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TV is Still China's Mass Media
 With the government planning to turn its largest television network, China Central Television (CCTV), into an international media powerhouse, we were curious to talk shop with China Mass Media (NYSEArca:CMM), one of CCTV's most prominent ad agents. In this interview, China Mass Media Chief Financial Officer Eric Cheung talks with JLMPE about his company's unique business model, ad spending trends and the threat of new media.
First, can you tell us a bit about the industry and your business model?
Eric Cheung: Historically speaking, TV advertising agencies in China have low margins. Maybe an advertiser will spend RMB 20 million on the next two months of advertisements but won't give you a cent for introducing them to the airtime because they know you got a rebate from the media vendor, e.g., CCTV. If an advertiser is interested in a particular airtime, for example a 15-second commercial at 7 p.m. or right before the network news, then the agency's commission is terribly low, 0-3% max.
So, to get away from this buy and sell model, a number of years ago we went to CCTV and asked for a collection of remnants, which was something no one else had done before. On CCTV channels 1 and 2 [which offer comprehensive news and financial programming, respectively], only 10% of airtime, or six minutes each hour, is dedicated to advertising. Our strategy is to buy a collection of 15 time slots each day, each slot three minutes, aside from the slots airing during primetime, which is from 7-10 p.m. The underwriting fee is not significant because individually the viewership rate of each time slot is low. But, when we bundle these slots together, their accumulated viewership rate is near that of primetime and we charge one-fourth to one-ninth of the primetime rates for these packages. That gives us tremendous room for securing clients that are sensitive to CPM, such as those in pharmaceuticals, household goods, and food and beverages.
In 2008, we started to revisit this model because its growth is limited to 10-15% per year. We started to expand our platform by underwriting news-related programs on CCTV channels 2 and 4 as well as CCTV's French and Spanish channels.
Do you expect to benefit from government plans to turn CCTV into China's international media powerhouse?
Absolutely. Right before President Hu Jintao, Prime Minister Wen Jiabao and other high ranking Chinese leaders took trips to Central America and Africa in late 2007 and early 2008, CCTV launched its Spanish and French channels. I think there is a strong signal from our government that China is no longer just an international manufacturing powerhouse. People overseas need to hear voices from China as well. They want to understand more about Chinese culture. Internationalization of CCTV will provide a wonderful platform for Chinese products to promote themselves abroad.
We recently obtained exclusive distribution rights for CCTV Spanish and French channels, which are broadcasting in 38 countries, and should be able to help exporters build their brands overseas.
This year, advertisers are cutting their budgets in China. Do you think this general trend will slow your business in 2009?
In general, starting from the fourth quarter of 2008, a lot of negative news scared people. Because a lot of companies were doing their budgets at the time, we haven't seen any significant increment in pre-booking yet, but I think pre-bookings will start to normalize during the second half of this year.
People's daily lives are not affected [by the financial crisis] in China because people tend to use cash and have a lot of savings. FMCGs [fast moving consumer goods] are shrinking a little bit, but, if there is no effect on daily life, companies still need market momentum to stimulate product sales.
What key industries do you serve?
By the end of last year, food and beverages was number one, pharmaceuticals was number two, at 15% of revenue, and three and four were fashion and household products and electrical appliances. After that would be telecom and tourist destinations. The top five industries accounted for about 70% of our total revenue. We also have clients in financial services and the auto industry.
Which industry do you think will see the most growth in ad spending this year?
Food and beverages and pharmaceuticals are in constant demand, same with daily necessities. Consumption on household products and electrical appliances would probably be stimulated by the 4 trillion yuan government initiatives package to expand consumption in rural areas, so you might see them spending a bit more. Tourism destinations may be another one. Local governments have more money in their hand from the stimulus package and they want to publicize their development projects.
As a traditional media company, do you see new or online media channels as a potential threat?
Online is not always a challenge to traditional media. The online advertising industry really started to take off in 2003, so it will enjoy a high growth rate because the base is relatively small as a sub-sector. As of 2007, only 8% of national advertisement spending, which totaled about $15 billion, was online, while almost 40% was on TV. So for TV to grow much higher or at the same pace as online advertising is kind of unrealistic.
Still, I won't say online advertising is a threat but probably a complementary media platform because different advertisers have different ‘tastes.’ Pharmaceuticals and food and beverages may do some online advertisements, but TV is the key spending area because there are a lot of messages embedded into the facial expressions and movement.
Some would suggest online advertisement is cheaper than traditional TV. It depends on how you analyze it. If you calculate the CPM numbers, I would say the CPM for online media is actually higher than that of CCTV because their respective coverage is quite different. While CCTV has about 95% reach of the total Chinese population, internet can only reach wealthier regions, such as coastal areas and municipalities. Auto maybe better suited to online, however, because consumers are most likely wealthier and they want to read a lot of information about cars before they buy. So the decision of where to spend the advertising monies depends on what kind of products are you promoting and sometimes you need different types of media working together to provide a comprehensive promotion platform for your product.
Can you talk about your competition and competitive advantages?
There are only two other listed companies doing advertising agency business in China, SinoMedia (623.HK) and China Television Media Ltd. (600088.SH), but there are about 2,000 advertising companies working for CCTV alone. Someone outside this industry would intuitively think that, if they pay a higher cost, they can grab a CCTV contract, but it's not that simple. For many years, we have been providing stable and growing business to CCTV and built up a strong partner relationship with the station. Our products provide excellent promotion and communication channels to our advertisers. I would imagine neither CCTV nor advertisers would like to take the risk to accept a new agency company simply because of pricing.
Also, in our contracts with CCTV, we always have a clause for first right of refusal. Under that clause, CCTV should turn to us at the end of our agency contracts and ask if we are going to match the bidding of companies who have offered to pay more.
For many years, we haven't seen major shifts in the mixture of the advertisement underwriting team for CCTV. The entry barrier is high, and, before we went public in 2008, we renewed all of our contracts for at least 3-5 years.
From the advertiser’s perspective, the size of the advertising agency matters. Because advertising agencies are human capital businesses, there are more than 100,000 small advertising agencies in China. From an advertiser’s perspective, you need to prepay for advertisements if you want to broadcast your promotional messages on CCTV. Small advertising agencies don't give you a sense of comfort when you need to entrust them with millions of dollars.
We have been underwriting CCTV advertising time slots for six years now and currently offer more than 500 minutes of advertising time slots on CCTV 1, 2, 4, E and F. We are also the New Year's Gala program exclusive advertising agent for CCTV along with channels 1, 2 and 4. The fact that we are a sizable advertising company helps a lot in getting new customers.
We also do production and offer a one-stop advertising shop. We have a 40-people in-house production team shooting public service announcements and commercial advertisements for government agencies and corporate clients like the Ministry of Health, Beijing Olympic Organizing Committee, China National Petroleum Corporation (NYSE:PTR, 601857.SH, 0857.HK), Otis Elevator, Mengniu Dairy (2319.HK), New China Life Insurance and many other companies. Since 2003, we have produced about 300 advertisements and have won a number of the most prestigious awards in China.
Within the next year or two, does your company plan to do any M&A?
M&A has always been one of our key growth strategies. In the traditional media sector, organic growth is quite limited unless you get more media resources. We just finished a round of media resources expansion in early and mid-2008. The most important operational initiative would be optimization of the utilization of all our media resources. So we may acquire a few small agencies to beef up our client service capabilities, while keeping our eyes open for other opportunities as well.
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