CHINA S TV AND DIGITAL VIDEO DISTRIBUTION MARKET March 19, Supported by

CHINA S TV AND DIGITAL VIDEO DISTRIBUTION MARKET March 19, 2015 Supported by

TABLE OF CONTENTS Methodology 1 Overview 1 Key TV Regulations & Policies 1 TV Industry Revenue Streams 2 Terrestrial TV 3 Provincial TV 4 Pay-TV Channel Offering and Advertising 5 TV Content in China 5 The Pay-TV Landscape 6 Cable Remains a Utility Service 7 DTH s Limited Commercial Value 8 SMG s BesTV Drives IPTV Growth 8 Internet TV and Online Video -- the Largest in Asia 9 Internet TV and Online Video Business Models, Players and Developments 10 Mobile TV 12 Broadband 12 Fixed Broadband and Mobile Growth 13 In-house Entertainment in 3-star and Above Hotels 14 Concluding Summary 14 List of exhibits Exhibit 1: TV and Video Industry Revenue, 2009-18 3 Exhibit 2: Net FTA Advertising, 2009-2018 3 Exhibit 3: Provincial TV Advertising, 2009-18 4 Exhibit 4: Local/City TV Advertising, 2009-18 4 Exhibit 5: Pay-TV TV Advertising, 2009-18 5 Exhibit 6: Pay-TV Subscriber and Penetration, 2009-18 6 Exhibit 7: Cable TV Subscribers and Revenues, 2009-18 7 Exhibit 8: Public Cable Companies: Subscribers and Revenues, 2013 8 Exhibit 9: Content Cost Comparison Between Major Internet TV and Online Video Platforms and Satellite TV networks 9 Exhibit 10: Summary of LeTV Products and Services 11 Exhibit 11: VOD Revenue, 2009-2018 12 Exhibit 12: Broadband Subscriber and ARPU Trends, 2009-18 14 List of annex Annex 1 Premium Channel Lineup, Shenzhen Topway 15 Annex 2 Key Internet TV and Online Video Players 16 Annex 3 Top 10 TV Channels and Audience Share, Beijing, Shanghai, and Guangzhou 17 Annex 4 - Top 10 TV Programs and Ratings, Beijing, Shanghai, Guangzhou 17 Annex 5 - Channel Lineup in 3-Star and 5-Star Hotels 19 Annex 6 - Key Regulations 20 China s TV and Digital Video Distribution Market II

METHODOLOGY Media Partners Asia s analysis and forecasts are based on a number of factors including (1) Discussions with video distribution companies and key groups in the value chain including broadcasters, investors, platform operators, channel operators, technology suppliers, and media agencies, (2) Proprietary databases managed by Media Partners Asia including historical industry revenues and their components, and (3) Analysis based on media industry metrics from Nielsen, GroupM and ZenithOptimedia as well as key local groups such as the SAIC (The State Administration for Industry and Commerce) and SAPPRFT (The State Administration of Press and Publications, Radio, Film, and Television). All advertising revenues are in net terms, after discounts and commissions. OVERVIEW China s media sector is large and growing at a healthy rate that generally exceeds nominal GDP growth. Television and video media remain the key segments with growth driven by demand for films, dramas and entertainment. Monetization and business models are primarily advertising driven though subscription revenue streams and business models are growing. Over the past decade, the Chinese economy has expanded over 240% due to the government s focus on rapid macroeconomic development and wealth creation. Market oriented reforms have boosted living standards, ensuring that China, a country with the world s largest population, is the second largest global economy and remains a top economic performer. Per the IMF, China s purchasing power parity (PPP) adjusted GDP was 96% of the USA s in 2013 and is forecast to exceed the USA s in 2014. Based on 2013 foreign exchange rates, China s GDP totaled US$9.3 trillion for the year. More recently, economic growth has slowed due to deliberate government measures and with the muted global economic rebound. The Xi Jinping Administration has opted to accept lower GDP growth rates as economic and legal reforms are implemented and quality of life issues increasingly emphasized. As a result, China s economy is transitioning from its traditional dependence on fixed investment, heavy industry and exports to one more reliant on consumer demand and the services sector. Furthermore, China s 12th Five-Year Plan (2011 2015) identified the cultural industry, including media and entertainment, as a key focus of economic growth. The IMF forecasts that China s real GDP growth rate will gradually decline from 7.7% in 2013 to 6.4% in 2018. Media Partners Asia estimates that the TV and video segments generated revenues of US$30.7 bil. in 2013. TV advertising is the dominant ad media in China totaling US$15.9 bil. in 2013 and equaling 47% of total advertising. Media Partners Asia forecasts TV and video revenues will grow from US$30.7 bil. in 2013 to US$47.2 bil. in 2018, a 9.0% CAGR. Future TV content and video demand drivers will be: (1) Robust demand from TV channels including national, provincial satellite, provincial terrestrial, and city/local TV; (2) Spending and demand from online video platforms; and (3) Spending and demand from fast growing and emerging IPTV-based and Internet TV platforms. KEY TV REGULATIONS & POLICIES The government views TV as a critical tool for communicating with China s vast population of 1.37 billion people. All domestic TV channels and platforms are state-owned and controlled. TV is the dominant media, accounting for 47% of total advertising revenue. Several authorities regulate video content and its distribution. The State Administration of Press and Publications, Radio, Film, and Television (SAPPRFT) is the main regulator and oversees TV content, channels, broadcasting and pay-tv platform operations. The Ministry of Industry and Information Technology is responsible for Internet infrastructure, including IPTV infrastructure and SAPPRFT oversees online content. Regulations emphasize cultural values, often to China s TV and Digital Video Distribution Market 1

