising revenue, the lifeblood of free content online video sharing sites.   Through the merger, Shanda expands its already formidable on- and off-line media reach in China, and will leverage the extent of its resources to ensure the budding site flourishes.

With more internet users (338M, and growing by the hour) than the U.S. (227M, and growing significantly slower), and a population that increasingly turns to the internet as a source of entertainment (see Metan’s newsletter on Internet Cafes, LINK, and online video, LINK), the online video marketplace will need to accommodate an audience growing in both size and sophistication.  The sites might also find themselves well-positioned in one of this millennium’s most lucrative advertising revenue pools.

Online market, Announcements by Ku6/Sohu and Youku

On Tuesday, December 22, 2009, Ku6, along with partner Sohu, announced that the video sharing site and web portal would each invest rmb 50,000,000 (for a total of rmb 100,000,000) to acquire legally licensed content copyrights both domestically and from overseas.  Ku6 and Sohu share similar blood; Ku6 CEO Kevin (Shanyou) Li spent years at Sohu under the portal’s renowned Internet tycoon Charles (Chaoyang) Zhang.

It appears there’s no hard feelings between the one-time colleagues, as Mr. Zhang participated enthusiastically in Mr. Li’s artfully orchestrated press conference on December 22 at the Grand Hyatt Hotel in Beijing’s iconic Oriental Plaza.  The conference featured a Chinese drum performance by qipao-clad dancers, a laser light show, and yes, interesting viewpoints from industry experts.

Tudou, the video sharing giant, wasted no time in announcing the establishment of its own rmb 100,000,000 content development and acquisition fund on Wednesday, December 23.  It remains to be seen exactly what content these sites have their eye on, and how the market for foreign copyrighted content broadcast online in China will shape up amongst fierce competition.

Speculation for the future of China’s online video market

These pledges by online video sites Ku6, Sohu, and Tudou to take down pirated content exemplify a trend in China towards increased protection of international copyrights.  That being said, the issue of broadcasting pirated content presents a prisoners’ dilemma for online video sites.  Talk is cheap, and despite industry leaders’ signing the China Online Video Anti-Piracy Alliance on September 15, 2009, pirated content has not been altogether eliminated.  Companies risk losing valuable advertising revenue if appropriate legal and competitive steps are not taken.

Ku6 and Sohu, along with Tudou, might know something their competitors do not.  Perhaps they foresee a time in the not-so-distant future when pirated content holds no place in the online video marketplace.  This first-mover strategy could prove vital to their survival.  Or, the relevant Chinese authorities have already made it very clear to the online industry that it will no longer tolerate broadcasting pirated content, and that the sites will have to find new ways to attract viewers or else cough up the funds to acquire copyrights.  Either way, change is afoot.

Conclusion

One last caveat to this equation: China’s state-controlled media starts and ends with TV.  The CCTV live advertising auction this year netted over $1.25B in a matter of hours.  If China’s online video portals grow too big too fast, sucking ad dollars away from CCTV and satellite, provincial, and city TV stations, they can expect to get an earful (and possibly more) from the government.  The portals must manage their relationships with TV outlets to ensure a ‘harmonious’ and simultaneous media industry growth.

Indeed, if these newly-announced funds are any indication, China’s web portals are on the verge of building up large libraries of online content, both current and past, to elbow their way into the video entertainment marketplace. It remains to be seen exactly how these portals will position themselves against each other and against the rest of the industry.  I’ll be watching, and I hope you will, too.

Source: METAN Development Group

http://www.metandevelopmentgroup.com/assets/newsletter/61/pdf/61.pdf

As my primary role in business development, I have my hands in a little bit in every division at METAN – from TV production and marketing to operations and digital. However, as my New Year’s resolution, I’m pledging to go back to the METAN basics to where our entire business model is rooted: brand advertising. This is our forte, our core competency, and certainly our bread and butter. This is also the biggest opportunity in the China market today.

I read that total measured advertising expenditures in the first half of 2009 fell nearly 14.3% versus a year ago (to $60.9B USD) in the United States. Compare that to China’s ad spend and you see an inverse of that figure of nearly growth of 12% in the first three quarters of 2009 (to $54B USD) according to the latest figures by CTR Market Research.

Hardly anyone will argue against the fact China is becoming the global hot spot for any global brands. With nearly all roads leading into China today, there’s no question paying close attention to the growing China market will be a critical step in any global brand’s strategy for expansion. However, the idea of advertising is vague. And statistics are just that – statistics. A more critical look into 2010 for the two platforms leading the way (television and online) will unveil a better idea of where the money is and where it’s going.

TV – KING OF THE HILL

Television remains as the predominant media platform with a 78% market share of the total ad spend in China . I will note that although I say sarcastically it grew a mere 14% in the first three quarters of 2009 versus the previous year, television has given up some distance to other forms of advertising including that of Internet and outdoor. I will also note that television in China will never be undermined or ever go away (at least not in the foreseeable future) – as long as the mass media is under current regime and regulations, television will forever have a footprint in how media is consumed and preferred.

For 2010, Chinese advertising on television will shift from that of driving viewers to that of media value. This really should not have taken anybody by a big surprise. After all, in the US, this transformation has started long age starting with the advent of online videos and digital video recorders. These technologies allowed viewers to skirt traditional advertising and put more pressure on media value and brand integration in the content themselves.

