Go For Launch: Disney's Recipe For Success In China - Joseph Mathew

GO FOR LAUNCH
DISNEY’S RECIPE FOR SUCCESSFULLY
PIERCING THE MEDIA VEIL IN CHINA
April 29, 2013
By Joseph Mathew
J.D. Candidate, Class of 2013 | Virginia Law
M.B.A., Class of 2010 | Darden Graduate School of Business
josephmathew10@gmail.com | 706-255-9793

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EXECUTIVE SUMMARY .......................................................................................................... 4
I. INTRODUCTION ................................................................................................................. 5
a. China’s Ascension In Media................................................................................................ 5
b. Disney’s Ideal Roadmap In China ....................................................................................... 5
II. DISNEY’S AMBITIONS .................................................................................................. 6
a. Empire Building................................................................................................................... 6
i. Story Generation .............................................................................................................. 6
ii. Monetization Machine...................................................................................................... 7
iii. The Network’s Value........................................................................................................ 8
b. Disney In China ................................................................................................................... 8
i. Background: Shanghai Disneyland................................................................................. 8
ii. Competition Heats Up: DreamWorks Animation.......................................................... 10
iii. News Corp.’s China Network Frustrations.................................................................... 10
iv. Disney’s Counter: Tencent & DMG Partnerships........................................................ 11
v. The End Game................................................................................................................ 12
III. ANTICIPATING CHINA’S MEDIA ASPIRATIONS................................................. 12
a. China’s Media History....................................................................................................... 12
i. The Early Years: Government Instrument .................................................................... 12
ii. Soft Power Expansion .................................................................................................... 13
b. Building An Analytical Framework: Government Decisions, Directives, & Investments
As Data Points........................................................................................................................... 15
c. Central Committee Decisions: To Provide A Cultural Surge Breaker ............................. 15
d. SARFT Directives: To Limit Popular Entertainment ....................................................... 16
i. Foreign Drama: Limit Entertainment Value................................................................. 17
ii. Children’s Programming: Limit Addictive Foreign Content........................................ 17
iii. Reality Programming: Limit Entertaining Domestic & Foreign Shows....................... 18
iv. Film: Limit Everything Foreign.................................................................................... 19
e. Domestic Media Industry Investments: Originate Media Titans...................................... 19
i. Animation Centers.......................................................................................................... 19
ii. Shanghai Media Group.................................................................................................. 20
iii. Network Infrastructure................................................................................................... 21
f. Synthesizing The Data ....................................................................................................... 21
i. Soft Power Rules ............................................................................................................ 21
OUTLINE

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ii. Soft Power’s Embodiment: Chinese Media Empires .................................................... 22
IV. DISNEY’S OPTIONS FOR LAUNCHING A NETWORK IN CHINA .................... 23
a. Overview............................................................................................................................ 23
b. Timing Options.................................................................................................................. 23
i. Trail Blaze...................................................................................................................... 23
ii. Follow The Leader ......................................................................................................... 25
c. Ownership Options ............................................................................................................ 26
i. Go It Alone: Wholly Owned Foreign Entity.................................................................. 26
ii. Representative Office ..................................................................................................... 27
iii. Partnership/Term Sheet?................................................................................................ 28
iv. Joint Venture .................................................................................................................. 29
d. Size Of Investment Options............................................................................................... 31
e. The Ultimate Route: Go Fast, Go EJV, Go Big................................................................ 33
V. EQUITY JOINT VENTURE: CRITICAL NEGOTIATING POINTS..................... 33
a. Overview............................................................................................................................ 33
b. Operational......................................................................................................................... 34
i. Control & Ownership: Representative, General Manager, Seal.................................. 34
ii. Unanimous Approval Issues........................................................................................... 35
iii. Film Release Issues ........................................................................................................ 35
c. Financial: Profit Sharing................................................................................................... 35
d. Legal .................................................................................................................................. 36
i. Dispute Resolution ......................................................................................................... 36
ii. Technology Protection ................................................................................................... 37
VI. EQUITY JOINT VENTURE: STRATEGIES FOR LONG TERM SUCCESS....... 37
a. Achieve The Role Of Consigliere...................................................................................... 37
b. Story Telling ...................................................................................................................... 38
i. Working With The Chinese JV Members In Story Development.................................... 38
ii. Seeding Domestic Creative Talent................................................................................. 39
c. Franchise Monetization...................................................................................................... 39
i. Executive Talent............................................................................................................. 39
ii. Synergistic Businesses.................................................................................................... 40
d. Retain Mr. Iger................................................................................................................... 40
e. Continue Opposing Censorship & Quotas......................................................................... 41
VII. CONCLUSION ................................................................................................................ 41

