China is a collection of 3,000 cable systems with 125 million subscribers.
I just returned from a technical conference in China, and one of the main topics being discussed and on people’s minds was consolidation.
Today, China is a collection of roughly 3,000 cable systems, with approximately 125 million subscriber households out of 348 million total households. The largest cable operator has about four million subscribers.
Consolidation among the cable systems is just beginning, and they are doing it for many of the same reasons as in the United States during the ’80s and ’90s: for operational economies of scale, to create uniform requirements across a larger subscriber base, and to allow for better and more uniform service offerings, which lead to more choice in solutions, better pricing and revenue growth. Consolidation in China, however, is occurring differently than it did in the U.S., and to understand how this process is developing, it is worthwhile to look at the structure of the cable industry in China and how digitization is going.
Cable TV service in China falls under the authority of the government agency called the State Administration of Radio, Film and Television (SARFT), and all cable systems and TV stations are part of SARFT. Mirroring the four levels of government in China, there are four levels of broadcast stations and cable systems: central (i.e., national), provincial, city/municipal and county, each reporting to the higher level. Think of these levels as geographic areas with the smaller, lower levels nested into the larger ones. For example, a county comprises several small cities and towns; a “city,” or municipality, will contain many counties; and a province will contain several “cities.”
On the broadcast side, at the highest level (i.e., the central level), you have CCTV, which has about a dozen channels that are transmitted nationwide over satellite for re-broadcast by all cable systems. At the provincial level, each province has one or more broadcast television stations, of which one is transmitted nationwide over satellite for all cable systems to re-broadcast if they want to. There are 31 provincial-level broadcasters.
At the city level, each city broadcaster has one or more broadcast TV stations, and there are about 300 city-level broadcasters. These are not transmitted over satellite. In the past, there were county-level broadcasters, but not anymore. There are about 2,800 counties in China. Some of the larger broadcasters, such as Shanghai Media Group and CCTV, have launched pay-TV channels. These are transmitted over satellite and are trying to find a foothold among subscribers.
Paralleling the structure of the broadcast TV stations, the cable industry is likewise tiered by level of government. There is one central cable operator, 31 provincial cable operators, approximately 300 city-level cable operators and about 2,800 county-level cable operators. The central-level cable operator is called China Cable Network (CCN). CCN traditionally only controlled the national backbone connecting the provinces and the major cities and had no subscribers.
Likewise, the provincial cable operators only operated provincial backbones and had no subscribers. Now, CCN and the provincial cable operators are beginning to take over some city- and county-level operators. The city- and county-level cable operators are the ones that generate the revenue. They have the cable subscribers and collect the subscription fees, which range from $1-$2 per subscriber, per month.
Cable in China first started digitizing in 2003, and in 2005, SARFT declared that all cable systems must go digital by 2015, starting with the larger cities. So far, there are about 30 million digital subscribers, and about 100 of the largest cable operators have digitized. While going through the process of digitization, the industry started to appreciate the benefits of consolidation, and in the past year it started this process.
While in the U.S., where the cable industry started out as many small independent systems, in China the industry – as you can see – is more structured, with all systems falling under the authority of SARFT. This structure, however, can make consolidation easier. I have seen three ways that consolidation is happening.
The first way is by the central cable operator CCN. CCN, which traditionally operated the national backbone but had no subscribers, has plans to consolidate as many as 40 million subscribers. So far, CCN has taken more than 14 city-level operators and one provincial operator.
The second way, which makes logical sense, is for the provincial operators to subsume and purchase the city-level and county-level operators under them in their province. This has the double advantage that these city- and county-level operators are under their authority and are geographically close together.
The third way that consolidation is happening is for well-off city-level operators to buy other city- or county-level operators near them.
As you can see, while many of the reasons are the same for consolidation as with the U.S., the structure of the industry in China can make consolidation easier and can make it happen at a much faster pace.
Next month: Arris’ Joe Matarese will write about the future challenges
and opportunities for delivering demand-driven content and advertising.
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