The transformation of a media giant: the inside story of Shanghai Media Group's 100 billion yuan integration

On the 23rd floor of the Shanghai Vision Building on Weihai Road, through the empty and simple temporary office area, is the location of the Listing Management Committee of Shanghai Media Group (SMG) during its transitional integration period. Over the past six months, the restructuring plans of BesTV and Oriental Pearl, two A-share listed companies with a total market value of 100 billion yuan, were finalized here.

"After the CSRC finally reviews and approves the integration plan, Oriental Pearl will be delisted, and BesTV will consider changing its name to Oriental Pearl New Media Co., Ltd. In the future, more than 70% of the business assets, revenue and profits of the entire SMG will all enter the listed company."

BesTV President Ling Gang recently accepted an exclusive interview with Tencent Technology here and publicly confirmed SMG's reform trend for the first time. Ling Gang previously served as the director of the State-owned Assets Office of the Shanghai Publicity Department for many years and was one of the three members of the Shanghai Media Group Integration Reform Working Group.

After leading and completing the integration of Shanghai Media Group and Shanghai SMG, Li Ruigang, Chairman of Shanghai Media Group, withdrew from the management of specific affairs, and Ling Gang became the actual operator of the asset restructuring of the two listed companies under SMG.

However, this complex reform case, which involves institutional reform, changes in state-owned capital and market capital, public institutions and public resources, as well as the interests of hundreds of different business enterprises across the country, is truly understood by very few outsiders.

"Even SMG's original internal executives and professional investors were confused and didn't know where to start when faced with the more than 700-page restructuring report," a person who participated in the restructuring of Shanghai Media Group's listed companies revealed to Tencent Technology.

Ling Gang told Tencent Technology that the goal of Shanghai Media Group's series of integrations is to subvert its genes and completely transform the group's main business into a new Internet company, benchmarking against hot Internet companies such as BAT, Xiaomi and LeTV.

However, how exactly does Shanghai Media Group plan to integrate its many traditional businesses with new media businesses? What are the business and organizational structure of the new listed company? What is the relationship between the TV broadcasting business within the system, such as Dragon TV, and the listed company? Tencent Technology will elaborate on these questions in detail in this article.

Integration of large and small media

Historically, Shanghai Media Group’s shareholding structure, internal personnel and organizational relationships have been complex, becoming a “deep water area” for reform.

In 2001, Shanghai Culture, Radio, Film and Television Group (Shanghai Media Group) and Shanghai Media Group (the predecessor of Shanghai Media Group) were established successively. Shanghai Media Group is a public institution, which includes Oriental Pearl, Shanghai Film Group, Eastday.com and other companies; Shanghai Media Group includes Shanghai's original radio and television media businesses and companies such as BesTV.

Xiao SMG developed more rapidly under the leadership of Li Ruigang, but due to national policy restrictions, Xiao SMG could not be listed as a whole at that time. In 2009, Shanghai Media Group implemented the separation of production and broadcasting, and split it into two units, namely "Shanghai Radio and Television Station" and "Shanghai Oriental Media Group Co., Ltd.". The Xiao SMG that is usually referred to now refers to the latter.

An insider of Shanghai Media Group told Tencent Technology that many people habitually understand Shanghai Media Group (SMG) as the superior unit of Shanghai Media Group (XMG). In fact, this is not the case. Shanghai Media Group (XMG) is a subsidiary enterprise of Shanghai Radio and Television Station, which is managed and controlled by the station, while Shanghai Radio and Television Station is directly led by the Propaganda Department of the Shanghai Municipal Committee of the Communist Party of China.

After the separation of production and broadcasting, Li Ruigang wanted to build the newly established Shanghai Oriental Media Group Co., Ltd. (Shanghai Media Group) into a holding group and promote the independent listing of each subsidiary business, such as BesTV, Xuandong Communication, Oriental Entertainment, Oriental Shopping, Shangshi Pictures, and First Financial News. However, the result was the division of resources and each operating independently. Faced with the impact of new media and the market competition landscape, the company's core competitiveness was lost.

"We started thinking about the integration of SMG two years ago," Ling Gang told Tencent Technology. The Shanghai Municipal Party Committee leadership, the Propaganda Department, and the TV station were all thinking about it at different levels, but the problem was that they had not been able to find a suitable approach and integration structure. During research and discussions, everyone had doubts about the different results that different integration methods would bring.