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THESIS
 Disney’s ultimate strategy at breaching China’s protective regime will be to inject a
tremendous amount of capital (between $500 million to $1 billion) in an equity joint
venture and to position the firm as the nation’s true trusted advisor in the media space
DISNEY’S AMBITIONS
 Expand Internationally
o Disney has matured into the preeminent media firm at franchise creation and
monetization and now seeks to continue expanding globally at a rapid rate
 Focus On China
o China will soon become the largest media market worldwide, and Disney is
hustling to gain access to the state’s precious airwaves
CHINA’S ASPIRATIONS
 Media Empire Creation
o Contrary to conventional wisdom, China’s desire to concoct several media
behemoths is their dominant impetus in the arena
 Ruanshili’s Ascension
o This underlying appetite epitomizes China’s long term ruanshili (soft power)
ambitions and will eventually supersede their predisposition to clamp down on
foreign entertainment
EXECUTIVE SUMMARY

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I. INTRODUCTION
a. China’s Ascension In Media
The global economy is experiencing a tectonic shift in financial power and growth,
spurred by the forces of capitalism unleashed at the end of the Cold War. The media industry
has not been immune to the systemic changes occurring. The international box office for films
increased 35% from 2007 to 2011, while the United States and Canada box office grew at only
6% over that same period. The U.S. and Canada market actually declined 4% from 2010 to
2011.1
Within the international box office, emerging markets represent the majority of the
growth, with the Asia Pacific region and Latin America experiencing growth of 38% and 86%,
respectively, over that period. Among the emerging markets, China is, far and away, the crown
jewel, increasing at a 35% pace in 2011 alone, to $2 billion, and moving the country into second
place, behind only Japan among the international territories.2
China’s growth has not gone
unnoticed among global media firms, with one of those enterprises, The Walt Disney Company,
being particularly interested the country’s roughly 250 million children.3
While China presents
an unprecedented opportunity for Disney to reach a new, growing, and increasingly prosperous
population, the state’s blended, free market and managed economy constitutes a labyrinthine risk
environment.
b. Disney’s Ideal Roadmap In China
Disney is especially keen on setting up a twenty four hour, seven days a week television
channel China, which would have the potential to produce more profits than any of their other
1
Theatrical Market Statistics 2011. Motion Picture Association Of America Inc. (April 9, 2013),
http://www.mpaa.org/resources/5bec4ac9-a95e-443b-987b-bff6fb5455a9.pdf.
2
Id.
3
The Associated Press, China Restricts Foreign Cartoons, Los Angeles Times, (April 9, 2013),
http://articles.latimes.com/2006/aug/14/business/fi-cartoons14.

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business ventures in the region. The other elite media conglomerates are vying for a foothold in
China as well, though, but most of them have been rebuffed, frustrated, with some retreating in a
daze. In order for Disney to realize their grand ambitions in China, they must first ascertain the
Chinese government’s value drivers from both a political and economic perspective. After
divining China’s true intentions, Disney should formulate a strategy that focuses on realizing
Beijing and Burbank’s expansive dreams, while limiting their cumulative exposure.4
Based on data drawn from China’s statements and actions in the public arena, I contend
that, contrary to conventional wisdom, the government’s desire to concoct several media
behemoths is their dominant impetus. This underlying appetite epitomizes China’s long term
soft power ambitions and will eventually supersede their predisposition to clamp down on
foreign entertainment. Disney’s ultimate strategy at breaching the protective regime will be,
therefore, to inject a tremendous amount of capital (between $500 million to $1 billion) in an
equity joint venture, and position the firm as China’s true trusted advisor, in their journey to
media stardom.
II. DISNEY’S AMBITIONS
a. Empire Building
i. Story Generation
Walt Disney grew up in humble beginnings in Chicago at the turn of the twentieth
century. After studying at the Kansas City Art Institute and linking up with his brother Roy O.
Disney, Walt eventually developed the character of Mickey Mouse, which formed the
cornerstone of what would evolve into an animation powerhouse, churning out classics such as
Snow White and The Seven Dwarves in 1937, Pinocchio in 1940, and Bambi in 1942. In 1954
Walt expanded The Walt Disney Company even further by making the leap onto the small screen
4
Burbank, California is the corporate headquarters of The Walt Disney Company.