the detriment of commercial revenues, while also serving to protect CCTV s elite position as the national broadcaster. Channels self-censor to comply with government requirements. Sensitive topics include content dealing with political, religious, cultural, and moral affairs. Advertising is limited to 12 minutes per hour and a maximum of 18 minutes from 11am to 1 pm and 7 pm to 9 pm daily. Approval for the launch of domestic pay channels is subject to SAPPRFT or its local equivalent s approval. Regulations for foreign media companies and channel operators are more onerous. Landing permits are required for foreign channels and thus far, only 34 have received these permits The SAPPRFT controlled China International Television Corporation manages uplinking and downlinking via its appointed subsidiary, the CTV-Satellite TV Program Co., Ltd. Foreign channels are only distributed via approved provincial-level agents within a prescribed range, including 3-star hotels and above and foreign compounds, which significantly reduce potential viewership. The licensing of foreign television and video content is subject to government approval, and foreign content broadcast on TV is effectively capped at 25% of total airtime for domestic free-to-air (FTA) channels and 30% for pay channels. Foreign content is not allowed to air on domestic channels from 7 pm to 10 pm daily. Foreign direct investment (FDI) in the television sector, including FTA channels, domestic pay channels, pay-tv platforms and content companies is prohibited. With Internet TV and online video, foreign content will be capped at 30% of total licensed content in 2015. With the licensing approval of foreign TV content implemented in 2014 and the 30% cap on Internet TV and online video content announced in 2014 and scheduled for implementation in April 2015, the regulatory regime is becoming more restrictive for international content providers. Collectively, these regulations are the most restrictive of all Asian markets, excluding North Korea. Meaningful foreign investment is discouraged. Broadcast of international channels is limited, and program licensing is both capped and subject to government approval. Government regulations have inhibited and will inhibit the growth of television media. Thus far, these regulations have encouraged the flow of more original and entertaining content to online video platforms such as Youku Tudou and to hybrid IPTV/ Internet TV platforms such as BesTV; however, new approval requirements and licensing caps for foreign content will limit the relative freedom and operational flexibility that IPTV, Internet TV and online video platforms have enjoyed thus far. A more detailed summary of China s media regulations is in Annex 6. TV INDUSTRY REVENUE STREAMS As of year-end 2013, China had 450 mil. households and a television penetration rate of 97.3%, equaling 438 mil. TV households. The channel landscape includes approximately 3,350 national, provincial satellite, provincial terrestrial, regional and city FTA channels as well as domestic and international pay channels. The government or key state-owned enterprises (SOEs) control all domestic FTA and pay channels. As of year-end 2013, TV industry revenues totaled US$29.3 billion. Key revenue components include FTA advertising of US$11.4 billion (39.0% of total TV revenues), pay-tv advertising of US$4.5 billion (15.4% of total TV revenues), and pay-tv subscription of US$13.3 billion (45.5% of total TV revenues). Total TV revenues are projected to grow at an 8.1% CAGR from US$29.3 billion in 2013 to US$43.1 billion in 2018. Pay-TV subscription revenues are forecast to grow at a 10.3% CAGR which is largely attributable to IPTV households growing from 29 mil. in 2013 to 50 mil. in 2018. For 2013-18, TV advertising is projected to grow at a 6.1% CAGR, which reflects GDP growth tempered with increasing allocations to online and mobile advertising. China s TV and Digital Video Distribution Market 2

Exhibit 1: TV and Video Industry Revenue, 2009-18 (US$ mil.) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 % CAGR 2013-18 Total TV Industry Revenue 17,260 20,159 23,064 26,181 29,251 32,329 35,118 37,926 40,631 43,126 8.1% TV Advertising 10,689 12,108 13,582 14,832 15,928 17,047 18,172 19,300 20,387 21,371 6.1% FTA 7,726 8,738 9,752 10,644 11,414 12,207 13,000 13,789 14,540 15,217 5.9% Pay-TV 2,963 3,369 3,830 4,187 4,514 4,840 5,171 5,511 5,846 6,154 6.4% Pay-TV Subscription * 6,571 8,051 9,482 11,350 13,323 15,282 16,946 18,627 20,245 21,755 10.3% Video revenue from AVOD 170 330 670 1,070 1,401 2,013 2,572 3,078 3,556 4,033 23.6% Total TV and Video Revenue 17,430 20,489 23,734 27,251 30,652 34,342 37,690 41,004 44,187 47,159 9.0% * Pay-TV subscription revenue includes SVOD and TVOD revenues Exhibit 2: Net FTA Advertising, 2009-2018 (US$ mil.) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 % CAGR 2013-18 Terrestrial 7,726 8,738 9,752 10,644 11,414 12,207 13,000 13,789 14,540 15,217 5.9% CCTV 2,716 3,036 3,268 3,561 3,810 4,073 4,333 4,589 4,832 5,056 5.8% Provincial 3,010 3,421 3,887 4,253 4,599 4,939 5,288 5,651 6,017 6,359 6.7% City TV / Local 1,999 2,281 2,596 2,830 3,004 3,195 3,378 3,549 3,691 3,803 4.8% Media Partners Asia notes that pirated pay services are available in China. Discussion of these services is deliberately excluded from the scope of this document. TERRESTRIAL TV Terrestrial channel operators include CCTV, provincial (satellite and terrestrial), as well as city and local channels. Channels are broadcast in both digital and analogue formats and the analogue switch off is scheduled for 2015-18, which is achievable. The DTT standard for China, as well as Hong Kong and Macau, is digital terrestrial multimedia broadcast (DTMB a Chinese domestically-developed standard). In 2013, terrestrial TV advertising revenues totaled US$11.4 billion which included CCTV (33%), provincial (40%), and city/local (26%). FTA advertising revenues are projected to increase at a 5.9% CAGR from US$11.4 billion in 2013 to US$15.2 billion in 2018. Provincial satellite channels will be the fastest growing terrestrial sub-segment as quality content and affordability drive advertiser demand. CCTV will remain important given its national reach but affordability for media buyers will limit growth. Content quality will remain an issue for provincial terrestrial, city and local channels. China s TV and Digital Video Distribution Market 3