In China, although technologies have made a significant impact in how content is consumed on an on-demand basis, the biggest factor in this shift comes from that of advertising inventory. Effective January 1, 2010, SARFT (State of Administration of Radio, Film and Television) is implementing regulation #61 whereby TV commercial airtimes cannot exceed 12 minutes per hour. As a result, estimates of an increase of 24-25% on advertising rate cards will ultimately drive advertisers to focus on getting more for their money.

With more advertisers scrambling to stretch their advertising dollars, the idea of branded integration will continue to be the new buzz word amongst agencies and content providers. Several months ago, we talked about ‘Ugly Wudi’ as one of the first to pioneer branded integration in Chinese television programming. Today, there are already new shows on-air and in the works that are riding the coattails of ‘Ugly Wudi’. Yet, with over 3,000 TV stations in China to fill of content, programming still has a long ways to mature before it meets the branded integration needs for global brands.

At the end, good content is king. I note ‘good’ only because advertisers still need to balance the idea of brand image with that of media value. To put it shortly, I do believe branded content will be more readily available, but media value is not about availability but if it’s ‘right’ for the brand.

ONLINE – THE NEW KID ON THE BLOCK

Online opened up in China with a flurry. With over 360 million Chinese netizens in just over 10 years, online media is a formidable alternative platform to that of television.

While Internet advertising revenue growth in the US has hit a plateau of under 5%, China’s forecast of 20% growth in 2010 has digital advertising agencies appearing out of nowhere for the first time in the past few years. After all, this is where the key elusive demographic that the majority of global advertisers are salivating to get a chance to market is consuming their media.

For 2010, the big question about online advertising is not about why, but how. Unlike television where advertising has more of a defined role of where trends are shaping the industry, online is still the wild west for advertisers. For one, everyone is a content provider whether legitimate or not which really puts more pressures on content providers to produce more quality programming and on platforms to create the right marketing and promotion campaigns to make online advertising a legitimate success.

More importantly for 2010 on answering the ‘how’, online is still a fluid and dynamic platform. Advertisers understand the language of ROI (return on investment) and with constantly evolving platforms without rules and metrics, providing a sustainable business model will constantly be in-flux. For 2010, it will be a year of proving out the validity of online as content providers, platforms, and advertisers converge to figure out the right business model in the China market.

TV & ONLINE – WHOLE IS GREATER THAN THE SUM OF ITS PARTS

From my personal experience, the Chinese have a very ‘silo’-ed way of thinking of media platforms. As a content provider, it is either television or online – never that of both. With that, advertising has evolved their thinking in the same. However, from looking at media consumption behavior, I believe there will be a convergence of the two. Whether that happens sooner than later, I wouldn’t even know where to speculate; but this inevitable convergence of platforms will provide the richest and most effective opportunity for advertisers and content providers alike.

For 2010, platform convergence will shed light to a new way of media is consumed in China. The idea of platform convergence is more than just having the content available on both online and television, but utilizing both platforms to cross-promote the content and ultimately enhance the viewer experience. For television, online provides a whole new dimension of watching programs from audience interactivity and behind-the-scenes footage to an e-commerce component and social-networking aspect. For online, television provides the ultimate platform for promotion to drive viewers across to the digital threshold.

In this convergence scenario, both television and online fills the void where neither one could do successful on its own – simply put, at the end, advertisers win. For advertisers, the convergence of platforms is the pinnacle of media value. In a recent conversation with Kenny Bloom, CEO of Visitek Holdings, Bloom states it best, “At the end, brands care about driving sales….” – a statement that perfectly encapsulates the idea of how online and television can work together.

CONCLUSION

From online to television, China is an endless market of media opportunity. Despite the ever-changing media landscape and the difficulties following a moving target, I do believe Chinese media is evolving and shaping the right way.

As 2009 dwindles to its final days, I’m personally encouraged and excited to tackle 2010 with vigor and a new focus on brand advertising. Despite the ups and downs of navigating through the China market, 2010 only promises more of the same – and I wouldn’t have it any other way.

Source: METAN Development Group

http://www.metandevelopmentgroup.com/assets/newsletter/60/pdf/60.pdf

In the US, ‘Black Friday’ is the unofficial start of the holiday shopping season. Marked as the Friday after Thanksgiving, hordes of people line up at retail stores hours before the store opens in hopes to be one of the first to get in on early holiday shopping.

In China, while they may not have ‘Black Friday’, the idea of bargain shopping is not novel and is part of the shopping culture that now is prevalent in the market today. On November 14^th, there was a line 600 people deep waiting patiently hours before the opening of H&M store in China – all waiting for the worldwide start date of H&M’s Jimmy Choo line.

‘M-SHAPE’ SOCIETY

For me, the whole dichotomy of an affordable apparel brand with high-end style such as H&M is hard for me to grasp. ‘Affordable’ and ‘high-end’ doesn’t belong in the same sentence together and I’ve been accustomed to the idea of very segmented shopping tiers.

For many retail analysts, the trend of ‘affordable luxury’ is the sign of a shrinking middle class – otherwise known as the M-shaped phenomenon. Japanese economist and strategist Kenichi Ohmae refers the ‘M’ as the polarization of the extreme rich and extreme poor in society – thus the ‘M’ shape with peaks and valleys in societal status.