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with the television series Disneyland as well as the live entertainment with theme parks such as
Disneyland in Anaheim, California.5
After Walt’s passing, Disney went through a period of searching until Roy E. Disney
helped the company find its magic again in 1984 with a talented team led by Mr. Michael Eisner,
Mr. Frank Wells, and a junior executive Mr. Jeffrey Katzenberg.6
This group helped revive
Disney’s fortunes with the string of hits The Little Mermaid, Beauty and the Beast, Aladdin, and
The Lion King.7
ii. Monetization Machine
In addition to resuscitating the film studio, Mr. Eisner expanded operations into music
with the formation of Hollywood Records and network television with the Capital Cities/ABC
acquisition in 1995, which brought ESPN into the Disney fray as well.8
Disney’s theme parks
expanded as well with MGM Studios, the Animal Kingdom, Disneyland Paris, and Hong Kong
Disneyland all opening between 1989 and 2005. Mr. Bob Iger, took over the reins at Disney in
2005, and promptly executed a number of wildly successful deals, including the company’s $7.4
billion acquisition of Pixar in 2006, $4 billion acquisition of Marvel Entertainment in 2009, and
more recent $4 billion purchase of Lucasfilm in 2012.9
Disney has evolved, under Mr. Iger’s tenure, as the preeminent media firm at monetizing
creative franchise properties through a network of businesses including film, television,
publishing, consumer products, and theme parks. Toy Story 3, released by Pixar in 2010, led to
5
The Walt Disney Company, (April 6, 2013), http://www.fundinguniverse.com/company-histories/the-walt-disney-
company-history/.
6
Roy E. Disney was the son of Roy O. Disney and the nephew of Walt Disney.
7
List Of Disney Theatrical Animated Features (April 6, 2013),
http://en.wikipedia.org/wiki/List_of_Disney_theatrical_animated_features.
8
Theatrical Market Statistics 2011. Motion Picture Association Of America Inc. (April 9, 2013),
http://www.mpaa.org/resources/5bec4ac9-a95e-443b-987b-bff6fb5455a9.pdf.
9
Devin Leonard, How Disney Bought Lucasfilm—And Its Plans For ‘Star Wars,’ Bloomberg Businessweek (April
6, 2013), http://www.businessweek.com/articles/2013-03-07/how-disney-bought-lucasfilm-and-its-plans-for-star-
wars.

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$9.8 billion in franchise revenues for Disney, with $7.6 billion in revenues coming from
licensing and retail stores.10
As Disney has expanded their business lines and franchise
properties, they have also made a concerted effort to push across geographies, deploying theme
parks, networks, and stores around the world.11
iii. The Network’s Value
With all these mutually beneficial businesses, Disney’s most profitable segment, by far,
is Media Networks. This unit generated more than $19 billion of the firm’s overall $42 billion
revenues in 2012. Even more vital, from the firm’s financial perspective, is that Networks
produced a 34% margin, capturing $6.6 billion operating income during that period, which
represents 66% of the overall operating income.12
b. Disney In China
i. Background: Shanghai Disneyland
While Networks has been, and is expected to continue to be Disney’s premier profit
center, China is predicted to be the clear leader of emerging market growth, with compound
annual growth to average 17% from 2010 to 2015. According to Ernst & Young’s Asia-Pacific
Media & Entertainment Leader David McGregor, “The largest media and entertainment
companies in the world certainly understand that their global strategy has to have China front
and center.”13
According to China’s State Administration of Radio, Film, and Television
(SARFT), their television market is expanding at 27% annually, and generated $19 billion in
10
Id.
11
The Associated Press, China Restricts Foreign Cartoons, Los Angeles Times (April 8, 2013),
http://articles.latimes.com/2006/aug/14/business/fi-cartoons14.
12
Annual Report 2012, The Walt Disney Company (April 6, 2013),
http://www.sec.gov/Archives/edgar/data/1001039/000119312512479027/d405160d10k.htm.
13
China Media And Entertainment Industry Continues To Experience Exponential Growth As Consumer Spending
Rises And Technologies Converge, Ernst & Young (April 10, 2013), http://www.ey.com/GL/en/Newsroom/News-
releases/News_China-media-and-entertainment-industry-continues-to-experience-exponential-growth.