PROVINCIAL TV The provincial broadcasters can be divided into provincial satellite and provincial terrestrial TV channels. Each of China s 34 provinciallevel administrative units operates at least one and up to six satellite channels broadcast nationally via cable operators basic pack. In 2013, the provincial satellite market totaled US$5.1 billion and it is forecast to grow at a 9.5% CAGR to US$8.0 billion in 2018. Advertisers and media buyers are increasingly focused on these channels as they offer a competitive alternative to CCTV s reach at lower costs. Unlike provincial satellite channels, which compete nationally, provincial terrestrial channels are more numerous and feature content targeting mainly provincial audiences. Production values are lower and the channels suffer from content disadvantages similar to the city and local channels. As a result, provincial terrestrial TV advertising is smaller than provincial satellite TV s and stood at US$3.3 billion in 2013. Poor content quality will continue to impact growth and provincial terrestrial TV advertising is projected to grow a modest 1.6% CAGR to US$3.6 billion in 2018. City and local channels account for the vast majority of China s TV channels. While production values are lower and viewer demographics less appealing for national media buys, the sheer volume of these channels and media buyers ability to deliver geographically targeted advertising solutions aids city and local channels. City and local TV advertising is forecast to grow from US$3.8 billion in 2013 to US$4.8 billion in 2018, a 4.8% CAGR. Exhibit 3: Provincial TV Advertising, 2009-18 (US$ mil.) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 % CAGR 2013-18 Total Provincial 5,474 6,220 7,068 7,733 8,363 8,980 9,615 10,275 10,941 11,562 6.7% Provincial satellite 2,793 3,124 3,801 4,460 5,063 5,669 6,283 6,904 7,515 7,983 9.5% Provincial Terrestrial TV 2,681 3,096 3,267 3,273 3,300 3,311 3,333 3,371 3,426 3,578 1.6% Exhibit 4: Local/City TV Advertising, 2009-18 (US$ mil.) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 % CAGR 2013-18 Local / City TV 2,499 2,852 3,245 3,537 3,755 3,994 4,223 4,436 4,614 4,754 4.8% China s TV and Digital Video Distribution Market 4

PAY-TV CHANNEL OFFERING AND ADVERTISING Basic and premium pay channel advertising totaled US$4.5 billion in 2013 and is forecast to grow to US$6.2 billion in 2018, a 6.4% CAGR. Basic pay channel advertising will be the primary driver supplemented with more limited advertising from premium domestic channels (usually about 60 channels per platform) and 34 foreign channels that have landing permits. Increasing GDP and expanding tourism will be factors in pay channel advertising growth. An indicative premium channel lineup is included in Annex 1 and indicative 3 and 5-star channel packages are included in Annex 5. Media Partners Asia notes that limited leakage from 3-star and above hotels and foreign compounds does occur; however, the economic impact from other forms of piracy and informal channel distribution are probably higher. Media Partners Asia also notes that foreign channels which are typically only available in 3-star and above hotels and foreign compounds are available to foreign nationals with passport identification in some regions; thus enforcement of foreign channel regulations may not be uniform. For example, Phoenix Satellite TV channels, which are unencrypted on Asiasat 7, are sometimes available in China. TV CONTENT IN CHINA Per SAPPRFT, movies and dramas account for the largest genre of content broadcast. News, entertainment, lifestyle and commercials account for much of the balance of content aired. Dramas, both domestic and foreign, movies, news and game shows can all rate well. Regional differences in viewership exist. Exhibit 5: Pay-TV TV Advertising, 2009-18 (US$ mil.) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 % CAGR 2013-18 Pay-TV Advertising 2,963 3,369 3,830 4,187 4,514 4,840 5,171 5,511 5,846 6,154 6.4% China s TV and Digital Video Distribution Market 5

Exhibit 6: Pay-TV Subscriber and Penetration, 2009-18 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 % CAGR 2013-18 TVHH ('000) 401,181 408,839 419,638 430,502 438,017 445,527 452,059 457,754 462,333 465,412 1.2% Pay-TV Subs ('000) 178,920 194,996 215,105 237,598 252,565 265,516 275,513 297,770 308,397 319,261 4.8% Cable Subs ('000) 175,220 187,290 201,520 214,590 224,000 231,146 235,799 239,292 242,406 245,471 1.8% Analog ('000) 112,010 99,310 89,332 76,823 62,974 47,269 31,354 24,571 18,259 12,235-27.9% Digital ('000) 63,210 87,980 112,188 137,767 161,026 183,877 204,445 214,721 224,147 233,236 7.7% DTH Subs ('000) - - - - - - - 14,986 19,106 23,780 n/a IPTV Subs ('000) 3,700 7,706 13,585 23,008 28,565 34,370 39,714 43,492 46,885 50,010 11.9% % Pay-TV Pen./TVHH (incl. multiple subs)* (%) 43.8% 46.0% 48.3% 50.4% 51.8% 52.7% 53.0% 56.5% 57.6% 58.9% 2.6% Pay-TV ARPU (US$) 3.2 3.6 3.9 4.2 4.5 4.9 5.2 5.4 5.6 5.8 5.0% Cable (US$) 3.2 3.6 3.8 4.1 4.5 4.9 5.2 5.5 5.8 6.0 6.1% DTH (US$) - - - - - - - 0.9 0.9 1.0 n/a IPTV (US$) 3.9 4.3 4.5 4.7 4.9 5.3 5.6 5.9 6.3 6.6 6.3% * Analysis assumes approximately 90% of IPTV subs also subscribe to cable THE PAY-TV LANDSCAPE With 224 mil. subscribers (89% of pay-tv households and 51% of total TV households), cable is China s primary pay platform. The mandated conversion to digital continued with more than 72% of cable households converted to digital as of year-end 2013. Media Partners Asia projects 87% digital conversion by year-end 2015. Remaining analog households will eventually be converted by 2020. More immediate conversion is not feasible, as many rural or suburban subscribers cannot be cost effectively converted to digital. Ultimately, these subscribers may be digitalized via the rural DTH offering in the future. Cable will remain the dominant pay-tv delivery platform, serving 245 mil. homes by 2018. Platforms competing with cable include DTH and IPTV as well as disruptive platforms such as online video offered via IP-based transmission and Internet TV, which is the digital distribution of TV content over the Internet. DTH is expanding rapidly in rural regions but it is a free service (see below). IPTV will continue strong growth, eventually competing in China s largest ~100 cities. In general, the commercial relevance of pay-tv platforms and DTH are limited due to the utility nature of the services. The utility nature of these services has several defining characteristics. The service is frequently low cost for viewers and low margin for platforms, which is not surprising as the Communist Party views TV primarily as a means of communicating with its population and secondarily as a form of entertainment. VAS, while often offered, are not as actively marketed as in many other Asian countries. Pay platform service fees are frequently bundled with electricity bills which also highlights the utility nature of the service. Given the conventional content aired on pay platforms, more original, entertaining and commercial content has often migrated to less regulated content delivery systems such as online video and Internet China s TV and Digital Video Distribution Market 6