In a well-developed modern society, class distribution is often inverted where the middle class forms the bulk of society. However, with China’s economy booming as fast as it is as a consequence of rapid globalization (whether for good or bad), the middle class diminished and quickly assimilated on to either side of the economic class spectrum.

I should preface that the M-Shape phenomenon is a global phenomenon and China is not just the exception. Even here in the United States, the middle class is slowly disappearing and the gap between rich and poor continue to grow. Unfortunately, going ‘upwards’ is often much more difficult than sliding ‘backwards’ and more of the polarization of the Chinese middle class has shifted to the poor.

So, how does this tie together with H&M and what does this mean for brands in China. For starters, this does present a very unique consumer market where, like everyone around the world, these lower-end consumers still aspire to a better quality of life. However, they are value buyers and have monumental expectations for great quality at affordable prices. For brands such as H&M and IKEA, China is a golden opportunity to tap into this enormous market.

H&M: SUCCESS IN CHINA

I admit that I am a self-professed avid fan of H&M. H&M brings a chic Euro-style to China with trendy replicas of luxury products at inexpensive prices, fitting the needs of the majority of Chinese consumers (low-income but pursuing expensive taste). Contrary in India where only upper middle class consumers follow Western fashion, the majority of Chinese consumers follow Western trends no matter where they fall in the economic spectrum.

H&M has been one of the most popular Western retail brands since first entering China in 2007. There is a common joke that says there are only 2 places in Shanghai that you need to line up for: in front of the bank to buy funds, and in front of H&M to shop. According to H&M, first day sales at their Shanghai store reached 2 million RMB ($292,000), which easily eclipses the total daily sales of 200 Chinese domestic brands put together.

It is also important to note that the price of foreign brands is typically higher in China than anywhere else around the world – namely due to the high tariffs China places on imports. However, H&M kept to their pricing integrity and remained prices similar to that of Europe.

“Of course I love Louis Vuitton, Chanel, and Dior, but I can’t afford their prices,” 25-year-old Zhang Xi tells a reporter, “H&M have reasonable prices, and yet keep pace with the trends. You can always find the most fashionable items in their store.”

According to market research from China, H&M is priced at a fraction of some luxury brands yet features similar trend-savvy seasonal design elements – a winning combination that has generated an unprecedented buying upsurge in the market.

FOREIGN BRANDS IN CHINA

H&M’s strategy is not rocket science. Logic is actually very simple – chic clothes coupled with affordable prices is a winning combination in retail. However in China, there is more than winning on price alone. Especially with foreign brands increasingly entering the China market, the retail strategy has shifted from focus on the wealthy to where the majority of where the Chinese market stands.

Brand Strategy

For foreign brands, prices are typically 20%-30% higher in China than overseas due to China’s high import taxes on foreign goods and to the brand positioning strategy where there is a concerted effort to set foreign brands apart from their local counterparts.

For example in China, Starbucks is considered “a symbol of status and success”, young people go to KFC and McDonalds to date since it’s often regarded as “romantic” (but mainly because it has nice lighting, air conditioning, and a nicer bathroom), and owning a pair of Nike shoes or Levi’s jeans is just a young person’s dream.

“[Foreign retailers in China] don’t feel that they have to compete on price, because they are offering a wider selection of goods and a more pleasant shopping experience than domestic competitors”, said Ann Chen, a retail analyst at Boston-based consultancy Bain & Co.

Pricing Strategy

In contrast to the overall high-price approach, some foreign brands have recently adopted a price-cutting strategy in order to attract more customers. When IKEA (known for its inexpensive and modern furniture) first entered China in 1998, it positioned itself as high-end brand and offered their products at premium prices. This strategy failed as many Chinese consumers crowded the IKEA stores not particularly shopping, but enjoying the ‘freebies’ the store had to offer (e.g. air-conditioning, comfy chairs). Needless to say, window shopping doesn’t always result in sales and IKEA fell short in their revenue expectations.

Consequently, in the last few years, the company has adjusted its marketing position by transitioning into a mainstream commodity. Because of its success in localizing products for the China market specifically, IKEA has been able to cut prices by an average of 54% in more than 1,000 categories since 2005. IKEA broke the regular foreign brand pricing strategy and succeed in China because they decided to “stand on the side of the majority of people”.

“I had to make a break, change [Chinese] perceptions that Western-branded goods are normally more expensive…,” said Ian Duffy, IKEA president for Asia Pacific said.

In the face of fierce competition from both global and domestic competitors, more and more global brands are adopting this mentality of ‘standing on the majority side of the people’ by cutting prices. For example, McDonalds recently cut nearly 40% off its prices for its special lunch package. Even premier brands like Louis Vuitton, Gucci, and Salvatore Ferragamo are dropping prices “to trim the price gap between China and other regions and to entice customers”.

CONCLUSION

What does this all mean for brands and consumers in this M-Shaped China market? For consumers, even the lower-end of the M-Shape consumer market is striving for excellence and quality. However, they are not willing at premium prices usually associated with many foreign brands.