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advertising in 2011.14
Disney began testing the Chinese waters in the late 1990s. During that time, they
attempted to first build a theme park in Shanghai. Negotiations were protracted, and the
company decided, instead, to move forward with Hong Kong Disneyland, which opened in 2005.
A major sticking point in the deal was exactly what culture would be on display at the
destination.
Negotiations for Shanghai Disneyland continued, and Disney finally broke ground on the
$4.4 billion theme park and resort in April 2011.15
Managing to walk a tight line between
staying true to Disney’s roots while expanding into a new frontier, Mr. Iger stated that “Shanghai
Disney Resort will be both authentically Disney and distinctly Chinese.” The deal was
consummated via a joint venture between Disney and the Shanghai Shendi Group with
ownership, capital expenditures, and resulting profits split at 43% and 57% between the two
parties respectively.16
The Shanghai Shendi Group represents three state-owned businesses,
Shanghai Lujiazui Group, the Shanghai Radio, Film and Television Development Company, and
Jinjiang International Group Holding Company.17
Another factor leading to the protracted nature of the deal was that Disney attempted to
tie their content broadcast rights to the theme park investment, but that battle, apparently, was
left for another day. Mr. Iger specifically noted this desire, during the deal signing, to develop a
wide array of businesses in China, including television, games, retail, and English-language
14
PR Newswire (April 8, 2013), http://www.prnewswire.com/news-releases/star-china-media-ltd-enters-into-a-joint-
venture-with-puji-capital-limited-161194865.html.
15
Ethan Smith, James Areddy, Disney Breaks Ground On Shanghai Theme Park, The Wall Street Journal, (April 7,
2013), http://online.wsj.com/article/SB10001424052748704630004576249403695469400.html.
16
Id.
17
Shanghai Shendi Group (April 8, 2013), http://en.shanghaidisneyresort.com.cn/en/press/company-
information/shanghai-shendi-group/.

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learning centers.18
ii. Competition Heats Up: DreamWorks Animation
Disney, though, is not alone in their bid to dive into the kid’s animation space in China.
DreamWorks Animation announced its own $3.1 billion entertainment district in Shanghai called
the Dream Center, intended to emulate London’s West End and New York’s Broadway. The
DreamWorks Animation project also involves a joint venture with the Shanghai Media Group
and involves the world’s largest IMAX, a Kung Fu Panda themed pagoda, and music venues.19
DreamWorks Animation also appears focused on China for the long term, as they are the first
major animation studio to form a joint venture with China Media Capital called Oriental
DreamWorks, which is slated to produce two to three films per year in China.20
iii. News Corp.’s China Network Frustrations
News Corporations’ experience in China, like Disney’s, has been strenuous. News Corp.
has also been attempting to gain broadcast rights in China for two decades, but their hopes were
tempered in 2005, when the Chinese government announced additional rules restricting foreign
ownership of local television assets.21
In 2010, News Corp. finally made a strategic retreat,
selling its stake in three Star China properties, Xing Kong, Xing Kong International, and
Channel V to China Media Capital for approximately $150 million.22
More recently, though,
News Corp. re-entered the Chinese market by taking a 19.9% stake in the Bona Film Group
18
Ethan Smith, James Areddy, Disney Breaks Ground On Shanghai Theme Park, The Wall Street Journal, (April 7,
2013), http://online.wsj.com/article/SB10001424052748704630004576249403695469400.html.
19
Erica Orden. James Areddy, Michelle Kung, DreamWorks To Challenge Rival Disney In Shanghai, The Wall
Street Journal (August 7, 2012),
http://online.wsj.com/article/SB10000872396390443659204577574622272666192.html.
20
George Salazai, DreamWorks Oriental to Eventually Produce Two, Three Films a Year in China, The Hollywood
Reporter (April 8, 2013), http://www.hollywoodreporter.com/news/dreamworks-oriental-eventually-produce-two-
377804.
21
Daniel Bardsley, China Tough Sell For Foreign Media, TheNational (August 15, 2011),
http://www.thenational.ae/thenationalconversation/industry-insights/media/china-tough-sell-for-foreign-media.
22
David Barboza, News Corp. Sells Stakes In TV Units In China, The New York Times (April 7, 2013)
http://www.nytimes.com/2010/08/10/business/global/10news.html?_r=0.

