As China continues to provide expansion opportunities for global marketers and local Chinese companies start to focus more on brand-building, GroupM predicts in a report issued this month that media spending in the mainland will grow 19% in 2007, nearly double the growth rate for the overall economy. In 2008, the year of the Olympic Games in Beijing, media spending will hit at least 29%.
The media group attributes spending growth to rising incomes and low consumer price inflation, which are fueling consumer demand and sales growth. Urban per-capita disposable income grew 87% between 2000 and 2006, from $816 to $1,527. Retail sales also nearly doubled (at current prices) between 2000 and 2005.
As retail distribution extends to 600 smaller cities, marketers will spend more money reaching these new consumers as they catch up with their compatriots in big cities like Shanghai.
High demand for CCTV airtime
“Media inflation will also continue to drive the increase in investment. Television especially remains a sellers' medium in which the big channels like CCTV, Beijing TV and Shanghai Media Group have strong negotiating power as they deliver key audiences and markets and have no competitors that can match them,” said Bessie Lee, GroupM's CEO China in Beijing.
CCTV accounts for 10% of the total TV market, but more like 20% of national advertising, so its fortunes are closely linked to the budgets and performance of major advertisers, both local and multinational, that want the scale of economy of national reach and can afford price increases.
“Also, the demand for airtime remains very high compared to the supply on these big TV channels, where strict airtime restrictions apply," Ms. Lee said. "We expect media price inflation of around 15% in the coming year.”
Television continues to dominate China media investment with a 70% share of total media spending. In terms of sheer capacity to reach the massive Chinese population, television with its 90%+ penetration has no rival.
Buyers face rate card inflation
But China's multi-tiered TV market is complicated. The national powerhouse broadcaster China Central Television (CCTV) has 17 channels, followed by more than 250 provincial channels and 659 local or city channels.
The market does offer advertisers “some flexibility to match their TV investment pattern with their distribution footprint and presence, local or national,” said Ms. Lee. “In the medium term, we expect an overall broadening of marketing and distribution as companies expand into smaller towns. This will fuel increasing expenditure on television.”
“But rate card inflation will remain heavy,” she added, because demand exceeds supply in 16 out of 26 markets, or 41% of the market by revenue. There is excess supply in only 29% of the market by revenue. “Estimates on TV inflation next year vary but we predict 25%-30%.”
In the run-up to the world's premier sporting event, Olympic-based content will be a big draw for advertisers and will dominate new content. Package goods will continue to be the mainstay of television, especially the growing beverage sector, according to the GroupM report.
Automobiles and mobile phones will continue to play a big part, though in the mobile category, China will see some multinationals spending more below-the-line.
“The wild card for TV, and most media, will be financial services. China's accession into the World Trade Organization and deregulation will spur domestic and foreign banks and insurers to raise ad budgets materially,” said Ms. Lee.
Content remains a problem
But there are problems, and the biggest is content. Though quality has improved recently, there is still a long way to go. Television stations in China still perform important social development and cultural functions.
This restricts airtime devoted to entertainment. This year, China's State Administration of Radio Film and Television (SARFT) restricted the number of reality shows, and allows no more than three channels to air them at the same time. Similarly, in 2006 there was a curb on foreign cartoons to boost the local animation industry.
To plan branded content and other innovative formats, “it is necessary to keep such regulations in mind and work within the framework. Related to this, we are seeing youth especially spending more time on the internet where they can see more varied and customized content,” said Ms. Lee.
Time spent online has gone up 33% in the last four years. Fewer younger or lighter TV viewers also mean advertisers “have to buy more ratings to maintain reach.”
Advertising is regulated to protect consumer interests as well. In December 2004, for example, SARFT limited advertisers to 18 minutes during prime time (7-9pm), or approximately nine minutes per hour, causing rate inflation to top 30%.
TV advertising of prescription medicines is banned completely, and last year the ban was extended to home shopping offers for weight loss, breast enlargement, some tonics and in-home medical devices. Other TV shopping ads including jewelery sales are still allowed.
CCTV is king but provincial players are catching up
Television is still the undisputed media heavyweight in China. GroupM expects revenues for CCTV--the official Olympic broadcaster--to grow 60% in 2008, following a stronger-than-average 28% increase in the current year.
CCTV is expected to launch two dedicated, high-definition pay-per-view Olympics channels in 2008, which will broaden its revenue stream. Experts such as Ms. Lee predict unprecedented ratings for the Olympics and for the media opportunity to “exceed a dozen Superbowls” on the basis that sports audiences will be three to five times their usual size.
Advertiser access to such events will come at a price, prompting smaller advertisers to start shifting their budgets to provincial satellite channels. GroupM expects China's satellite channels to become a major growth engine, with revenues rising 28% to 32% over this year and 2008.
There are two main reasons. The enormous success of Hunan Satellite TV's American Idol-like Supergirl singing contest has encouraged other provincial satellite channels to try more innovative programming and branded content. Most are better at it than CCTV and some of the city channels. And it's cost effective to advertise on a provincial level rather than city-by-city.
“The problem provincial TV faces is the way marketers are used to thinking city-by-city rather than holistically in provinces,” said Ms. Lee.
Olympics push digital TV forward
Digital TV is also expected to take off. With nearly 140 million users, China has the second largest internet population in the world.
The user base is still growing rapidly with almost 30 million users added last year. Ad spending on two formats, digital television (DTV) and internet protocol television (IPTV), is likely to grow about 30% this year, and 60% in 2008.
But digital TV in China “is not quite the same animal as it is in the rest of the world,” warned Ms. Lee. “Today, 'digital' refers more to a transmission mode rather than differentiated content or a means of advertising. Its impact is being felt not so much as an interactive advertising medium but through its effect on TV as we know it."
According to SARFT, major cities in China should switch to digital by 2008, and the Olympic Games will be broadcast entirely in digital. By 2015, analogue broadcasting will be phased out completely.
As more channels build in the digital space, viewers will have more choices. Day-parts like off-prime and genres other than the ubiquitous TV drama will gain traction. Already DTV homes show a marked difference in viewing patterns: off-prime and late prime are the biggest gainers in ratings.
Ideally, based on response mechanisms, broadcasters will be able to address DTV viewers willing to pay for superior entertainment and information. In theory, subscription revenue will replace advertising revenue, and opportunities to reach a mass-reach audience will become scarcer. However the dearth of 'superior' content is a barrier to this.
Also, said Ms. Lee, “consumers are not so keen to pay for content. More Chinese will download a thirty-minute television show accompanied with ads at a cost of $1 than pay $2 to get the same thing without ads."
The growth of IPTV faces even bigger hurdles. It will require cooperation between telecom providers and TV channels who currently own the content.
“It is difficult to envisage this happening rapidly. Also, a successful IPTV roll-out would involve agreements across different regions, which again is a difficult task.”
Despite the issues, China Telecom is a key proponent of IPTV, which will drive its online connectivity services, and media owners like East TV are partnering with telecom carriers to provide IPTV-specific content. Thanks to the Olympics, 4.5 million subscribers and $231 million in set-top box (STB) revenue in 2008 are forecast.
Presently only Shanghai and a few South China cities have many IPTV users. Most consumers are used to free TV, familiarity with IPTV is low and set-top boxes cist around $63. Movies-on-demand is the service most people want from IPTV. Video chatting, online gaming and online studying also have potential, and the video phone has some takers.