Afterward, Li introduced a plan that called for all new recruits to sign up as enterprise employees rather than public workers.

Traditional media including TV has faced fierce competition over the past decade thanks to an explosion of new media outlets embracing the Internet and mobile phones, as well as more niche markets. Li recognized this trend, and thus led SMG to develop new media.

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SMG was in the first batch of Chinese media to win licenses for Internet Protocol TV, broadband services and mobile phone TV services. SMG also expanded into print by launching China Business Network Daily and CBN Weekly nationwide.

More recently, SMG has been preparing for its overhaul by standardizing financial reports and establishing subsidiaries that its executives call "small giants." Li has called progress at these subsidiaries a bellwether for reform.

Reform Bottleneck

SMG's development slowed somewhat after a financing bottleneck formed in 2007. The next year, Li decided subsidiaries CBN Media Co. Ltd. and Channel Young would launch IPOs, but that the rest of the group would not rush into a listing. He wanted to offload risks before seeking more financing.

But CBN's financing effort stumbled. "SARFT did not approve SMG's proposal to let a company run CBN's TV channel," said a source close to the failed deal.

Channel Young was plagued by policy restraints as well. The Shanghai CPC Committee's Publicity Department hurt its financing chances after saying that it could cooperate with foreign companies but was forbidden to invest overseas or set up a joint venture with foreign capital. 

SMG saw its worst slump in 2008 when business development slowed and TV ratings fell. In addition, the global financial crisis forced the company to cut employee salaries 15 percent.

Li and his media empire were at a crossroads. "I reached a development bottleneck," he told Caijing.

But Li sensed the possibility of high-level change in the second half of 2008, when preparations began for launching China Media Capital (CMC), a media development fund. Few people would "detect the change in the industry," Li said. "However, as an insider, I can sense it. My opportunity is around the corner."

That opportunity came in the form of support for separating SMG's production and broadcasting, which until then had been opposed by SARFT. SMG strategic development employees told Caijing they received Li's order to research separation of production and broadcasting in September 2008, reflecting the president's change of heart and signals from regulators.

"I stubbornly objected to separating production and broadcasting at the beginning," Li admitted. He insisted at the time that the separation was neither feasible nor made sense.

But Li said he realized something had to be done. Comparing government policy restrictions to a wall, he said he realized that "separation is the only force to break the wall, to realize the commercialization of the media and expand our reach."

Dividing Line

Just a few months after Li ordered staffers to research a company split, the Shanghai CPC Committee's Publicity Department Director Wang Zhongwei formally endorsed the change at SMG, giving a green light to reform. SMG started the process of verifying its fixed assets in July, while Li took responsibility for communicating with government superiors.

The communication effort was crucial – a fact underscored by the failure of Hunan TV's reform. The Hunan broadcaster stumbled when its leaders failed to strike a balance between capital market interests and industry regulators that strictly watch China's ideology control.

SMG's plan also won support from SARFT and the CPC Central Committee's Publicity Department, but not without plenty of discussion. Indeed, a draft reform was not approved until after more than 40 amendments were added, based on opinions from SARFT, the Shanghai CPC, and the CPC Central Committee's Publicity Department.

SARFT officially approved SMG's reform plan August 20, calling it the only feasible option among several plans.

Enter the CMC fund, which started in April 2009 with Li serving as chairman and 5 billion yuan. Investors included SMG, the China
 Development Bank, and the Broadband Industry Fund. Li said some money would be invested in the new SMG.

Li said SMG's latest separation has laid the groundwork for further reform – a reform that would be gradually institutionalized according to market mechanisms.

"Top policymakers in China's central government have been considering the industrialization of the broadcast market," said Han Guoqing, the deputy editor-in-chief of China Business News. "But the reform can only inch ahead under the current policy framework. SMG has achieved a temporary success by fitting its plan to policymaker interests. "

Now, Li's ultimate goal is to convert SMG's 16 subsidiaries into independent market entities that would eventually qualify for IPOs. Each would operate separately and take responsibility for all profits and losses.

While Li fine-tunes the process, the rest of the media industry – and investors – are watching with hopes for success. "The plan's failure would greatly damage the whole reform process," warned an SMG insider.

Internal Issues

Some insiders suggest SMG should adopt an equity incentive mechanism to limit professional employee turnover. Under one plan, equity would be used to reward broadcast talent as the company expands. But such incentives could only be given to employees willing to relinquish the protective status as public workers.

SMG had more than 6,000 workers before the split. Some 1,500 will stay at STV, while the rest will become employees of the new enterprise.

In addition to incentive mechanism, the power to run the advertising business is considered key to streamlining SMG's spinoff subsidiaries, said an insider involved in the split.

Ad revenue is a major source of TV station profits, which means company control and efforts to establish corporate governance pivot on the right to run the advertisement business.
　　
The reform plan gives control of all advertising to the new SMG, although there is no immediate timetable for SMG to allow the power sharing with subsidiaries.

This is "an obstacle that has to be overcome sooner or later," said a media industry insider. "If subsidiaries do not weather the elements, the market will not grow to maturity."

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Full artile in Chinese: http://magazine.caijing.com.cn/2009-10-26/110294402.html