But no matter what, integration is inevitable. Ling Gang believes that there are two main reasons. First, traditional mainstream media are facing challenges and need to develop under a new system and organizational structure. Second, under large groups, they are all divided into interest entities, each doing its own thing, which leads to competition for interests and mutual sabotage, making it impossible to share resources and differentiate positioning.

All parties in Shanghai finally reached a consensus, and the final integration also went beyond the scope of small SMG. At the end of 2013 and the beginning of 2014, Shanghai set up two groups to promote a new round of integration reform of large and small SMG. Ling Gang, Li Ruigang and Wang Jianjun formed a three-person reform working group to assist the reform leading group headed by Xu Lin, the Minister of Propaganda of Shanghai, in promoting the integration of large and small SMG. In February 2014, Li Ruigang delivered a speech at an internal meeting of Shanghai SMG, releasing the information of the comprehensive integration of SMG to the outside world for the first time.

On March 31 last year, Oriental Pearl and BesTV, which had both been suspended for a week, issued an announcement, announcing the Shanghai Media Group's integration and reform plan: the original Shanghai Culture, Radio, Film and Television Group's institutional structure was abolished, and except for Shanghai Film Group and East Network, which would operate independently, other businesses were restructured to establish the wholly state-owned Shanghai Culture, Radio, Film and Television Group Co., Ltd., and Shanghai Oriental Media Group Co., Ltd. would be integrated with the former by transferring state-owned equity.

After the integration, Shanghai Media Group is 100% controlled by Shanghai State-owned Assets Supervision and Administration Commission and has a parallel relationship with Shanghai Radio and Television Station.

The capital market did not give a positive response to the integration of large and small cultural and broadcasting companies at that time, but Ling Gang said that this solved the top-level design problem for the subsequent substantive integration: putting public resources and the legal functions of radio and television stations under the responsibility of television station institutions and controlled by the state; corporatizing the operating entity market and having it 100% controlled by the State-owned Assets Supervision and Administration Commission. The two are separated in terms of legal relations. It is neither a superior-subordinate relationship nor a capital ties relationship, but a collaborative operation relationship.

"The complete separation of production and broadcasting will lead to irreconcilable competitive conflicts; completely mixing them together to corporatize channels will result in the misuse of public resources for private purposes, confusing public resources with market-oriented operations and breeding corruption." Ling Gang commented on the difficulties currently facing the reform of traditional media. He believes that the reform of Shanghai Media Group has provided a good reference case for the country.

However, an SMG internal employee told Tencent Technology that it will still take a long time to sort out the independence of Shanghai Radio and Television and Shanghai Media Group in terms of management, organization and personnel after the integration is completed.

BesTV carries the mission of overall listing

After the integration of the two media companies is completed, the more important task is the merger of BesTV and Oriental Pearl, as well as the injection of other assets into the listed company. "Under the overall development framework of the Internet, SMG must make arrangements for the listing of the whole company, and can no longer continue the original mechanism of the five major sectors advancing separately," Ling Gang said.

In terms of equity structure, Shanghai Media Group directly holds 41.92% of BesTV and 55.32% of Oriental Pearl. The reason for the merger is that the two companies are in competition in new media business, and the scale effect brought by the merger is conducive to better play the role of financing platform and promote the overall development of the group by capital means.

Compared with BesTV, Oriental Pearl previously had better financial data and brand, and its major shareholders held a higher proportion of shares. It was considered to be a more ideal shell resource for asset injection and M&A expansion. However, SMG ultimately chose BesTV to merge Oriental Pearl based on a very simple reason: BesTV owns resources such as Internet TV licenses, and any equity change would greatly affect the company's business operations.

On November 22, 2014, BesTV announced that it would absorb and merge Oriental Pearl with newly added shares, and at the same time acquire all or part of the equity of Shangshi Pictures, Wu'an Communication, SMG Interactive, and Oriental Xijie under SMG Group. The total amount of this transaction reached 49.242 billion yuan. After the completion of the transaction, BesTV's total share capital was about 2.628 billion shares, of which Shanghai SMG Group held 1.185 billion shares, holding 45.07%.

At this point, 70% of the business assets, revenue and profits of the entire Shanghai Media Group have all entered the listed company. In a sense, BesTV has taken on the mission of the so-called overall listing of the group.

So, what other assets have not been injected into the listed company? Ling Gang told Tencent Technology that they include the production and operation of program content for all channels and frequencies of the radio and television stations, advertising revenue from all channels and frequencies, the loss-making social welfare performing arts sector, real estate and equipment, etc.