For foreign brands, both a branding and pricing strategy is necessary to succeed in China. Given its ‘M’ consumer distribution, cutting prices to create larger sales volume is a trend many brands have adopted and are successful at. Will this trend continue even as China continues to grow economically and people will have more money on-hand? Hard to say, but as a consumer who fits the ‘mold’ and mentality of the majority of the China market, my thoughts gravitate towards no. While ‘branding’ and ‘pricing’ are both very important factors in my shopping behavior, ‘value’ drives me to say ‘yes’ and that only happens when you have both.

Source: METAN Development Group

http://www.metandevelopmentgroup.com/assets/newsletter/59/pdf/59.pdf

On the flip side, let’s take Taobao as an example – China’s version of eBay. For every new Taobao employee in China, he/she needs to learn the proper way to do a handstand against the wall. No toys, no gadgets, no world-class cafeteria – just the ability to perform a physical handstand. Some would argue that Taobao is possibly the most bizarre environment for any Chinese company; however, with a market share of 86% (in 2009) and a +10% year over year growth rate since 2005 – you have to wonder what Taobao might be doing right.

I don’t personally know of any scientific or in-depth correlation between a luxury kitchen versus a handstand has to do with a company’s market share growth in China, but comparing the fact both Google and Taobao launched relatively at the same time in China, one has to ask if there is an effective way to how management plays a role in the success. Google’s slow growth in China is not an anomaly in China – in fact, many global companies face similar challenges. A closer look at Taobao’s corporate ideologies and management style may reveal some interesting insight.

ANIMAL OF EXECUTION

Jakie Ma, CEO of Taobao, has an interesting philosophy in conducting business in China. For him, an ‘execution-oriented’ style is the most effective way to grow a company in China. In his words, ‘to sacrifice the best ideas for the sake of execution is necessary.’

There is no question the fact the Chinese market is one of the most dynamic and fragmented markets in the world. Ma’s philosophy is that a reasoning / analyzing based management system is simply too slow to react in a market like China. Good ideas are only that – good ideas. Our VP of Business Development, Gordon Chu, likes to refer it as, ‘analysis to paralysis’.

In Ma’s management style, good ideas are important and innovation will definitely be the driving force to grow any company; however, it should only play second role to that of execution first. For Ma, the company itself should move from being managed as an ‘organization’ to being trained as an ‘animal of execution’.

IDEOLOGY VERSUS VALUE

It’s not uncommon for companies to have a set of corporate values that are shared by all the employees and resonated every so often by upper management. Everyone understands the common goal and works towards meeting them. Yes – perfectly legitimate and perfectly fine. Ma makes it more than just a ‘value’ but wants to transform the company’s process into an ‘ideology’.

At the core, value is a set of ideas communicated to employees through education. Thus the upper management speeches and occasional staff meetings to hammer home the point. An ideology is built on a transformation of the way of thinking. At Taobao, employees are required to learn a handstand to enforce the idea of ‘thinking differently’. As part of their initiation, they are often given a mythical name taken from famous Kung Fu novels (Ma is an avid fan of the Chinese martial arts) to illustrate their specialty and personality. Rooms and offices are also appropriately tagged with fictional Kung Fu-inspired names to remind everyone just the importance of their mission at-hand.

Perhaps the naming convention is only a novel part of Ma’s ultimate management style; however, it resonates the idea of an alternative way of thinking – an ideology of uniting his employees to focus on execution. Recently, surveys show that the Taobao employees have the highest loyalty to the company with below-the-average salary (IT industry).

THE TAI-CHI OF MANAGEMENT

There is a method to the chaos Ma has implemented in Taobao. Kung Fu names is not simply a reflection of Ma’s personal interest, but is a deliberate way to quickly and effectively communicate his ‘ideology’ to run a business.

For most Chinese, there is a long-lasting tie to the Kung Fu culture ever since as kids. It’s part of every kid’s imagination growing up and is extremely prevalent in the culture of the youth. For Ma, implementing processes around the ideas of Kung Fu is a seamless way for his employees to understand how decisions are made.

As for decisions that are made, it’s been proven that there is a direct correlation with how long and difficult it is to implement decision with the sheer size of a company. That makes logical sense – the larger the company, the more decisions need to be examined and implemented. However, using terms from Kung Fu novels to stand for different ‘decisions’ or how decisions are made, employees can easily be understood and embraced by the employees. To put in Tai-Chi terms, controlling the body through breathing is faster than manipulating different muscles. In other words, speak the language of the employees and execution because all of a sudden a whole lot easier.

FOUR OUNCES TO YIELD 1000 CATTIES

In Tai-Chi, there is a Chinese phrase that translate to ‘Four ounces to yield 1000 catties’. While I don’t necessarily know what ‘catties’ particularly means, the thought is about leverage. An opponent strikes, use his blow to redirect back towards him. In this particular case, ‘leverage’ is a reaction and requires as much observation and listening as it takes to act.

For many global companies entering China, the business reaction is carefully based on analysis and understanding of the market. This often limits companies to base decisions on current market conditions and taking facts as-is. However, in China where the dynamics of the market changes within a blink of an eye, the ability to react quickly and to leverage your position is an important skill set to have when dealing in China.

For Ma, Taobao takes every opportunity to their business advantage – both from a relevant culture and political standpoint o help build their corporate and brand image. For example, in 2008, amidst a bad global economy that resulted in many lay-offs for Internet companies in China, Ma invited all his employees and their respective family to visit the company and inform there would be no downsizing and that everyone should be considered as family. Not only is this a media gem, but is a great example of how Taobao leverages the current conditions to better their corporate branding with their employees and amongst other Internet companies.