TV. Media Partners Asia expects that these delivery systems will play a larger role in the pay-tv ecosystem in the future, driven by players such as Wasu and BesTV but also notes that heightened government content oversight and licensing requirements will likely limit the potential of these platforms too. CABLE REMAINS A UTILITY SERVICE Cable is a utility service in China. ARPUs are only US$4.5 and only modest revenues flow through to channel operators. The typical digital basic pack includes over 60 domestic channels including 12 CCTV channels, 34 provincial satellite channels with provincial terrestrial and city/local contributing the balance. According to Media Partners Asia, cable subs are expected to grow at a CAGR of 1.8% from 224 mil. in 2013 to 245 mil. in 2018, driven mainly by continued urbanization. Cable ARPUs are projected to increase from US$4.5 in 2013 to US$6.0 in 2018, boosted by HD and VAS, including catch up services and VOD. 13% of total cable subscribers used HD services in 2013. The adoption of value added services (VAS), primarily DVR, catch up and VOD, is nascent. Less than 1% of digital cable subs use DVRs while VOD adoption is growing at a decent rate from a low base. Revenues from HD and VAS totaled US$1.4 bil. in 2013, equivalent to 12% of digital cable revenues. Going forward, Media Partners Asia projects that HD cable subs will grow from 29 mil. in 2013 to 77 mil. in 2018. Key drivers include falling prices of flat screen TV sets and HD STBs combined with the proliferation of local content, movies and sports in HD formats. While total cable platforms exceed 2,000, cable consolidation within the provinces continues but inter-provincial consolidation is limited. National cable operators will emerge but the timing of their emergence is difficult to estimate. Key large-scale and well managed cable platforms include Sichuan Cable, Jiangsu Cable, Shenzhen Topway, Guangdong Cable, Hunan Cable, Oriental Cable, Wasu Media, and China Cable Network, in which Wasu Media owns a ~42% stake. These companies will be best positioned as consolidators going forward. Wasu s raising its stake in China Cable Network from 31% in 2012 to 42% in 2013 was the largest interprovincial transaction for the year. Jack Ma and Shi Yuzhu s US$1 bil. investment in Wasu was the largest media transaction of 2014. Wasu operates various cable systems with direct ownership of 2.6 mil. customers in Hangzhou City. It also operates Internet TV services across multiple provinces. Its aggregate subscribers Exhibit 7: Cable TV Subscribers and Revenues, 2009-18 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 % CAGR 2013-18 Cable Subs ('000) 175,220 187,290 201,520 214,590 224,000 231,146 235,799 239,292 242,406 245,471 1.8% Analog ('000) 112,010 99,310 89,332 76,823 62,974 47,269 31,354 24,571 18,259 12,235-27.9% Digital ('000) 63,210 87,980 112,188 137,767 161,026 183,877 204,445 214,721 224,147 233,236 7.7% Cable ARPU (US$) 3.2 3.6 3.8 4.1 4.5 4.9 5.2 5.5 5.8 6.0 6.1% Cable TV Sub revenue (US$ mil.) 6,423 7,754 8,913 10,323 11,818 13,287 14,455 15,586 16,628 17,668 8.4% Analog (US$ mil.) 3,633 3,488 3,168 2,841 2,433 1,939 1,397 1,004 776 558-25.5% Digital (US$ mil.) 2,790 4,266 5,745 7,483 9,385 11,349 13,059 14,582 15,851 17,109 12.8% China s TV and Digital Video Distribution Market 7

(cable, interactive digital, and internet TV) totaled 20 mil. as of yearend 2013. Wasu plans to invest US$240 mil. in content-related areas, and US$180 mil. in Internet TV terminals. Further investment in cable operators and digital content are likely. In 2014, China Radio and Television Network (CRTN) was finally incorporated and it is potentially being positioned as a national cable consolidator. Its progress thus far has been nominal. While its limited capital base of US$725 mil. may be one factor, other issues may include consolidation complexities associated with the incomplete integration of SOs within provinces and resistance from provincial operators and their stakeholders. Accordingly, its near term impact is likely to be limited. Exhibit 8: Public Cable Companies: Subscribers and Revenues, 2013 Cable Operators (2013) Cable TV Subscribers Cable TV ARPU (US$) Revenue (US$ mil.) EBITDA (US$ mil.) Wasu Media 2,590,000 4.0 285 119 Shenzhen Topway 1,123,400 4.0 146 55 China Cable Network 4,068,000 3.5 273 20 Beijing Gehua 5,240,000 2.9 350 162 Foreign channel operator revenues are derived primarily from (1) Distribution in 3-star and above hotels and foreign compounds, (2) Program specific advertising revenue share arrangements with provincial satellite channels, (3) Content licensing to premium digital cable channels, and (4) Distribution on digital cable platforms. DTH S LIMITED COMMERCIAL VALUE China remains committed to the rollout of its ambitious DTH initiatives. The plans are designed to provide TV services to poor, rural households, primarily in western China. DTH services were launched in 2009 and the service includes 60 CCTV, provincial satellite, provincial terrestrial and city/local channels. DTH households, all of which are free, totaled 27 mil. as of year-end 2013. Subscription services are expected to be launched in 2016 with paying subscribers increasing from 15 mil. in 2016 to 24 mil. in 2018. HD services will be a key driver in the uptake of pay DTH services. Media Partners Asia expects monthly ARPUs to be approximately US$1/month for 2016-18. SAPPRFT, provincial governments and China Mobile subsidize the DTH STBs. SMG S BESTV DRIVES IPTV GROWTH Shanghai Media Group controlled BesTV operates a joint venture with CCTV affiliate China Network Television (CNTV). The BesTV branded service has positioned itself as the incumbent in the IPTV space. It was available in 22 cities and it had 20 mil. subscribers as of year-end 2013. BesTV s offering is an add-on to fixed line broadband (8-10 Mbps) services. BesTV s IPTV service is offered in partnership with China s three leading fixed line telecommunications providers China Telecom, China Unicom and China Mobile. Content is provincially localized and the company offers 160 channels in Shanghai. In 2013, the company had 20 mil. IPTV subscribers and 1 mil. Internet TV subscribers. 2013 revenues from Internet TV services totaled US$25 mil. while the IPTV business generated US$400 mil., adjusted for revenue sharing with the telcos and its JV partner. In 2014, BesTV announced its acquisition of Shanghai Oriental Pearl Group. Post-acquisition, BesTV will become SMG s primary Internet vehicle. Concurrently, BesTV plans to raise US$1.6 bil. via a private placement to acquire additional SMG assets. Future IPTV subscriber growth is dependent upon regulators opening new cities as well as the infrastructure in expansion cities supporting the service. Media Partners Asia envisions that IPTV will ultimately China s TV and Digital Video Distribution Market 8

