SMG Joins Shanghai Media Overhaul
As a Shanghai resident, it’s been interesting to watch the sudden flurry of changes blowing through the local media industry that has suddenly entered a state of crisis amid plunging advertising sales. The newest change has seen a major restructuring for Shanghai Media Group (SMG), the city’s dominant broadcaster and China’s second largest traditional media company. Just 2 or 3 years ago I would have called SMG China’s second largest media company, but I suspect it has been passed in value over that period by more nimble and fast-growing new media firms like Tencent (HKEx: 700), Baidu (Nasdaq: BIDU) and possibly even Internet stalwart Sina (Nasdaq: SINA).
The rapid rise of these new media companies has posed an unprecedented challenge for traditional players like SMG, which once enjoyed a state-sponsored monopoly on the media market and were the only choice for advertisers. The new media companies, nearly all of them privately owned, can offer much more targeted and interactive platforms for advertisers than traditional outlets like newspapers and TV. Accordingly, these younger, more nimble firms have been stealing huge amounts of advertising revenue from the traditional media companies over the last 2 years, mirroring a similar trend in the west.
Against that backdrop, let’s take a look at the latest headlines involving the new overhaul at SMG. The restructuring looks mostly technical, involving the merger of Shanghai Media & Entertainment Group and Shanghai Media Group. (English article; Chinese article) The marriage looks like the reversal of a previous move that had split the former media conglomerate into separate companies, one focused on making filmed entertainment and the other on operating distribution channels like TV stations.
Perhaps most importantly, the reports say the overhaul will transform SMG into a corporation from its current status as a state-owned entity. That should help to free the company from many of the restraints it faces as a result of state ownership, including regular interference from local government and other officials who often have different agendas from running a profitable company.
This SMG restructuring comes just months after the city merged its 2 leading print media groups, Jiefang and Wenhui Xinmin, which collectively own most of the city’s major newspapers. Following that merger, the new entity, called Shanghai United Media Group, has been ordered to improve its operations by making a major push into digital media.
SMG is coming under the same pressures. Several of my contacts at China Business News, SMG’s biggest print newspaper, have told me the publication has seen a sharp drop in advertising revenue over the last 2 years. CBN is taking drastic steps to cut costs, including layoffs, hiring freezes and the cancellation of a national distribution contract for its financial news TV station. At the same time, it is accelerating a move into digital media, in a bid to bring back some of the advertisers that have abandoned the newspaper for more nimble new media options like Sina and Phoenix New Media (NYSE: FENG).
Investors weren’t too excited about the latest restructuring, with shares of SMG’s 2 listed subsidiaries falling on news of the reports. Shares of BestTV New Media (Shanghai: 600637) and Shanghai Oriental Pearl (Shanghai: 600832) both dropped by their daily 10 percent limit after the news came out. I’m equally pessimistic about the outlook for this newly restructured SMG, and also for Shanghai United Media Group.
Put simply, both of these restructurings look like too little too late. What’s more, both SMG and Shanghai United Media have deep roots as state-run entities, meaning it will be difficult to change their corporate cultures despite these big mergers and corporate overhauls. At the end of the day, these companies biggest asset will be their strong government connections, which could help to slow their decline. But I have serious doubts about the long-term viability of both of these 2 newly overhauled Shanghai media conglomerates, and also about similar state-run traditional media companies throughout China.
Bottom line: A new overhaul of Shanghai’s leading traditional media company SMG is unlikely to halt its recent decline, as it gets overtaken by younger, more nimble private sector new media firms.
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