By Scott Cendrowski, writer
FORTUNE -- Whenever you see a Western media company doing business in China, you can bet its executives have had nightmares. Between censorship of everyday material like gay culture and violence on television, strict quotas on foreign content, and the near impossibility of obtaining a license to produce in the country, the restrictions China's policies place on outsiders are onerous -- especially outsiders in the entertainment business.
That's the cost side of entering the Chinese media market. The benefits explain why companies put up with the headaches. Take television, for instance. Advertisers are rushing to attract the country's rising middle class: TV advertising nearly doubled to $40 billion over the past three years in China, according to McKinsey, and in three more years that figure will rise to more than $70 billion.
Once media companies decide to make a show, they benefit from more than a skyrocketing ad market. China has dozens of channels with whom content producers can strike deals -- there are more than 290 Chinese television broadcasters and 1,300 channels in the country today. Coupled with ad spending, China's countless television outlets mean more options, more outlets, and a bigger appetite for programming, making it attractive for foreign media companies to do business in China.
That's what Grupo Televisa has found. The Mexico-based company is the biggest media business in the Spanish-speaking world, capturing 70% of the primetime audience in Mexico and spending more than $1 billion a year on producing content. Its specialties are the telenovelas that have enjoyed a long history in Latin America -- hour-long soap-opera style shows that are broadcast daily all over the region in primetime, their narrative arcs lasting six months to a year. But in a little-noticed expansion outside its market, for the past 15 years, Televisa has been bringing them to China -- and now it counts Asia as its second-fastest-growing international market after Latin America (which it considers to be a foreign market from its native Mexico).
At first, the company was limited in China to selling dubbed versions of telenovelas that had previously aired in Mexico. But in 2006, it started striking deals with local Chinese producers to develop original telenovelas in Mandarin for Chinese viewers. The company avoids using the phrase "co-production'' -- something the Chinese dislike because it takes attention away from local talent -- so instead the partnerships are described as "collaborations."
Partnering with local production companies, Televisa has released a host of popular telenovelas in China, some to notable success. Ugly Wudi, a Chinese version of the U.S. hit Ugly Betty, which itself was a version of Colombia's telenovela Yo soy Betty, la fea, debuted in 2008 and captured 11 million regular viewers in China. (The hottest show in the U.S. today, Duck Dynasty on A&E, premiered last week to an audience of 12 million. Mad Men averages about 2.5 million viewers a week.)
Ugly Wudi included a heavy product placement deal with Unilever's (UL) Dove brand -- the soap appeared all over the plot -- that hints at another reason why Televisa is so eager to be in China: Its viewers are much more receptive than Western audiences to product placement in its entertainment. That's good for Televisa, whose telenovela viewership is mostly women, many of them housewives, aged 20-54, one of the most sought-after demographics for advertisers. Another reason Televisa likes the China market: Its viewers like drama. "China is a market used to TV drama," says Francisco Ortiz, Televisa's president in charge of China.
But Ortiz says that while the company's concepts are well-tailored for Chinese tastes, challenges remain. In Mexico, for example, telenovela writers incorporate current events into scripts at the last minute. In China, censors require an entire season upfront, diminishing a show's flexibility. "One of the differences between the product in Mexico and China is that in China it's more like a movie," he says. "You cross your fingers to see how it's going to work."
While Televisa says its Chinese operations are profitable, it does not break out financials, and it did not share profit figures with Fortune. Rather than a huge boom to the overall bottom line, China is a growing, albeit small, business for Televisa, one in which it will reinvest the profits it earns from show sales and product placement for years to come.
But Televisa's competition in China will heat up as the market grows. Competitor Telemundo has been transmitting dubbed shows into the country, and the rest of Latin America's producers aren't far behind. Televisa has a long lead in terms of the local partnerships it's struck, but as China's television market continues to grow, it's hard to imagine Western media companies not fighting for more in China. Telenovelas may be just the start.
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