be allowed into China s largest ~100 cities where the IPTV platform is technically feasible and scalable. INTERNET TV AND ONLINE VIDEO -- THE LARGEST IN ASIA China is the largest market in Asia Pacific for Internet TV and online video services. The market will benefit significantly from increased smartphone usage. The operators combined subscriber base for 3G and 4G networks totaled 417 mil. in 2013 and is expected to expand to 1.2 bil. by 2018, with 4G accounting for the majority of customers. Online video is an increasingly competitive market and is only a small slice of China s digital economy which includes search, games and e-commerce as well as Internet TV technology and mobile applications. Large online companies (i.e. Alibaba, Baidu, Tencent, Xiaomi) have started to invest in online video platforms in a bid to capitalize on growing online video content consumption. The market for Internet TV and online video totaled US$1.6 bil. in 2013, a 36.5% year-on-year growth, with advertising topping US$1.4 bil. and subscription reaching US$191 mil. Media Partners Asia projects that the Internet TV and online video market will grow at a CAGR of 23.5% between 2013 and 2018, reaching US$4.6 bil. in revenue by 2018 with subscription representing almost US$549 mil. and advertising totaling US$4.0 bil. Online video consumption and monetization via mobile platforms will be a key catalyst for industry growth. Content costs are significant, reaching approximately US$920 mil. in 2013. Content investment at some of the bigger Internet TV and online video players is in the US$200-300 million range, on a par with top-tier satellite networks. Internet TV and online video players such as Youku Tudou are gradually scaling down their exposure to external content (i.e. Asian and Hollywood content as well as domestic dramas) with the focus increasingly on self-produced content. However, other major players such as Tencent s QQ Live, Sohu and the Baidu-owned iqiyi along with internet TV/STB specialists (i.e. Wasu, LeTV, BesTV) continue to invest aggressively in external content, led by domestic TV dramas and variety shows as well as premium Asian content, such as Korean dramas. During 2013, Media Partners Asia estimates that out of the US$920 mil. spent on content by Internet TV and online video platforms, 30% was allocated to overseas content, led by Hollywood, Korean and exmainland Chinese content while 70% was spent on domestic dramas and shows as well as in-house productions and partnerships. Expenditure on US or Hollywood content, totaled US$150 mil. or more than 15% of total content costs for the Internet TV and online video industry. In 2014, competitive bidding increased the cost of a number of local TV shows including: (1) LeTV s exclusive win of I m A Singer, produced by Hunan Satellite TV; (2) PPTV s broad program partnership with Jiangsu Satellite TV for a range of shows; (3) Tencent s high cost win for the successful Voice of China Season 3, produced by the China Media Exhibit 9: Content Cost Comparison Between Major Internet TV and Online Video Platforms and Satellite TV networks US$ mil. 300 250 200 150 100 50 0 Youku Tudou Jiangsu TV Zhejiang TV iqiyi LeTV Tencent Video Anhui TV Dragon TV Note: Online video platforms shown in blue color, Satellite TV networks denoted in green color Source: Company data, Media Partners Asia China s TV and Digital Video Distribution Market 9

Capital owned Star China and run first on Zhejiang Satellite TV; and (4) iqiyi s expensive acquisition of Where Are We Going, Dad?, a big hit reality show produced by Hunan Satellite TV. INTERNET TV AND ONLINE VIDEO BUSINESS MODELS, PLAYERS AND DEVELOPMENTS Key players in online video portals include Youku Tudou, Tencent, Baidu-owned iqiyi and Sohu. These players are dependent on advertising-supported AVOD services with ~1% of customers subscribing to SVOD. Youku Tudou is a leading online video portal in China. Youku launched in December 2006. In March 2012, Tudou, the No.2 online video portal at that time, merged with Youku. The new company was named Youku Tudou. In May 2014, e-commerce giant Alibaba invested approximately US$1.1 bil. to acquire a 16.5% equity interest in Youku Tudou. In November 2014, Xiaomi, China s second largest smartphone manufacturer, invested in Youku Tudou through the open market. The two companies agreed to jointly develop content and technology, including multiscreen online video services. Youku offers a combination of licensed professional content, usergenerated content and self-produced content. Most of the company s revenue is derived from online advertising, followed by consumer services, anchored to SVOD models. Youku Tudou is increasingly focused on growing subscription revenues through its consumer business, which had 800,000 customers at end- September 2014. Annualized revenues are tracking at US$25 million. The company plans to invest in original video content, allocating close to US$100 mil. to such content (essentially self produced) in 2015 versus ~US$50 mil. in 2014. In Q3 2014, Youku Tudou s inhouse self-produced original content helped drive 10% of its total traffic. Total content costs are still weighted towards acquired shows and the overall content budget is set to reach US$400 mil. in 2015. The company s main goal is to ramp up its leadership position as a multiscreen video player. During 1H 2014, mobile contributed more than 50% of Youku Tudou s traffic and over 30% of its revenue. The company is also partnering with all of China s major Internet TV set manufacturers and STB makers to allow consumers access to the Youku App pre-installed. iqiyi launched in 2010 and is an online video platform owned by search giant Baidu. Baidu also acquired another online video business called PPS in May 2013. Baidu merged PPS into iqiyi in 2013. Since this integration, iqiyi s traffic has accelerated, and it is currently competing with Youku Tudou for the top position in China s online video market. The company has experienced strong traffic growth on both PC and mobile in 2014, due to aggressive content acquisition. Total content costs are estimated to have topped RMB1 billion in 2014, driven by acquisition of external content. About 55% of its budget is allocated to external content, led by domestic TV dramas and entertainment and followed by shows and movies from the US and Asia. About 30% of iqiyi s traffic is generated by domestic TV dramas and variety shows. In November 2014, Xiaomi invested US$300 mil. into iqiyi with the intention that iqiyi leverage Xiaomi s strong hardware distribution and sales capabilities in smartphones and other hardware. Search giant Baidu will remain the majority shareholder as it continues to view video as an important vertical within the Internet space. Like Youku Tudou, iqiyi plans to invest more in self-produced content. In 2015, the company plans to produce 2-3 series per month of drama series as well as a number of talk shows. QQ Live is the online video platform of Chinese Internet giant Tencent. The platform broadcasts TV programs from China s major China s TV and Digital Video Distribution Market 10