CONCLUSION

For Taobao, how does this all relate to that of business and business sense. A Tai-Chi style management does not necessarily translate well to investors on Wall Street. For the last five years, Taobao has expressed no plans for going public. For starters, Ma claims they have enough cash, but more importantly, he doesn’t want his management to be affected by the stock market at this ‘early’ stage of Taobao.

Sure Ma has to contend to investor scrutiny and, at the end of the day, results and numbers speaks volumes. However, despite the business end of Taobao, there is an admiration for Ma’s management philosophy and how it’ll play a role in transforming management for all of China.

Source: METAN Development Group

http://www.metandevelopmentgroup.com/assets/newsletter/58/pdf/58.pdf

Today in China, there are two distinct styles of music that tend to dominate the airwaves: traditional pop music and Yaogun Yinyue (Chinese rock music).

“Yaogun” literally means rock-and-roll.  The introduction of western style rock music in China can be traced back to the early 1980s. In Beijing at that time, young adults became increasingly exposed to Western music and in turn, tried to emulate what they were hearing – and they did quite a good job. As early as 1980, the first band to ever play modern style western rock in China was formed — Wan Li Ma Wang. Their first shows were held mainly in foreign hotels in downtown Beijing to audiences of mostly foreign students. Wan Li Ma Wang was famous for playing mostly western-style classic rock.

While the genre of rock music in China was pioneered by a multitude of talented and gifted artists, only one artist has been  referred to as the “Father of Chinese Rock”— Cui Jian.  Born in Beijing, Jian showed aptitude toward music at a very young age. At the age of fourteen he began playing trumpet and by the age of twenty, he joined the esteemed Chinese Philharmonic Orchestra.

According to Jian, he was inspired to learn guitar by Western musicians such as Simon and Garfunkel, the Beatles, Talking Heads, and the Rolling Stones.  In the mid-1980s, Jian formed the band “Seven Ply Board” (later renamed ADO). The band played music inspired by the Northwest Wind music style – a traditional folk style music originating in China’s northern Shaanxi Province. Northwest Wind style music was predominately popular between 1986 and 1989 and was influenced significantly by Cui Jian.

Jian’s style drew heavily on the traditional folk Northwest Wind music while also incorporating elements of western rock such as the fast tempo and strong bass. For many fans and listeners, his music represented a cultural movement – one that can also be discerned in Chinese literature and films produced around the same time.

In 1986, Jian’s hit song titled “Nothing to My Name,” became the first popular song written in China to use electric guitar. Jian performed the song on a television talent show, and became an overnight sensation. The song is now widely considered to be one of the most influential songs of his generation. Even to this day, some even consider “Nothing to My Name” an “unofficial” anthem for the student protestors during the Tiananmen Square uprising in 1989.

The brilliance of Jian’s work is often attributed to his unique way of incorporating the sounds of traditional Chinese instruments with electric guitar and other elements he admired in the western recordings he enjoyed.  In fact, when Jian first listened to western rock music on smuggled recordings from Hong Kong and Bangkok at 20 years old, he knew that he needed to spread this genre of music throughout China.

“We learned a lot by imitating,” said Cui Jian, “But we have our own problems, our own feelings to express, so we’ve started making our own music.”

If we explore the evolution of Chinese Rock through to today, the first part of Cui’s words is what typically bothers many young Chinese rock bands, while the later part (to a certain degree) give the excuse for those bands to think that they should not be bothered.

Does “Imitation” Work?

By most accounts, rock-and-roll music originated in the United States during the late 1940s and early 1950s and became increasingly popular with singles such as Elvis’ “That’s All Right (Mama)” in 1954 and Bill Haley’s “Rock Around the Clock” in 1955. However, through rock music in the late 1950s and early 1960s, the Beatles, drove rock music into the international mainstream and catapulted western pop culture around the world. However, over 20 years after Cui started his “rebellious” band, the share of rock music today in the Chinese market is even smaller than during the 1980s – less than 5%. There are many arguments for this; political restriction, music pirating, declining record business, etc. However, in China, you will get a simple answer when you ask people what they think of rock music: it’s NOISY. And the answer has not changed much even after 20 years.

On a very basic level, many westerners arguably develop an appreciation for rock music because – to some extent – the so-called NOISE satisfies their need to express their inner cravings to “rebel”. It can often be taken for granted that the Confucianism culture is deeply rooted in China – and is so strong that it makes people feel that “to rebel” is a bad thing. Consequently “noise” must be bad and the whole “rock” idea is a difficult notion for the Chinese to understand.

So the assumption I am making here is that, in China, the youth don’t relate “rebelling” to “noise” but rather to the “image” of rock n’roll. It’s the idea and image of rebellion versus the love for the actual melodies and sounds itself. The fact of the matter is that the Chinese prefer visual communication over alternative forms. This topic could be stretched far beyond rock music, but we will just keep it to the topic on-hand: Does “imitation” work?

What are the Implications?

Let’s return to the last part of Cui’s quote “We have our own feeling to express, so we start to make our own music”. For the youth in China, the desire to “rebel” is certainly personified in the image, but not expressed in the music itself. If we look at some emerging pop trends below, you can see how the way to “rebel” heavily relies on visual experiences.

