China's Documentary Channel Financial Problems: More Context

The ‘financial problems’ at CCTV that we reported last week relate to the “branding” of programs.

“Branding” in China refers to:

The financing by a brand of a production that has the editorial mission of presenting the brand positively.
Example: ‘Inside the Porsche F1 Racing Team.’
The attachment of a sponsor message and product placement to a program that is compatible with a brand.
Example: ‘Living on a Luxury Yacht’ sponsored by Rolex.

Branded programs are an accepted part of the network business model in Asia – more than in the US and Europe where there are funding opportunities from networks and their advertisers, governments and foundations.

License fees in China for nonfiction specials are typically less than $10,000.
However I have heard of $1Mn budgets for sponsored nonfiction programs.

Chinese producers and channels are therefore highly motivated to secure financing from brands in order to improve their budgets, the quality of their productions, and their schedules.

The cashflow from spending by a brand has been split between the production budget and network revenues.

Achievements
Earlier this week, warning against a rush to judgement, I wrote: CCTV-9 director Liu Wen successfully delivered on his mandate from the media regulator SARFT to create China’s first dedicated documentary channel. The scale of the audience proved to be mind-boggling. He also blasted CCTV-9 onto the world stage, establishing copro partnerships with players in all major territories. And the path he blazed for CCTV-9 has been followed by CCTV-10 Science Channel, and numerous regional nonfiction channels. In short, he played a key role in organizing a market where before there was mainly chaos. And for that accomplishment, Liu Wen deserves the strong support from those of us who keenly signed up to be his vendors, partners and consultants.

Welcome to a Developing Market

China is not an ideal broadcasting system:

But it may be good enough if the value chain is transparent.
Although my own experience in China since the ‘Nineties has been that there are layers of intermediaries between the program supplier and the network buyer, and that many of these characters are creepy.
But remember: sponsorship was the model on which the emerging US television industry was based. (‘See NBC’s Camel News Caravan’)

And ‘branded entertainment’ is the key revenue stream for online programming, including most YouTube channels.
In any case, brand engagement is one of the few opportunities available to fund production in a developing market like China.

Two Kinds of Trouble

The present troubles at CCTV are said to arise from two situations:

There is a shortage of highly desirable ‘Signature’ programs that brands want to sponsor. CCTV executives are said to have taken advantage of this shortage, and they connected sponsors to programs in return for under-the-table payments from the brands.
Western producers have told me that there was often a gap between the contracted price for delivery of a program to a Chinese channel and the payments they received. Many accepted the discrepancy as a cost of business – roughly as the Chinese equivalent of the ‘presentation fee’ that US PBS stations charge producers to launch a program. However, we hear that Chinese network executives are alleged to have skimmed the difference.

Why Now?

China’s Communist Party rulers are committed from the top down to developing a professional management class.
This starts with promoting a transparent accounting system in state and government enterprises.
Professional audits are becoming routine, and they are catching practices that were accepted before but may now be suspected as ‘white collar crime.’
The audits also serve government policy by rooting out corruption without being clouded by the suspicion that factional Party politics are involved.
These developments are occurring against the backdrop of the ‘Flies versus Tigers’ campaign in which China’s rulers respond to public resentment against high-living winners of the system, particularly Communist Party cadres and their families.

Fallout: Further Vendor Concentration

China’s television industry burst on to the world stage earlier this decade (See my reports from along the Croisette).
Senior executives and government officials emphasized a strategy of partnering with producers who are notable global players rather than independents.
But China’s documentary revolution has been a tide that has raised many boats, including many small, creative producers.
We have heard that CCTV and other documentary network operators are now doubling down on their large-scale suppliers who add a layer of professional financial control, and this will help satisfy the attention of the auditors.
After all, having a reliable legal and accounting back office is one of the motivations for US and European networks to concentrate their commissions on ‘preferred producers,’ as we discussed in a recent post on Leftfield Entertainment‘s acquisition by ITV Studios.

Takeaway for Independents

So we have a curious situation developing:

The documentary revolution that started a three years ago at last opened the doors to decision-makers for independent producers, even if the indies were ‘less preferred’ than global players.
But small producers are now again struggling to gain access to their national broadcaster: this time because of the government’s laudable attempt to create transparent business practices in high places.