TV stations, including dramas, variety shows, animation, sports, and HD movies. Tencent is aggressively investing in video content for QQ Live, forming strategic partnerships with Warner, HBO and Fox as it aims to become the exclusive online broadcasting platform for various US series and National Geographic Channel programming in China. The company owns the online rights to The Voice and is also looking to deliver 50 online concerts in 2015. Another key investment area will be in-house production of TV dramas. In November 2014, Chinese content producer Huayi Brothers signed an agreement with Tencent and Alibaba and separately announced that Tencent will participate in its private placement with total investment of ~US$200 mil. Tencent will have priority in the adaptation of Huayi Brothers drama and movie products for its online assets. Tencent and Alibaba and their related businesses will also have priority in obtaining the broadcasting rights (including PC and mobile internet, IPTV, smart or internet TV, STB) for Huayi dramas and movies. Tencent will also have the right to invest 5-10% in Huayi s movie products. In the next three years, Tencent and Huayi will cooperate in producing five movies. Sohu is the last major player in the AVOD-based online video base but has faced a challenging time due to growing competition among industry players.. Sohu does not have a major competitive edge over players such as Youku (backed by Alibaba), iqiyi (backed by Baidu) and Tencent video. The company continues to spend about US$100 mil. a year on content, mostly on acquired shows (domestic and international). Sohu Video generated US$176 mil. in AVOD revenue during 2014 and its online video services remain unprofitable with losses expanding due to the increasing scale of content costs. More than 60% of Sohu Video traffic is generated via mobile. In Q4 2014, the company broadcast two highly rated TV variety shows, the SBS Korea owned Running Man and the Chinese version of Amazing Race, the latter being exclusively on Sohu Video. The two programs collectively generated almost 900m video views on its platform. Key players in Internet connected TV include LeTV, BesTV and Xiaomi. Sales of Internet connected TV sets or smart TVs continue to grow rapidly, providing a foundation for subscription-based video services. Key players are selling branded TV sets bundled with SVOD libraries and various online premium services. Total accumulated internet TV set sales reached 88 million in 2014 (60% year-on-year growth) while internet TV users are estimated to have reached 32 mil. Because of its aggressive bundling with content, the space has come under increased regulatory scrutiny. LeTV produces branded TV sets (Super TV) and charges US$78 per year for the use of its SVOD library. The company had about 1.5 mil. active users in 2014. Content investments totaled US$160 mil. in 2014, leveraging external content acquisition; its own investments in producers such as FlowerTV and LeVision Pictures; and the licensing of sports rights. LeTV has come under increased regulatory scrutiny in late 2014 as SAPPRFT announced that companies without integrated Internet and TV broadcasting and content services licenses cannot provide video apps on smart TV terminals. Accordingly, LeTV is applying for these licenses, which it expects to receive in 1H 2015. Until this time, the company has halted marketing and selling its Internet TV services. Exhibit 10: Summary of LeTV Products and Services App Content Platform Terminal LeTV store Content producing E-commerce Web browser Video searching Content operating Video cloud open platform Smart terminal (Super TV + STB) LeTV User Interface (App) China s TV and Digital Video Distribution Market 11

Exhibit 11: VOD Revenue, 2009-2018 (US$ mil.) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 % CAGR 2013-18 Total VOD Revenue 271 540 1,000 1,543 2,051 2,819 3,535 4,214 4,826 5,435 21.5% AVOD Revenue 170 330 670 1,070 1,401 2,013 2,572 3,078 3,556 4,033 23.6% SVOD Revenue 15 20 50 96 191 256 325 398 482 549 23.5% TVOD Revenue 86 190 281 377 459 550 637 737 788 853 13.2% BesTV, the IPTV leader in China, has 1 mil. Internet TV subscribers with ARPUs of US$2.4 a month in 2013. BesTV is increasingly focused on its Internet TV platform. In November 2014, the company announced its plans to merge with sister company, Shanghai Oriental Pearl. Once merged, it plans to invest US$800 mil. in Internet TV while also increasing its investment in other content acquisitions. Other Internet connected TV players include online operators partnering with technology vendors and TV manufacturers, including Skyworth, Haier and TCL. Key players participating in Internet TV via STBs include Wasu Media, BesTV and LeTV while others such as Tencent, Youku Tudou and iqiyi are also entering the space. Sales of STBs to access Internet TV and online video services are also growing with an almost 17 mil. subs in 2013 and a growing percentage is buying through to SVOD services. Details for key Internet TV and online video license holders are included in Annex 2. MOBILE TV China has three key mobile and fixed line telephony companies - China Telecom, China Mobile and China Unicom with over 1.2 billion users (including multiple accounts). Their service offerings include the live streaming of multiple TV channels via the CMMB standard as well as video downloads. Revenues from mobile TV are derived from data streaming. While specific revenues for mobile TV are difficult to disaggregate, mobile video consumption is increasing rapidly with the proliferation of smart phones and with the launch of 4G services in 2014. BROADBAND Total broadband subscribers, including wireless, will grow from 816 mil. in 2014 to approximately 1.5 bil. by 2018, according to Media Partners Asia. Increasing 4G adoption and smartphone usage will provide a significant boost to online video consumption. Key trends include: The combined subscriber base for 3G and 4G networks reached 593 mil. in 2014, according to Media Partners Asia analysis, and is expected to swell in the future, with 4G accounting for a greater share of customers. Both China Mobile and China Telecom have accelerated their respective 4G network deployment plans, with China Mobile leading the industry in terms of 4G network coverage. China Mobile s large scale 4G deployment plan covers over 300 cities and extends into rural areas. China Telecom meanwhile is targeting coverage in the 100 largest cities where over 75% of mobile data traffic is generated. China Unicom plans to expand its 4G network deployment in 2015 with 330,000 new base stations. China s TV and Digital Video Distribution Market 12

