The Chinese government’s recent crackdown on free speech, particularly on the Internet, does not provide an accurate picture of the country’s media industry, according to Zhengrong Hu, a professor at Communication University of China, who spoke recently at Penn’s Annenberg School of Communication. The media industry, like Chinese history itself, is evolving sporadically, he said — “one step forward, two steps back,” but forward nonetheless.

Understanding cultural differences is perhaps the biggest challenge Western investors are likely to face when trying to maneuver the growing yet politically sensitive media sector, said Hu, who was interviewed by Knowledge at Wharton after his presentation.  Westerners tend to take crackdowns on TV programming or Internet content at face-value, while Chinese people understand that these are actions the government must take to save face. In other words, they know that a “wink, wink” accompanies these pronouncements and that loopholes exist everywhere, said Hu. Indeed, entering the media business is “hard if you do everything according to published policy. You need to find ways to get around the policy.”

One of the best ways to accomplish this, according to Hu, is through political public relations or lobbying the central government. This top-down approach reflects the central government’s enormous power, which includes control of all media-related activity at the provincial and local levels. Good relations with the central government, said Hu, increase one’s chances of finding a government body that is willing to “have one eye open and the other closed, offering silent permission.”

Hu pointed to Rupert Murdoch, chairman of News Corp., as an example of an international investor who, overall, has done well in China. “He lobbies the central and local governments, and has a relatively good relationship with the central government,” said Hu, adding that outsiders also need to understand the “Chinese way,” which is to move their agenda forward quietly. “You should just do it. If you talk too much, people will be nervous.” In other words, people who draw attention to themselves are more highly scrutinized than those who remain under the radar, Hu suggested. Yet there are limits to “going around the system,” something Murdoch learned a few months ago after being rebuked by Chinese officials for allegedly offering cable TV programs without receiving the proper authorization.

So Many Channels, So Little Content

With so much at stake, it’s no wonder that moguls like Murdoch are anxious for the government to move at a more Western pace. Audiences and potential advertising revenues are staggering. China today has 1.2 billion radio listeners and 1.23 billion TV watchers, and there are currently 282 radio stations, 314 television stations and 1,913 broadcasting stations at the city level. Income from these outlets totaled approximately $10 billion in 2004 — numbers that will only grow as cable and digital TV roll out nationwide over the coming years.

Such growth puts the Chinese government in a difficult position. “Broadcasting outlets are able to produce less than 70% of content locally,” Hu said. “The shortage of content is the biggest burden for the Chinese government,” so much so that the government took an unprecedented step in its 2003 culture reform policy by segmenting content into two major categories: the public sector and the business sector. Now all programming that is within the realm of ideology, such as news, current affairs, political information and education, will remain within the public service sector, while less ideological activities — such as production, distribution, transmission networks, advertising, entertainment, music, movies, TV dramas, sports and lifestyle — will fall to private media companies.

Of course government bodies, in this case provincial regulators, continue to monitor all content, but standards for a soap opera, for example, are much looser than for a news show. This slight lessening of control also applies to print media as well and has opened the field to a growing number of joint ventures, such as Ziff Davis’s recent partnership with Hong Kong-based SEEC Media Group to launch a Chinese version of PC Magazine.

Finding the Loopholes

While content development remains a major unmet need, particularly in broadcast media, it is also one of the hardest areas for outside investors to break into, given the government’s wish to control what its citizens see and hear. Hu stressed that there is a certain amount of ambivalence within the party when it comes to media: While the government works hard to keep control of this industry, it also recognizes the media’s potential to consolidate and legitimize the government’s own power. This results in what many people on the outside see as mixed signals as to where the industry is headed.

On the one hand, the government has paved the way for more outside investment by allowing media companies like the Beijing Gehua Cable Network to be listed on the stock exchange. On the other hand, the government has not announced any changes to its rigid communication structure — a four-tier system in which government officials at every geographic level (national, provincial, city and county) have the right to control media.

Additionally, different central government offices oversee different sectors of the media. For example the Ministry of Culture oversees all art and entertainment programming, the State Council’s Information Office manages online media and the Internet, and the State Administration of Radio, Film and TV manages these three areas. A company looking to develop an entertainment show that would also be available on the Internet would need to consult three separate government offices as well as get approval from officials on four different geographic levels — an unwieldy system for any company looking to manage across media and across locales.

Hu sees a bigger and safer investment opportunity for outsiders on the business side. “What the government most wants to borrow from outsiders is technology and expertise,” he said. First, these areas are not at all related to ideology. Second, given that the media is a relatively young field in China and has been controlled by the government for so long, there is a dearth of expertise in everything from advertising sales and ratings data to the basic skills of running a media company.

Indeed, the Shanghai Daily News recently reported that the media sector suffers from a shortage of managers and senior technicians who specialize in digital communication. Citing a book titled, The Development of Chinese Talents, published by the China Academy of Social Science Documentation Publishing House, the newspaper noted that there are enough journalists and reporters but not enough managers. With advertising now the primary source of revenue, it said, managers are needed for advertising sales, promotion, program trading and special projects. Additionally, according to Hu, the government simply doesn’t have the capital to invest in the kind of technology needed to create a media infrastructure.

Hu suggested, in what may be a clear example of “the Chinese way,” that international investors who get in on the technology side may find themselves in the right place at the right time, should the government begin to loosen its grip on content development. Ultimately, however, investors must think long-term, said Hu, and expect “slow, incremental” progress.

Newspapers Feel the Heat

Oddly enough, there is one trend in the Chinese media sector that parallels what is happening in many Western countries: Now that Internet use is on the rise and the number of television stations is growing, newspapers are hurting. According to Guoming Yu, vice dean, School of Journalism and Communication at Renmin University of China and another speaker at the Annenberg conference, the rise of new media has led to a dispersion of advertising revenue and more fragmented audiences, affecting the country’s 1,926 newspapers. In 2004, for example, advertising revenue declined at the Beijing Youth, one of the country’s largest newspapers — the first time advertising has dropped since newspapers began accepting advertisements 10 years ago.

“New media is challenging the newspaper industry,” he said. “Many young people don’t want to read newspapers. They want to get their news from the Internet.” While some people are pessimistic about the ability of the newspaper industry to survive this competition, Yu remains optimistic, saying that China’s urban growth will bring in more readers. He also cited the Internet’s lack of content and the government’s strict controls as opportunities for newspapers to fill the content gap.