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Media Companies Face China's 'Great Firewall'

Media companies seeking to capitalize on China's growing middle class face greater challenges as authorities add digital bricks to the nation's "Great Firewall."

High-profile news about U.S. companies launching services in China only to be shut down by the country's regulators demonstrates the potential pitfalls for international media companies attempting to crack this market. Executives at companies that have successfully bridged the east-west divide said the type of content and how it's being offered makes a difference.

Media companies that have experienced setbacks in China include industry titans Walt Disney Co. and Apple Inc. Chinese regulators earlier this year banned DisneyLife, an over-the-top children's service launched by Disney and Alibaba Group Holding Ltd., and Apple's iBooks and iTunes Movies services. Both companies' digital services were pulled after a few months of operation in the country.

However, programmers such as Time Warner Inc.'s HBO Asia have struck new deals expanding on their presence in the country in recent months.

China experts and media executives at companies operating within the country said the crackdown on the Disney and Apple digital media services seemed inevitable due to Chinese regulations that ban foreign companies or entities funded by foreign companies from distributing a publishing or broadcasting service in China.

"I was shocked that the Chinese didn't block them a long time ago," said Steve Dickinson, a Seattle-based attorney at boutique law firm Harris Moure who assists foreign companies doing business in and with China. He said that Apple's shuttered iBook and iTunes Movies services presumably allowed Chinese customers to buy content that otherwise would not be permitted to be sold in brick-and-mortar stores in the country due to strict government controls over media.

What works in China

Discovery Communications Inc.'s Discovery Networks Asia-Pacific is among the foreign-affiliated programmers operating in China by offering content to local broadcasters to air. Discovery Networks Asia-Pacific distributes a slate of international and local programming to about 50 TV stations and digital platforms in China. While its content faces censorship, Chinese authorities have allowed Discovery to offer it directly to local outlets that bear the responsibility for making sure the programming is not objectionable. Fang Chang, Discovery Networks Asia-Pacific senior vice president and general manager for Greater China, said the programmer's main genre — documentaries — also tends to elicit less concern than the type of dramatic programming in which others specialize.

However, China's restrictions on distribution by foreign affiliates mean that Discovery's programming in the country is constrained by whatever airtime local broadcasters choose to allot it, Chang said. As a result, historically, Discovery has offered limited Chinese content, but that is changing. Discovery's first multi-million dollar show in China, "Survivor Games," launched on Chinese broadcaster Dragon TV and mainstream video websites. The adventure series, which involves eight Chinese celebrities and "Man vs Wild" star Bear Grylls, saw over 500 million online views and has been renewed for a second season.

Poster of Survivor GamesAs for Disney's banned service, Chang said most likely the content was not objectionable, but the OTT platform opened the door to a potential flood of foreigners attempting to launch similar services. "Once they let one in, other international companies will seek similar treatment," Chang said.

That leaves companies such as Netflix Inc., a major OTT player in most of the world, facing multiple challenges from both a distribution and a programming standpoint in attempting to crack the Chinese market.

The U.S.-based streaming service's content is much less likely to pass muster with the Chinese censors than, say DisneyLife, said Hemant Bhargava, a professor of technology management at the University of California-Davis Graduate School of Management.

"Netflix originals like 'House of Cards' and 'Jessica Jones' show governments in bad light. In the U.S., you can show the government as criminals, make fun of them, but that won't work in China," Bhargava said. Even so, Netflix's shows are still widely viewed in China, albeit through illegal means. Chinese web service Inc. reportedly hosted "House of Cards" for two seasons before China's censors caught on.

Netflix did not respond to requests for comment for this article.

Larry Namer, president and CEO of Metan Global Entertainment Group, which produces adaptations of popular U.S. content made to suit China's cultural and political sensitivities, said the key to successful programming in China is simply being respectful of the rules and culture.Metan's flagship programming includes shows such as "Hello! Hollywood," a weekly entertainment series that covers Hollywood and Chinese pop culture and lifestyle news tailored to Chinese viewers. The company is currently adapting a number of Western TV formats into localized Chinese versions and is consulting Warner Bros. and the creators of "Gossip Girl" on developing a Chinese version of the teen drama series.

"As an American, we are visiting somebody else's country … and there are certain rules of the house. Companies don't have to be in China if they don't want to do things the way it should be done in China," Namer said.

He stressed that U.S. companies must be concerned not just with what will pass legal or regulatory muster, but also what will play well with local audiences, incorporating "local customs and history and culture."

Disney, Apple and Netflix did not respond to requests for comment.

Tighter controls

While the Chinese government has traditionally sought control over media in the country, the political climate is moving toward even more regulation, experts said. "Under [President] Xi Jinping, the pendulum has swung even more firmly in the direction toward control of information and ideas. … Any possible alternative sources are seen as a threat," said Scott Kennedy, a deputy director at the Center For Strategic and International Studies, a Washington think tank.

Until now, for instance, hundreds of foreign companies have relied on a Variable Interest Entity, or VIE, to operate in ChinaCompanies have used this model to gain operational control over Chinese companies that are eligible for local licenses. However, Chinese regulators recently revised the rules, making it mandatory for Chinese entities to disclose and obtain approval of their relationships with foreign parties.

The Chinese government has now put in place a regulatory regime that allows it to closely monitor on a very micro-basis what it likes and doesn't like in terms of foreign companies using the internet in China," said Tom Shoesmith, a partner at Pillsbury Winthrop Shaw Pittman LLP who leads the law firm's China practice, in an interview.

Some believe that China is trying to use restrictions to prop up Chinese companies offering similar services, an effort that might undermine U.S. media and tech companies that attempt to launch there. For instance, even if Facebook could convince Chinese regulators to freely allow access to its platform, "with the presence of WeChat and other Chinese social media companies, it might not necessarily do well in China," Kennedy said.

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Even if U.S. media companies successfully launch in China, how long they could continue distributing content there would remain an open question, as Chinese regulators could choose to pull anything that they deem questionable.

"The regulations are very vague in their own terms — that leaves the government extensive power to ban whatever they think is improper," said SNL Kagan analyst Wangxing Zhao.

As for why U.S. companies continue to try to crack the Chinese market despite tall odds, Shoesmith said it's a simple risk-reward calculation. Given China's market potential, many foreign companies feel that the "only thing worse than doing business in China is not doing business in China," he said.