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Media companies in China say rewards outweigh censorship threat

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The growing appetite of Chinese consumers for news and entertainment provides tremendous growth opportunities for foreign media companies, but they have to contend with the efforts of Chinese government officials to control the release of sensitive information.

Although censorship is a crucial ethical concern for media companies, the rewards of expanding into the world's most populous nation outweigh the obstacles involved in publishing or operating in China, media executives and experts say.

Expanding into China became a high priority for publisher International Data Group after a visit in the late 1970s showed founder and Chairman Patrick McGovern that China was a "publisher's paradise" due to the enormous interest shown by Chinese consumers in books and magazines. After forming a partnership with a Chinese governmental entity, IDG launched China Computerworld in 1980 and now has 42 publications in China.

"Obviously, China has been a target country for anyone who wants to participate in the fastest-growing economy in the world," Mr. McGovern said.

More recently, Internet companies such as Google Inc. and Yahoo! Inc. have started or expanded operations in China to access the country's rapidly growing market of more than 100 million Internet users, up from 4.5 million in 1999.

The financial rewards of expanding into China are tremendous, publishers say. Boston-based IDG invested $250,000 in starting China Computerworld and has earned $52 million in royalties and dividends from the publication, Mr. McGovern said. In 2005, revenue of IDG's publishing, research, training, investment and event activities in China was $275 million and the company forecasts its total revenue in China will reach $8 billion by 2020, he said.

Unlike the struggling U.S. environment for magazine publishing, advertising revenue is showing strong double-digit growth in China, publishers say.

"Advertisers have interest in developing their brand recognition in China," said George Green, the New York-based president and chief executive officer of Hearst Magazines International, which publishes six of its consumer magazines--including Cosmopolitan--as part of a joint venture with IDG and the Chinese government.

Since China's government forbids direct foreign ownership of media, publishers form joint ventures with governmental entities. Media companies operating in China, though, have to contend with possible censorship of their editorial content as the government retains the right to restrict information when it deems it necessary.

"Media companies are in a strange place because it's one of the few industries that's still tightly regulated," said Stan Abrams, a Shanghai, China-based partner with Lehman, Lee & Xu. He specializes in intellectual property, media and entertainment issues.

For publishers such as IDG and Hearst that do not address economic or political issues, the threat of censorship is less significant. IDG does not receive comment from Chinese officials on its editorial content because its magazines do not address those issues, Mr. McGovern said.

For Internet companies, though, censorship is more complicated because search engines do contain information on economic and political issues. During a U.S. congressional hearing last year on Internet issues in China, a Google official acknowledged that the Mountain View, Calif.-based company agreed to censor its content.

"Understandably, many are puzzled or upset by our decision," Elliot Schrage, Google's vp, global communications and public affairs, said during the hearing. "But our decision was based on a judgment that Google.cn will make a meaningful, though imperfect, contribution to the overall expansion of access to information in China."

Although Google's decision to self-censor content was widely criticized, media companies can and should strike a fair balance between following Chinese laws and allowing access to information because they can't afford to stay out of the growing Chinese market, said Donald Forest, managing director for Sierra Asia Partners, a San Francisco-based investment consulting and advisory firm that assists multinational companies in China.

The decision by ISPs to acquiesce to the demands of Chinese officials came under intense scrutiny when it was discovered that personal user information furnished to Chinese officials by Yahoo! China helped lead to the identification and arrest of a Chinese citizen for allegedly using his e-mail account to disseminate information about restrictions on news reporting. Michael Callahan, the Santa Clara, Calif.-based company's senior vp and general counsel, told legislators that Yahoo! had to comply with the law enforcement demand or the company and its employees could have been subjected to criminal charges in China.

China spurs U.S. legislation

The situations with Google and Yahoo! spurred introduction of a bill in Congress that would prohibit U.S. Internet companies from cooperating with "repressive regimes" that restrict information about human rights and democracy on the Internet. The bill, known as the Global Online Freedom Act of 2007, would make it a crime for Internet companies to turn over personal information to governments that use that information to suppress dissent.

The bill, though, has drawn criticism as an unnecessary and possibly damaging attempt to interfere with the business decisions of media companies and the still-fragile economic and political relationship between the United States and China.

"I really detest the Congress coming up with legislation to dictate to companies," Mr. Forest said.

A key risk that media companies in the United States and other countries contend with--the possibility of being sued for defamation, libel or slander--is not a major exposure for media companies operating in China. "There's very little activity there right now and I'm not sure I see any trend in that area," Mr. Abrams said. "That being the case, it's always good to be conservative with these things."

Although laws governing these infractions similar to U.S. statutes do exist in China, cultural differences and the absence of significant damage awards limit litigation in this area, media experts say.