Sustainable pay-TV businesses in China are more likely to take shape around internet-enabled TVs and mobile phones rather than the incumbent distribution platforms that serve millions of homes today, proposed Li Ruigang, chairman of China Media Capital, a private equity fund, and president of Shanghai Media Group (SMG), one of the country’s largest state-owned media companies.

Dynamic growth in ad revenue for online video and broadcast TV is squeezing pay-TV’s development in China, Li noted, speaking at this year's Asia Pacific Pay-TV Operators Summit (APOS), organized by Media Partners Asia, publisher of Media Business Asia.

At the same time, content that could drive the development of premium pay-TV in China is being directed by the government towards mass-reach, ad-supported platforms, in a bid to nurture local production, Li added.

Recently awarded licenses for national documentary channels, for example, will attract investment and production that could be used to differentiate a more premium offering.

“But I have seen another ongoing trend,” Li remarked. “I believe the pay-TV model will happen in the near future because of new devices, because of internet TV and mobile TV.”

While free content is flourishing online as well as in broadcast, Li suggested that micro-billing could provide a way to charge for unique and premium branded content in the future.

“This is a new area,” he said. “I am less confident whether the traditional cable sector can transform themselves into a real pay-TV model, but I am confident that the pay-TV model will work in these new areas.”

Currently, few households in China opt for premium channels beyond a mandatory base pack, as incumbent cable networks operate largely as utilities, rather than customer-oriented services.

As a result, the sector is unused to competition for content and consumer time. Even SMG’s IPTV service BesTV, China’s largest listed media company and seen as a leading pay-TV platform, is in a precarious position, Li suggested.

“BesTV is standing at a very critical moment or turning point,” he said.

“We still have a small window, probably one or two years, to sustain our so-called IPTV model. Going forward, I think those OTT service providers will replace us significantly. It will happen very soon.”

BesTV must fight back with its own OTT offering, managing cannibalization of traditional IPTV revenue, Li added.

“In some ways, my left hand will fight with my right hand,” he noted. “That’s the situation I need to deal with. Definitely, we will move significantly in this area, otherwise we will die.”

Heavyweight competition

Meanwhile, competition looks set to intensify further, with ecommerce giant Alibaba recently buying into both China’s largest online video company, Youku Tudou, and BesTV rival Wasu, while investing in local studios and production houses.

For Li’s other concern however, China Media Capital, market disruption is opening up new opportuntities.

The four-year-old private equity firm, backed by the China Development Bank, was set up to explore alternative media models outside the confines of a state-owned enterprise.

Notable deals so far include: Star China Media, remodeling News Corp’s China channel business as a content producer; Oriental Dreamworks, an animation and entertainment JV with US studio Dreamworks Animation; and TVB China, a production and channels partnership with Hong Kong broadcaster TVB.

Given China’s changing media landscape, online distribution, mobile in particular, will be the main target for the fund’s first and recently closed US dollar round. 

These initiatives also help inform government media reforms, Li added. Media competition and consolidation in China are constrained, because most traditional platforms are owned and run by local government, either at a provincial or city level.

This limits the pace at which the central government can develop the sector as a whole. "Government departments in charge of media and entertainment are facing a dilemma,” Li said.

“On one side, they want to promote local standards of creativity, of content quality, and try to enlarge the size of the media and entertainment industry. On the other side, it’s still very hard to have real mergers and acquisitions in state-owned media assets.”

Managing that transition is a sizable challenge.“I think the idea is to gradually move ahead, controlling the pace,” Li said.

“Wait and see what happens next, then try to come up with a relatively smooth and gradual solution."