Super Girl

As far as music celebrities, the “Idol” concept has become an incredible phenomenon in China. With “American Idol” dominating the US market, the Chinese developed their own version, titled “Super Girl.”  To illustrate just how popular “Super Girl” became in China: the show’s popularity also attracted many critics that after 2006 it was cancelled, and has just recently been brought back onto the air.

Super Girl is, at its core, a karaoke competition television show. However it is considered the biggest music cultural event in the past10 years as well. The key to its success is likely that it creates visual experiences to attract the youth market and drive them to vote, which is considered a primary way to voice their opinions and to be a “rebel” in the sense of an individual opinion and not limited by authority.

Conclusion

Today, rock bands are learning from every emerging pop trend. The television reality show “Battle of the Bands”, sponsored by Pepsi Co., has become one the latest top-rated shows in China—with the number of bands’ live performances around the country increasing at a phenomenal rate of 300% per year. For most new and up-and-coming musicians, it is important to heed these lessons and learn how important it is today to create visual experiences to engage audiences and to enlarge a fan base. I a broader sense perhaps these are lessons the bands and label managers should learn from the history of western rock-and-roll.

Reference:

CANTO POP

Canto-pop was thrust into the spotlight in the 1970s – a decade before rock music was on the scene in China.  As television sitcoms began to gain popularity, it became apparent that a “theme song” would be a good way to tie in music to television.  Sandra Lang sang the first television theme song in China in 1971 – “The Yuanfen of a Wedding that Cries and Laughs”. Following the overwhelming response, pop stars from all over China tried to follow suit.. Theme songs fueled pop musicians careers throughout the rest of the decade.  In the 1980s, the genre really took off, and  remained at the top of the charts till the end of 90s, when its place is taken by Mando-pop

MANDO POP

Mando-pop’s biggest hub of distribution has long been Taiwan. Mando-pop aims to stay true to its shidaiqu roots from the 1920s, while incorporating newer and more modern instrumentation. Today, mando-pop stars such as Faye Wong, called the “Diva of Asia” after she was the first Chinese artist to perform in Japan, Jay Chou, and David Tao carry the genre. Despite the popularity of canto-pop within China, Mando-pop has gained a great export value for China.  Outlets in Canada, the U.S., and Australia all have great markets for mando-pop and other Chinese music. Moreover, mando-pop has proven to be an effective profit-making industry that has heavily influences Asian trends

Source: METAN Development Group

http://www.metandevelopmentgroup.com/assets/newsletter/57/pdf/57.pdf

Very little surprises me about pop culture in China, but I have to admit it took me a very long time to wrap my head around the magnitude of online games. From MMORPG (massively multiplayer online role-playing games) to fun casual games, online games are a staple in the pop culture of China’s youth.

The latest figure for the online game market is just shy of 27.5 billion yuan – or close to a little over $4B (USD). While the current numbers fall short compared to that of the United States (currently first in the world), China is expected to grow up to 68 billion yuan ($10B USD) accounting for almost half of the world market by 2012. While I do take these figures with a grain of salt, it’s hard to argue against general consensus on the growth opportunity of online games in China.

Currently, the online game marketed by Shanda, ‘Aion’ is the latest buzz – or, at least the very least, for the foreseeable future. While I have the upmost faith in the game’s ability to continue to dominate the online game market, they really have not been around for all that long. Just one year ago, it was all about Blizzard’s ‘World of Warcraft’ until regulatory restrictions and time lag significantly sapped Blizzard’s momentum to continue its growing market share.

And so, Shanda was quick to pick up where Blizzard had left off and poached the online community with Shanda’s adoption of Korea’s most popular MMORPG, ‘Aion’. Just to give you an idea of the magnitude of ‘Aion’ in China today, in a corner of Tai Jiang City (Zheijiang Province) lies the future home of an amusement park around the central theme of the popular game. In the latest report released by Shanda, there are over 6.8M online players and continues to grow since its beta release in April 2009.

I see the game’s growth as more of a strategic move by Shanda and, frankly, am not all that surprised by the initial success. Looking at Shanda, it appears that luck always seem to find its way to them and with the latest news on Shanda’s joint venture with Hunan TV, I would not be surprised if luck strikes again and could very well be the biggest pay off yet.

BACKSTORY OF SHANDA

I admit, I am a big fan of Shanda. They are quintessentially on the cutting edge on both their online game strategy as well as their aspirations to be a true multi-platform media company. They may be the leading entertainment media company, but complacency is certainly is not in their vocabulary and are extremely active in breaking out of their niche and extend their footprint in the media industry.

In 2006, Shanda introduced their Chinese version of the set-top TV box (think Apple TV) called Shanda EZ-Pod. The concept was to integrate the television and PC experience in an interactive entertainment platform. Sounds easy, right? Unfortunately, the EZ-Pod failed to make any significant penetration in the China market mainly due to the fact the China market was simply not ready yet. Regardless, you have to admire the ambitious nature of Shanda to horizontally integrate itself from PC to the television set.

The EZ-Pod is just one example of Shanda’s business history (albeit a good example). They’ve dabbled as a private equity company investing in emerging game studios as well as entering the mobile market with the acquisition of a mobile entertainment service company in June 2009. Some ideas will work, some will not; however, I think this new venture will be the best bet yet.