In terms of pricing, China Mobile has been actively driving 4G smartphone retail prices down to RMB800-1,000 and expects 4G handset prices to decline to RMB 600 in early 2015. The Ministry of Industry & Information Technology (MIIT) formally announced the Broadband China Strategy and Implementation Scheme in August 2013. The plan targets 50% fixed household penetration by 2015, and aims to ensure comprehensive broadband coverage in rural and urban areas by 2020, with connection speeds of at least 50 Mbps for urban areas and 12 Mbps for rural areas. Rollout of 4G will be crucial to connecting rural areas where fixedline infrastructure is not commercially viable. In December 2013, China Mobile was granted a fixed line and broadband license from MIIT, shaking up the legacy duopoly structure between China Telecom and China Unicom. To jumpstart its fixed broadband business, China Mobile is offering aggressive promotional broadband pricing, with discounts of up to 40% versus the China Telecom and China Unicom offerings. Fiber rollout remains a key focus for China Telecom, which has promoted fiber network and bandwidth upgrades in cities. More than 90% of its urban homes passed are capable of having broadband speeds of 20 Mbps. Fiber customers will account for 35% of the total fixed broadband market by 2020. FIXED BROADBAND AND MOBILE GROWTH Total broadband subs, including wireless, will grow from 269 mil. in 2013 to 368 mil. in 2018 as telco operators leverage 4G mobile networks; fixed networks compete with pricing, and FTTx is rolled out. The Ministry of Industry & Information Technology (MIIT) formally announced the Broadband China Strategy and Implementation Scheme in August 2013. The plan targets 50% fixed household penetration by 2015, and aims to ensure comprehensive broadband coverage in rural and urban areas by 2020, with connection speeds of 50 Mbps for urban areas and 12 Mbps for rural areas. Rollout of 4G is crucial in connecting rural areas where fixed-line infrastructure is not commercially viable. 4G services were launched in 2014 and the MIIT announced the services will be available in more than 300 cities by year-end. Fixed broadband, including cable, ADSL and FTTx, will remain dominant in China, although growth will slow due to increasing competition from wireless networks. Media Partners Asia projections indicate that fixed broadband household penetration will increase from 46% in 2013 to 57% by 2018. With increased competition, Media Partners Asia projects monthly fixed broadband ARPU to decline at a 3.8% CAGR from US$9.3 in 2013 to US$7.3 in 2018. Within fixed broadband, cable operators are competitively disadvantaged versus telecom incumbents, as financial constraints limit large-scale network upgrades. As a result, cable broadband household subscribers will grow moderately from 6 mil. in 2013 to 11 mil. in 2018. Uptake of ADSL and fiber will be driven by the expansion of China Mobile into the fixed line landscape and by price competition between the three telcos. In December 2013, China Mobile was granted a fixed line and broadband license from MIIT, shaking up the legacy duopoly structure between China Telecom and China Unicom. To jumpstart its fixed broadband business, China Mobile is offering aggressive promotional pricing, with discounts of up to 40% versus the China Telecom and China Unicom offerings. Fiber rollout remains a key focus for China Telecom, which has promoted fiber network and bandwidth upgrades in cities. More than 90% of its urban homes passed are now capable of having broadband speeds of 20 Mbps. Media Partners Asia projects fiber adoption in China to grow from 55 mil. subs in 2013 to 92 mil. subs in 2018. While ADSL will continue to be the most popular broadband technology in 2018, it will experience a significant slowdown in subscriber growth China s TV and Digital Video Distribution Market 13

