1

Direct-to Home for the China MarketCarson WenJones Day

2

Chinasat 9 was put into orbit by Long March 3B launched from Xichang on June 9, 2008. The satellite built by Thales Alenia Space is based on the Spacebus 4000 C1 platform and has a payload at launch of 4,500 kg, a capacity of 11 kW and design life of 15 years.

3

Chinasat 9 was launched to act as a relay satellite for the 2008 Olympic Games. It is operated by China DB Sat and equipped with 22 NATO J-band (IEEE Ku-band) transponders including eighteen 36-MHz and four 54-MHz channels. Currently 4 transponders are used for DTH broadcasts.

According to the original plan Chinasat 9 was to be deployed to be used together with Sinosat 2 using DFH-4 satellite to form the first generation DTH system for China.

4

As a result of the technical problems with Sinosat 2 which turned the latter into space debris, Chinasat 9 is currently the only DTH satellite for China. Sinosat 4 when launched will augment this function.

Chinasat 9 delivers programs on China’s homegrown ABS-S Standard, enabling TV services to be delivered to every village with 20 households or more in remote rural areas of China.

5

With Chinasat 9, 98% of the Chinese population can have direct access to television broadcasts using 0.45 m to 0.6 m dish antennae. In some areas the signals can be picked up using 0.35 m antennae. Chinasat 9 now delivers 48 television channels as well as 48 radio channels and 48 data service channels concurrently.

6

Chinasat 9 is placed in geosynchronous orbit at a longitude of 92.2º East. To receive DTH service, the set-top boxes use China’s homegrown ABS-S Standard with free reception. Chinasat 9 is not a commercial project but part of the “Expanding the Networks to Every Village (村村通)” undertaking in which RMB10.8 billion has been invested.

Since this is a free service, the set-top boxes cannot receive satellite broadcasting programs using other frequencies and standards.

7

The set-top boxes for Chinasat 9 delivered programs can receive the programs using ABS-S compliant de-encryption technology which follows the GY/T233-2028.

The set-top boxes should also support the GPSK format to receive Channels 1/2, 3/5, 2/3, 4/5, 5/6, 13/15, 7/8, 9/10 frequencies and the SPSK format to receive Channels 3/5, 2/3, 3/4, 5/6, 13/15, 9/10. The authorised set-up boxes are not allowed to deliver signals other than those that comply with the ABS-S Standard.

8

The ABS-S Standard is a Chinese homegrown proprietary standard, and replaced the European developed DVB-S standard which had been used in China for a decade before then.

According to the SARFT Department of Science and Technology White Paper on the “Expanding the Networks to Every Village Project by DGH” (“直播衛星村村通白皮書”), the department is organising tests on AVS and DRA, the international industry standards Authorisation from SARFT must be obtained for set-top boxes, “receivers” and antenna for the DTH service.

9

SARFT in December, 2008 picked 7 companies to supply DTH TV set-top boxes, for 3.66 million of those companies which were picked were Changhong Electric, Jiuzhou Electronic Technology, Shenzhou Electronic, Shenzhen Coship Electronics, Haier Group, Hisense Group and SVA Group.

The Liuzhou DTH boxes cost RMB400, with RMB paid by Liuzhou and RMB300 subsidised by the government.

10

SARFT started a second tender round in October 2009 for 8.65 million set-top boxes.

The vast majority of current DTH subscribes are rural residents with no cable TV access and also outside the areas with access to the 48 free DTH TV channels.

According to an August 2004 regulation, foreign media firms are only permitted to offer one satellite channel in Mainland China, subject to approval and annual review by SARFT.

11

The latest round of approvals by SARFT in February 2010 allowed the transmission of 31 foreign satellite TV channels in 3-star plus hotels designated as establishments permitted to serve foreign tourists.

Signals are encoded and transmitted via the SARFT-controlled foreign channel transmission platform on AsiaSat 6.

12

Approved channels include CNN, HBO, CineMax, CNBC Asia, MTV Mandarin, NGC Asia, Discovery, BBC World News, Bloomberg, Channel News Asia International and ESPN.