BACKSTORY OF HUNAN SATELLITE TV

How Shanda is to online games, Hunan TV is to television programming. Really, Hunan TV (as I know it) has only been around since 2002 when it transformed from a news channel to an entertainment channel targeting exclusively at the young demographic. Since then, Hunan TV has pioneered programs that are still being used as the standard in excellence including ‘Super Girl’ (Chinese version of US ‘American Idol’) and, my personal favorite, ‘Ugly Wudi’ (Chinese version of US ‘Ugly Betty’).

These shows excelled beyond just that of production value and concept – these shows revolutionized different programming strategies that all other TV stations are now looking to emulate. With ‘Super Girl’, the idea of integrating mobile text messages introduced the idea of audience interactivity. And, with ‘Ugly Wudi’, the idea of brand integration is certainly the hot key topic in nearly all programming discussions.

So, question in-mind, what does this mean as a joint venture between the two mega-companies? Too soon to predict (beyond launching their original programs); however, the partnership itself has significance and will certainly be an indicator of what the media industry in China has in-store.

SIGNIFICANCE OF THE JOINT VENTURE

More Money, More Problems

The idea of ‘more money, more problems’ really applies to that of Shanda. Shanda Games having gone public at the end of September on NASDAQ (ticker: GAME), they all of a sudden are sitting on a heap of cash and a very strong fiduciary duty to make good returns to their investors. So, the billion dollar question is – what will Shanda do with $2B (USD) in cash?

In this particular case, using the proceeds of the IPO to fund non-game initiatives – such as this particular $88M (USD) joint venture with Hunan TV to produce and distribute movies / television series. Will the investment  pan out as planned? Too soon to make mention, but the best way to mitigate risk is finding the right partner (nice transition to the next point).

Perfect Match

If I was maestro of this deal and orchestrated the different partners who would be put into place, I could not think of a better partner for Shanda than that of Hunan TV. It’s not just about the innovative nature of Hunan TV’s business, but it’s also about the right timing of it all.

‘Ugly Wudi’ was a runaway hit the last two years and advertisers are flooding to Hunan TV to hopefully join the branded content bandwagon. Hunan TV already has in-place four more original series similar in programming style and continues to trail blaze new grounds in Chinese television. Now, here comes Shanda with the same philosophy to push the limits of new media, sitting on a $2B (USD) heap of cash, and ready to make this work for all.

The joint venture’s first project will be a remake of a TV series, ‘Princess Huanzhu,’ which is adapted from a Taiwanese novel of the same name. The second is to produce a movie based on ‘Xing Chen Bian’ – a popular novel from Shanda Literature (how convenient) with an adapted online game soon to follow.

From Games to Television

If it wasn’t obvious enough, this joint venture would be the first example of an online game company making headway into other facets of media. For years, online games and television have been placed in their nice respective silos separate from one another. Yes, there would be cross-platform marketing campaigns and other channels where the two would co-exist, but never has the integration between the two very different markets has been so incredibly meshed together like this joint venture.

To me, the deal signifies more than a mash-up between industries, but is the catalyst of other companies looking to cross barriers and push the envelope of media integration. Who knows what the next ‘big thing’ might be, but creativity is the only limit and this joint venture marks one of the flagship times of history in the making.

Share in Financial Risk

For years, China’s TV industry operated very much on a one-way street: content providers and advertisers worked with (or for) the television stations. Distribution is king in China and has always held the power when working with both content providers and advertisers. After all, they were state-ran and there was no need to necessarily be commercially efficient.

However, as of recent, there is a new world order. Not to say that the power has shifted entirely to the content providers / advertisers, but they are making significant leeway. Case in point – the joint venture involved two parties investing $88M (USD) in total. Now, what the splits were between Shanda and Hunan TV, I really do not know, but the idea that Hunan TV would invest hard cash into any new venture marks a big swing in leverage in China.

CONCLUSION

Nobody really knows if the joint venture will really work as they expect it to. It may be wildly successful, or could be an $88M (USD) flop. Whatever the future holds the macro effects of these deals will define the media industry in China (and with ramifications globally as well). Of course, I’m fairly optimistic on the idea and look forward to a brighter and more dynamic media future.

Source: METAN Development Group

http://www.metandevelopmentgroup.com/assets/newsletter/56/pdf/56.pdf

In business school, case study after case study, Disney was the belle of the ball in nearly all of my classes. From marketing to finance, you couldn’t escape the Disney name without seeing them in one form or another. And I say why not – after all, they have undeniable brand power internationally. Mickey Mouse is synonymous to US pop culture and Walt Disney’s marquee signature is universally recognized in any language around the world.

This year especially, Disney seems to be very active in extending their reach in all facets of media. In movies, Disney’s summertime blockbuster lineups (from ‘Up’ to ‘A Christmas Carol’) show little signs of wear from this bad economy here domestically in the United States. Then there was the $4B (USD) plan to acquire all of comic behemoth Marvel’s assets. And to top off this illustrious year, breaking news to create a brand-new Disney China outside of Shanghai valued at over $3.5B (USD).