An insider revealed to Tencent Technology that in the future, the advertising business of TV stations such as Dragon TV may also be injected into the listed company in the form of agency operation. At present, all copyright-related businesses under SMG Group have been put into Wuan Communication.

At the same time, as BesTV's strategic position in SMG has been upgraded from a small subsidiary focusing on IPTV to a group strategic level, group executives began to move into BesTV to engage in management, while former BesTV executives such as Chen Haoyuan and Huang Sijun chose to resign.

However, in early January this year, Li Ruigang also resigned from the post of president of Shanghai Media Group, which aroused much suspicion in the market. An executive close to Li Ruigang explained to Tencent Technology that Li Ruigang's main task was to determine the general direction of the group's integration, which has been basically completed. What will be tested next is the team's execution ability.

Betting on Internet TV

After Oriental Pearl and other core businesses of the group were injected into BesTV, BesTV (which may be renamed Oriental Pearl in the future) was positioned to become a standard Internet company and build China's first Internet TV portal and Internet media ecosystem.

BesTV has currently established five business groups: Internet TV, cloud platform and big data, console games, telecommunications channels, and online video. After the injection of new assets, new business groups such as film and television production and copyright content operations are also under construction.

SMG divides the listed company's companies and businesses into three major sectors: content, platform channels, and online and offline operation services. Ling Gang believes that SMG's original business involves all areas of the ecological system. After all the company's resources are reorganized and integrated through content, channels, and services, it can bring out advantages at all levels and achieve ecological effects.

From the content perspective, SMG has resources in film and television production, media production, and copyright management. All copyrights of radio and television stations are also exclusively represented by SMG. From the channel perspective, there are IPTV channels, cable network channels, online video channels, game console channels, wireless transmission channels, and OTT set-top box channels. In terms of services, it includes Oriental Pearl's cultural tourism (online and offline interaction), TV and video shopping, and advertising business (new media and outdoor advertising, digital marketing, and TV stations' advertising revenue sharing).

Of course, these resources still need to be further integrated, such as wired and wireless transmission channels.

In short, BesTV's core strategic direction is Internet TV, which means reaching more users with content and application services such as advertising, games, and shopping through the Internet TV platform and various channels.

"We will expand the user base and form a market scale through existing mature channels and B2B2C models." Xu Feng, former director of SMG's strategic investment department and vice president of BesTV, told Tencent Technology that the listed company's goal is to reach 30 to 50 million Internet TV user base within three years, with each user generating monthly revenue of around 50 yuan.

In the field of IPTV, BesTV has reached a cooperation with China Telecom Yueme to launch a simplified IPTV service with both live broadcast and on-demand functions. On the cable network, it acquires Internet TV users through the DVB+OTT method. Not long ago, BesTV also announced that it plans to invest RMB 300 million of its own funds in Beijing Gehua Cable.

In the Internet TV business, SMG does have an advantage in license resources. For example, BesTV itself has an Internet TV license; in the telecom private network channel, BesTV and CNTV's joint venture Ai Shang TV has the only IPTV integrated broadcast control license in the country; in the cable network channel, SMG Interactive is also the only license holder with the qualification to sell or distribute cable pay channels in the national cable network.

However, from a global perspective, there are no profitable Internet TV companies and models. For Shanghai Media Group, how to develop innovative products suitable for the Internet, how to build a value-added service business model, and how to extend products from TV screens to the Internet to make up for shortcomings are all difficulties that it will face in the future.

In the short term, BesTV's revenue will still come from traditional businesses such as IPTV, TV shopping, and cultural tourism.

Another biggest challenge in the integration of cultural and broadcasting businesses is whether different companies and shareholders with different backgrounds understand and agree with the group's strategy. Different ways of thinking and conflicts of interest will become obstacles to reform.

As early as November last year, SMG held an investor exchange meeting to introduce the specific matters of the integration of the two listed companies to hundreds of institutional investors. Later, it communicated with investors in detail at the strategy meetings of Haitong Securities and Guotai Junan.

"The company has just completed the integration and the ecosystem has been initially built, but in order to improve the system and enhance user stickiness and traffic monetization capabilities, in addition to optimizing internal operations, we will have to rely on mergers and acquisitions." Xu Feng claimed that in the next few years, the listed company will be able to complete investment and mergers and acquisitions with a market value of around 30 billion yuan.

Media research scholar Wei Wuhui even believes that the core of SMG's reform this time lies in the "conglomerate-based" operation of the media group, that is, SMG uses institutional scarce resources to gain the favor of capital and use the power of capital to find more new elements.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.