Exhibit 12: Broadband Subscriber and ARPU Trends, 2009-18 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 % CAGR 2013-18 Total Broadband Internet Subs (000) 117,906 150,527 255,497 377,816 525,044 815,933 1,025,953 1,180,890 1,328,002 1,461,105 22.7% Cable (000) 2,299 3,185 4,386 5,303 6,228 7,269 8,242 9,128 9,991 10,840 11.7% ADSL (000) 83,896 101,205 119,247 131,307 143,938 151,382 157,340 162,312 165,484 168,322 3.2% FTTx (000) 18,471 21,902 32,854 43,876 54,858 64,302 72,921 80,890 87,217 91,723 10.8% Wireless (000) 13,240 24,235 99,010 197,330 320,020 592,980 787,450 928,560 1,065,310 1,190,220 30.0% % Fixed Broadband Pen./ Total HH (%) 24.9% 29.6% 36.0% 40.8% 45.6% 48.7% 51.5% 53.9% 55.6% 57.0% % Wireless Broadband Pen./Population (%) 1.0% 1.8% 7.3% 14.6% 23.5% 43.3% 57.3% 67.2% 76.7% 85.2% Fixed Broadband ARPU (US$) 10.6 10.3 9.9 9.7 9.3 9.1 8.7 8.2 8.0 7.7-3.7% Cable (US$) 8.1 7.9 7.7 7.4 7.2 7.0 6.9 6.7 6.6 6.4-2.4% ADSL (US$) 10.1 9.9 9.6 9.3 8.8 8.6 8.1 7.7 7.5 7.3-3.8% FTTx (US$) 12.7 12.2 11.7 11.3 11.0 10.6 10.1 9.5 9.1 8.8-4.5% Wireless Broadband ARPU (US$) 7.4 7.4 7.1 6.9 6.7 6.5 6.3 6.1 5.9 5.7-3.2% due to competition from fiber and wireless. ADSL subs will grow from 144 mil. in 2013 to 168 mil. in 2018. Wireless broadband subscribers will increase from 64 mil. in 2013 to 97 mil. in 2018 as the convenience and speed of the 4G service and rural demand drive growth. Wireless per capita penetration will grow from 5% in 2013 to 7% by 2018. IN-HOUSE ENTERTAINMENT IN 3-STAR AND ABOVE HOTELS China has approximately 100,000 3 star and above hotels with approximately 2 mil. total rooms. 3-star hotels generally offer in-room pay-tv services which includes ~50 channels and about 10 of these channels are international channels. CNN, HBO, NHK and Phoenix Infonews are well represented. 5-star hotels offer ~56 channels and the international offering is usually expanded to include ~15 international channels. Indicative 3-star and 5-star channel lineups are detailed in Annex 5. CONCLUDING SUMMARY China is the largest TV and video consumption market in Asia with total revenues of US$30.7 bil. in 2013 and forecast to grow at a 9.0% CAGR to US$47.2 bil. in 2018. China s TV and video regulations are among the most stringent in the region for foreign media companies. Specifically, (1) landing permits are required, (2) foreign content caps exist for both domestic free-to-air and pay channels, (3) foreign content is not allowed to be aired during prime-time, (4) all foreign television and video content must be approved by SAPPRFT, (5) licensed foreign content is capped at 30% of VOD service providers inventory, (6) legal distribution is limited to 3-star hotels and above as well as foreign compounds and (7) FDI is largely prohibited. As a result, foreign media players China revenues are significantly smaller than the overall country and sector economics might allow. China s TV and Digital Video Distribution Market 14

Annex 1 Premium Channel Lineup, Shenzhen Topway International Domestic Channel Channel Channel Channel [V] Music Asia News Fa Zhi Tian Di Qi Cai Xi Ju AXN Bao Bei Jia Feng Yun Drama Qi Mo BBC World Cai Fu Tian Xia Feng Yun Music Ren Yu Zhi Nan Bloomberg Cai Min Zai Xian Feng Yun Soccer Sheng Huo Shi Shang Celestial Movies CCTV-Collectibles Gaming Channel Shi Jie Di Li Channel News Asia CHC Animation Golf and tennis Shu Hua Channel Cinemax CHC Family Movie Golf Channel TianYuan CNBC Chinese Food Hua Cheng Movie Urban Construction CNN Classic Huan Qiu Qi Guan Urban drama Diva Universal Comedy drama Ji Shu Qi Che Wei Li Yin Yue Eurosport Contemporary Women Jin Se Pin Dao Wei Sheng Jian Kang HBO Defense and Military Jing Bao Ti Yu Xing Fu Cai KBS World Documentary Lao Gu Shi You Xi Feng Yun National Geographic Channel Dong Fang Cai Jing Lao Nian Fu Zao Qi Jiao Yu NHK World Dong Man Sou Chang Li Yuan Zheng Juan Info Channel Phoenix News Drama No.1 Lian Zhuang Zhong Xiao Xue Tong Bu Fu Dao Star Movies Elderly Health Liu Xue Shi Jie CHC Star Sports English Education Nu Sheng Shi Shang Wen Guang Star Sports 2 Eurosoccer Photography Xin Shi Jue TV5 Fa Xian Zhi Lu Pioneer Documentary TVG China s TV and Digital Video Distribution Market 15

Annex 2 Key Internet TV and Online Video Players Company Website Year Established Description Investor / Parent Youku Tudou www.youku.com Youku: 2006; Tudou: 2005 iqiyi/ppstream www.qiyi.com iqiyi: 2010; PPStream: 2006 Market leader with the largest unique user base, with ~30% share of online video market. Youku and Tudou merged in 2012 Baidu, parent of iqiyi, acquired PPStream for US$370 mil. in 2013. iqiyi and PPStream combined holds a market share of 17% of the online video market. iqiyi follows a purely Hulu subscription model, whereas PPStream is P2P based platform with an installed base of more than 350 mil. Sohu Video tv.sohu.com Video service launched in 2008 Video site of Sohu and third largest video site in China, with substantial investment into copyrighted content since 2009 LeTV www.letv.com 2004 LeTV follows a free+paid model for years and has a 9% market share of the online video. LeTV is the first Internet Company to launch its own selfdeveloped and branded smart TV. PPTV www.pptv.com 2005 #2 P2P service provider by user base with over 200 mil. installed base. PPTV operates P2P softwareand web-based streaming and live video services (branded PPLive), video search, a web game platform and an e-commerce site Tencent v.qq.com Video service launched in 2008 Tencent has about 9% of the online video market. It recently announced a strategic partnership with HBO to distribute exclusive content on its platform. BesTV http://www.bestv.com.cn/ Internet TV service launched in 2010 BesTV has about 20 mil. IPTV users and 1 mil. Internet TV subs.. 2013 revenues from Internet TV services totaled US$25 mil. while the IPTV business generated US$400 mil., adjusted for revenue sharing with the telcos and its JV partner. Wasu www.wasu.cn Internet TV service launched in 2009 Wasu is among the first in China to receive an Internet TV license. Since July 2013, Wasu partnered with Alibaba to produce STBs and develop online content for internet TV services. Wasu s internet TV service has nationwide reach, making its aggregate subscribers across its various platforms (cable, interactive digital, and internet TV combined) at near 20 mil. Listed as NYSE:YOKU Baidu (NASDAQ:BIDU) Sohu (NASDAQ:SOHU) Listed as SHE:300104 Softbank China Tencent (HKG:700) BesTV New Media (SHE:600637) Wasu New Media (SHE:000156) China s TV and Digital Video Distribution Market 16