BACKSTORY OF DISNEY CHINA

Now, I should be very clear that Disney China is not a spur-of-the-moment decision by the Chinese government to bring Western media groups over to China. The idea has been percolating for over 20 years to bring a brand-new amusement park for the Chinese market. Previous attempts were curtailed mainly due to perceived unwanted foreign cultural influences in the China market by the government.

After numerous attempts to bring an amusement park on to mainland China, Disney eventually ‘settled’ on Disney Hong Kong as a constellation prize. Unfortunately for Disney, the park has not fared well and paled in comparison to corporate’s grandiose expectations for the landmark.

Still, Disney Hong Kong was a great first run for Disney to test the waters when dealing with China.

SIGNIFICANCE OF DISNEY CHINA

When you first glance at the idea of a Disney park in mainland China, the gravity of such an event is not obviously apparent. There are over 300 theme parks throughout China and one more to that list doesn’t seem to be all that ground-breaking of media news. However, remove the roller coasters, the different attractions, and the physical location of Disney China as a whole, and the details and symbolism of Disney China takes front stage of worldwide importance.

Invitation of Western Media

Until recently, the whole Chinese media industry was very happy with status quo. And rightfully so. With state-run money as a sure income to your revenue top line, I don’t find it incredibly difficult to understand that Chinese-ran media companies had little motivation to go beyond that of status quo.

However, now with less reliance on government money and more dependence to be commercially viable, the entire Chinese media industry is evolving as we speak and have undeniably been more open to the ideas of Western companies and philosophy.

For China, the nod and the green light to develop Disney China is really an invitation of Western media companies to the China market. Not only does this exude miles upon miles of ‘soft power’ the Chinese have been very disciplined at practicing since the Beijing Olympics, but this is a way of China making their footprint as a worldwide media player.

Media’s Two-Way Street

It’s no mystery that China is on the rise and is the fastest growing consumer market in the world. While nearly the rest of the world is in an economic slump, China has been on the fast lane to aggressively build and grow their market during these troubled times.

Since even before the Olympics, China has invested billions in infrastructure to develop their cities to be a global spectacle. It’s also no mystery that tourism plays a big role in China’s plan (dovetails very nicely with the 2008 Olympics and the 2010 Shanghai World Expo) to extend their image. The approval for Disney China comes amid China’s ongoing efforts to develop its tourism sector – expected to grow 3% in 2009.

However, the build-it-and-they-will-come model does not always pan out according to plan. In this case, China understands that if it wants to play nice and rebrand themselves to be more open, they will ultimately need to learn the first lesson in the golden rule of sharing. In this particular case, opening their doors to Disney is a way to exemplify a spirit of a two-way street for Western companies and themselves.

Disney’s Way into China

We’ve focused a lot on describing the significance of Disney China on a more macro level for all Western companies alike. However, if we look into the micro, this new theme park is a significant boost in Disney’s presence in China.

For Disney, every move is a carefully analyzed decision that helps either build the company brand image or is a way to add to the income statement’s bottom line. I personally view Disney’s choices as a good indicator of where they see future growth. In the case for theme parks, Disney has real estate in Los Angeles, California; Orlando, Florida; Tokyo, Japan; Paris, France and Hong Kong. To carefully choose Shanghai (and 20-something odd years ago) as a near $4B (USD) bet is probably a good indicator of Disney’s thoughts on the Chinese market.

We’ve talked a lot about the difficulties and intricacies that go into entering in the China market. Many have tried and many have retreated simply because there is no simple way of doing so. Take Disney for example, in the United States, Disney operates an entire 24-hour TV channel and radio station – not to mention the numerous movies it produces every year as well. In China, Disney is limited to sporadic blocks of programming on local TV stations and has yet to capture the potential it sees in the China market.

Despite the barriers and hurdles to get across the goal line, Western companies still try and this is an excellent example at how Disney can really make a significant impact in the media industry in China going forward. It’s too soon to reveal the ‘how’ but landing a theme park is a great way to start the dialogue.

Share in Financial Risk

In my opinion, the most significant piece to the Disney China deal is understanding the flow of money. In this case, it’s rumored that Disney will only have 40% stake of the entire deal with the rest by Chinese monies.

To piggyback my previous comment about ‘playing nice’ with others, one of the most significant ways to demonstrate trust in any business transaction is a share in financial risk. For China, investing in 60% in this new venture demonstrates a real serious nature about being a global media country that is committed to make this a successful venture for all.

Especially with business in China where culturally, transactions are commonly lopsided in favor for the Chinese partner, this is a positive invitation for other Western companies to create ventures in China once again. This time – without the prejudice and without the notion of ‘playing by the rules’.

CONCLUSION

The whole concept of Disney China is still in its infancy stage. Yes, there are already committees and teams dedicated to creatively start drafting the ideas for the theme park altogether. I hear they’ve already tackled issues of localization (remembering the follies of Disneyland Paris) for the China market and are well aware of the fine lines they need to tread when working in China.

There will be hiccups along the way and I’m sure there will be areas of disagreement; however, Disney China is such an important venture for more than just operational reasons to Disney. It symbolizes an opportunity for Western companies to partake in China; and is a platform for China to demonstrate their ability to exude ‘soft power’ on a global stage. In either case, I see China truly being the place ‘where dreams come true’.

Source: METAN Development Group

http://www.metandevelopmentgroup.com/assets/newsletter/53/pdf/53.pdf