SMG Challenges LeTV, Xiaomi With MTC Buy

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by: Doug Young

Bottom line: Oriental Pearl’s new purchase of a stake in a set-top box and TV maker is part of a broader series of recent moves that could help position it to emerge as a viable rival to China’s private online video companies.

State-run broadcaster Shanghai Media Group (SMG) is wasting no time telling the world who it sees as its main rivals, with word that the company is buying a major stake in a TV and set-top box maker after completing an overhaul of its own digital TV assets. Anyone who follows the industry will know that the high-flying LeTV appears to be the major target of this new SMG tie-up, which is seeing the company’s newly launched Oriental Pearl digital video unit purchase a major stake in a Shenzhen-listed company called MTC for 2.2 billion yuan ($350 million).

The new Oriental Pearl announced the MTC investment as the company itself relaunched, following its formation through the merger of SMG’s 2 largest digital media assets. The new company boasts a wide range of potent partners, including global giants Microsoft (NASDAQ:MSFT) and Disney (NYSE:DIS), as well as domestic powerhouse Alibaba (NYSE:BABA), which last year was reportedly planning to invest tens or even hundreds of millions of dollars in the new company.

This new investment should put the relaunched Oriental Pearl on better footing to compete with LeTV, which uses a business model of bundling cheaply priced Internet TVs with subscription video services to attract new customers. Smartphone sensation Xiaomi is trying out a similar model, and most of China’s major video providers have also launched various similar tie-ups with TV and set-top box makers over the last 2 years.

According to the latest reports, Oriental Pearl’s big new investment will make it MTC’s second largest stakeholder, though the reports aren’t more specific about the size of the stake. (Chinese article) MTC had a market value of about 25 billion yuan at the end of last week, which would make the 2.2 billion yuan investment equal to about 9 percent of the company.

China’s traditional broadcasters have been in a mad scramble over the last 2 years to catch up with fast-growing Internet-based video companies like LeTV, Alibaba-backed Youku Tudou (NYSE:YOKU) and Baidu-backed (NASDAQ:BIDU) iQiyi, which are rapidly stealing their market share and advertising dollars. SMG has fought back with its major campaign that envisions Oriental Pearl as its main digital TV vehicle. Another leading broadcaster Huanan Satellite TV is fighting back with its own Mango TV Internet video offering, which recently signed up leading telco China Mobile (NYSE:CHL) as a major backer. (previous post)

There’s no more detail in the latest news on Oriental Pearl’s MTC investment, though the announcement also notes that home appliance giant Haier is a backer. The same report notes that Oriental Pearl is already among the largest of China’s state-owned Internet video providers, with more than 2 million subscribers to its set-top box-based service and more than 30 million viewers of its content over smart devices.

I suspect that the vast majority of its 2 million set-top box users are in its home market of Shanghai, where the company’s parent SMG enjoys a monopoly on traditional TV broadcasting services. What’s more, most of its 30 million smart device viewers are probably non-paying, occasional users, meaning Oriental Pearl is getting little or no money from that part of its business.

All that said, I’m cautiously optimistic about Oriental Pearl’s ability to emerge as a serious contender in the hotly contested space for video delivered over the Internet. It certainly has the connections and content to pose a major challenge, and all it really needs to do is create a good product and marketing plan. Many of those pieces appear to be falling into place to execute that vision, and SMG’s choice of Oriental Pearl to execute that vision also looks like a good way to create a more commercial company without the vast bureaucracy of its state-owned parent.

Disclosure: None