AOL Time Warner Inc foresaw boundless opportunity in China in June 2001, when then-chief executive Gerald Levin signed a US$200 million agreement to sell online services in the world's most populous nation.
"New businesses, new dreams and new possibilities will proliferate," Levin told a Beijing press conference, announcing AOL's Internet venture with Legend Group Ltd, China's No. 1 computer maker. The world's biggest media company by sales aimed to have the service up and running within six months, AOL International President Michael Lynton said at the time.
Almost two years later, AOL hasn't signed up a single paying subscriber in a nation of 59 million Web users. Links on the AOL-Legend Chinese-language Web site to services such as e-mail, instant messaging and Internet access lead nowhere: Users get a message saying the system is still being tested.
PHOTO: AFP
Foreign media companies such as AOL Time Warner, News Corp and Viacom Inc are still on the sidelines in China, even after the nation's 2001 entry to the WTO helped companies such as Volks-wagen AG and Motorola Inc make China their No. 2 markets behind their home countries.
Companies angling to sell Internet content, television programming and publications to China's 1.3 billion people are up against a Communist government that's reluctant to loosen its control over the flow of information, said Steve Marcopoto, president and managing director of Turner International Asia Pacific Ltd, an AOL television unit.
"We're not talking about cellphones or Buicks or toothpaste," Marcopoto said in an interview. "This is information, and it's highly sensitive in the Chinese market."
The Internet isn't the only area in which AOL Time Warner faces difficulty expanding within China. Turner's Mandarin-language TV network reaches just 2 million of China's 1.1 billion viewers.
Time magazine, AOL's flagship weekly, has been banned from Chinese newsstands for more than two years after publishing a story about the outlawed Falun Gong spiritual movement.
Piracy is also sapping sales: Bootleg DVD copies of films such as "Lord of the Rings: The Two Towers," released by AOL's Warner Bros studio, sell on Beijing streets for less than US$2.
Almost a decade after being allowed to introduce satellite-TV services in China, AOL Time Warner, News Corp and Viacom still have limited access to the country's households. Their sales of cable-TV programming are limited to one area of southern Guangdong Province bordering Hong Kong -- one of 31 Chinese Provinces.
In the rest of the country, they can offer satellite TV channels such as AOL's CNN and HBO only in foreign residential compounds, some hotels and select office buildings housing overseas companies.
AOL's setbacks in China come as the New York-based company's online service loses customers and faces accounting probes by the US Securities and Exchange Commission and Justice Department.
Shares of AOL have fallen more than 70 percent since America Online Inc bought Time Warner Inc in January 2001, and the company posted a US$98 billion loss last year.
Two of AOL's biggest investors -- California Public Employees' Retirement System and Capital Research & Management -- will vote against some of the company's directors, including its chairman, Stephen Case, at a shareholders' meeting this week, people familiar with the matter said last week.
Chinese officials say the current restrictions on foreign media companies are in line with government policies.
"Media is the country's mouthpiece. It's different from other industries," said Xue Ling, head of the foreign affairs department of the State Administration of Radio, Film and Television in Beijing. "It is normal not to open it up to foreign investment."
The government owns or controls all of China's newspapers, television stations, publishing companies and film studios.
Editors and producers who stray from guidance given by the Communist Party's propaganda department can be fired or their publications shut down. The 21st Century World Herald, a Guangdong-based newspaper, was closed in March after printing an article advocating political reform, the Economist reported.
The government controls Internet content available to domestic viewers, who can't access some foreign Web sites such as Time magazine's. Until China acknowledged the country's outbreak of severe acute respiratory syndrome last month, CNN news reports went dark as announcers introduced reports on the disease's spread in the country and resumed when the reports were over.
Non-Chinese media companies haven't shared in the market-opening concessions China made to join the WTO. Carmakers such as Volkswagen and General Motors Corp have increased sales as China lowered tariffs and increased import quotas after joining the trade body in December 2001.
China made no WTO pledges to overseas TV companies, and didn't relax controls on the content media companies can distribute. It agreed to raise the limit on foreign films shown in domestic theaters to 50 a year from 20 by the end of 2004, and allowed foreign companies to control as much as 50 percent of Internet service providers by the end of 2003.
AOL already owns 49 percent of its online venture with Legend, which is modeled on the company's market-leading US service. Yet AOL Time Warner spokesman Rich D'Amato said the company decided to delay introduction of the service after testing it last year.
"The launch is on hold and we are talking with other strategic partners," D'Amato said.
When asked about the delay at an April 28 Hong Kong press conference, Legend chief financial officer Mary Ma said, "There have been changes in the Chinese market, and we're reviewing the business model to fit in those changes."
She didn't give details.
Legend, which owns 51 percent of the venture, has invested US$25 million of the US$100 million it pledged in 2001, Ma said. AOL also committed US$100 million to the venture.
AOL spokesman David Packman wouldn't detail how much AOL has already spent, saying in an e-mailed statement, "AOL does not make financial disclosures of this nature."
Zeng Peitao, the venture's chief financial officer, declined to answer repeated questions on whether the service has received the government approvals it needs to go ahead.
So far, a handful of publicly traded Chinese Internet companies, including the three biggest -- Netease.com, Sina Corp and Sohu.com Inc -- have profited from surging growth in China's growing mass-media market.
Shares of Netease.com, a Beijing-based Internet company traded on the Nasdaq Composite Index, have surged to US$24.56 from US$1.15 over the past year as advertising revenue tripled -- the best performance of the Nasdaq's 3,507 companies. The company posted a third straight profit in the first quarter as demand for mobile-data services helped sales almost quadruple.
Viacom, the world's biggest media company by market value, and Rupert Murdoch's News Corp are battling similar restrictions to their television businesses in China to those faced by AOL.
While Viacom's MTV music network has aired via satellite in China since the mid-1990s, it's limited to select hotels and foreign housing compounds. Viacom joined News Corp and AOL Time Warner this year in broadcasting to about 2 million cable-TV viewers in Guangdong province, MTV International president Bill Roedy said.
"We are not looking to make huge bundles of money from China tomorrow," Roedy said in an interview. "It is a long-term play."
News Corp set up a Mandarin-language channel in Guangdong last year and broadcasts its Star Group Ltd English-language programs, ESPN and the National Geographic Channel to some hotels and to residences and office buildings housing foreigners.
Both Viacom's Roedy and AOL's Marcopoto say China is a market they can't afford to ignore. The country's number of Internet users is second only to that of the US and has more than doubled in the past two years. China's advertising market, worth about US$5 billion in 2001, expanded last year even as the global ad market shrank, according to Access Asia, a market researcher.
AOL Time Warner said it doesn't expect to reap profits from that growth soon -- especially with the English-language content that drives its profit elsewhere.
"This is all still very early days," Marcopoto said. "As an international company, you've got to be in Chinese-language television if you're going to be a player in the next 10 to 25 years."
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