In 2009, 33 foreign channels were approved. None of these are accessible by DTH.

13

On the contents side, SARFT decided in December, 2009 to limit the airing of TV series, which include soap operas and sitcoms, on provincial channels to 40% of total daily airtime, 45% of the 6 hours designated as prime time between 6 pm and midnight nightly will be allocated to the broadcast of TV series, with the remainder of daily programming schedules to be supplemented by a larger proportion of news programs.

14

The number of episodes within a series is also restricted, TV series consisting of more than 30 episodes would face challenges in being picked-up for broadcast on provincial channels.

Investors tend to shun China’s cable TV industry as it is unprofitable. The average Shanghai household pays RMB17 / month for cable TV services, compared to RMB300 / month for mobile phone and internet services. Cable TV prices are regulated and kept low to provide wider access to state television.

15

The Space Segment of the DTH project is managed by China DBSat, which was established as a 50/50 JV between China Satellite Communications and Sinosat but subsequently merged into China Aerospace in April, 2009.

The Earth Segment of the operations is managed by SARFT.

16

China’s current national policy is to keep DTH a public sector endeavour and has no plans to let DTH be commercialized for the time being.

All the costs in satellite acquisition, launch and maintenance are covered by state coffers, and all programs of 48 HD channels and 48 stereo audio programs and data services are available for free. The current mission is to make TV services available to every village with 20 households or more.

17

In the 10th Five Year Plan the “Expanding the Networks to Every Village” requirement was to make radio and TV broadcasting available to every village with 50 households or more, under the current 11th

Five Year Plan this requirement was raised to villages with 20 households or more. No higher requirements are made by the 12th Five Year Plan to be adopted by the National People’s Congress in March this year.

Without DTH some 5% of the population would not have access to TV given the lack of territorial and cable broadcasting infrastructure in remote areas.

18

Issues

1. Why not extend the coverage of DTH to the urban areas?

2. Only 4 of the 22 transponders on Chinasat 9 have been deployed for the DTH service, why not make more use of them?

3. The functionalities of satellite direct broadcasting, such as inter-activity, substantive capacity and mobile broadcasting have not been fully exploited.

19

Issues (cont’d)

4. The tremendous economic and business potentials of DTH have not been exploited to increase economic growth and employment. Just set-top boxes and antennae for 716,000 villages of 20 households or more (of course many villages have more households) at RMB300 per set will result in hardware costs of RMB4.3 billion, not counting other elements on the value chain. This enormous commercial potential has under the present policy as implemented not been made use of. Instead the state coffers are now bearing the cost.

20

Issues (cont’d)

5. The space segment and the earth segment are now separately operated and managed by China DBSat and SARFT respectively.

6. Currently the DTH operations have no revenues and are covered by the state coffers. Is this business model sustainable? Is advertising a revenue model to be considered?

21

Issues (cont’d)7. DTH has more appeal than cable in the multiplicity

of charging options, from packaged programs to premium channels and PPV. Under the present set-up all these advantages of DTH have not been exploited.

8. The current revenue model of wireless and cable TV is dependent on advertising derived from a somewhat sheltered environment. In cable TV although there are subscription fees but those are somewhat nominal (e.g. RMB17 per month for Shanghai) and do not cover costs.

22

For advertising revenue, although one has seen substantial increases over the past years, the expansion cannot be forever and will be affected by reduced economic growth or entry of competitors.

Given the over-emphasis on advertising growth, not enough resources and efforts have been devoted to the development of quality content and technology. This becomes a vicious circle that affects the attractiveness of cable TV as a paid service.

23

By not allowing commercial DTH service, China will miss this opportunity to enhance its TV industry and meet international competition. The wireless and cable industries have established business models with dependencies on advertising and low subscription fees, and changes in business model for such industries will be hard to implement or succeed.

By allowing DTH as a new sector to adopt new revenue models, in particular reasonable subscription fees or PPV charges for good content, China can inject new energy and experience into its broadcasting industry that can bring benefit to the entire value chain.