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forming a joint venture Puji Star Media with China Media Capital and Puji Capital.23
iv. Disney’s Counter: Tencent & DMG Partnerships
Coming hot on the heels of the Oriental DreamWorks announcement, Disney announced
a partnership with the Chinese internet company Tencent Holdings, to produce original live
content in April 2012. The partnership is called The National Animation Creative Research and
Development Cooperation (Cooperation) and aims to allow Disney to share storytelling know-
how with the China Animation Group and Tencent. The press release also expressed the goal to
“foster local content across mediums, including television, motion pictures and digital platforms,
for distribution in China and internationally.”24
Disney and Tencent have not announced any actual content to be produced through the
partnership, while Oriental Dreamworks committed to producing the Kung Fu Panda III as well
as, more recently, the Tibet Code, based on a series of popular, adventure stories. At the Tibet
Code announcement on April 19, 2013, Han Sinping, the Chairman of the mighty China Film
Group Corp., was on hand, expressing his pleasure that the movie’s potential to for exhibit
Chinese values, morality, history, culture, and landscape. (The China Film Group’s influence
derives from their control over the country’s film distribution.) The Tibet Code appears to be
hitting the sweet spot on all of China’s media objectives, to be discussed further in detail in
section III of this memorandum.25
23
PR Newswire (April 8, 2013), http://www.prnewswire.com/news-releases/star-china-media-ltd-enters-into-a-joint-
venture-with-puji-capital-limited-161194865.html.
24
The Walt Disney Company (April 25, 2013), http://thewaltdisneycompany.com/disney-news/press-
releases/2012/04/walt-disney-company-china-named-founding-partner-chinas-animation.
25
James Areddy, Andrew Browne, Merissa Marr, Katzenberg Unveils China Film Project, The Wall Street Journal
(April 24, 2013), http://online.wsj.com/article/SB10001424127887324763404578432491119398344.html.

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Disney has not been standing completely flat footed, though. Iron Man 3 was co-
produced with the Chinese firm DMG Entertainment, and they are even producing a separate
version including bonus footage, specifically for Chinese release in May 2013.26
v. The End Game
Disney, DreamWorks, News Corp. and other media empires appear to be racing to curry
favor with the state and local Chinese leadership, to attain the ultimate prize: access to the
television market.27
Understanding the thought processes and actions of China’s leadership in
the past and stated intentions for the future will help Disney design the optimal blueprint for the
biggest market in East Asia.
III. ANTICIPATING CHINA’S MEDIA ASPIRATIONS
a. China’s Media History
i. The Early Years: Government Instrument
Media in China has always been an important government instrument. The objectives
have transformed over the past few decades, in conjunction with China’s evolution as a state,
politically and economically. In 1912, the Empress Longyu was forced to abdicate her throne,
ending thousands of years of imperial rule, and setting the stage for the formation of the
Republic of China, which lasted till 1949. Mao Ze Dong, the leader of the Communist Party,
declared the People’s Republic of China in 1949 after winning a civil war against the
Kuomintang.28
Deng Xiaoping rose to prominence after Mao’s death in 1976 and led a transition
from a planned economy to a system with free market elements. President Jiang Zemin and
Premier Zhu Rongji then led China into a period of rapid sustained economic growth, with the
26
Michael White, Disney Wins Approval to Open ‘Iron Man 3’ in China on May 3, Bloomberg (April 25, 2013),
http://www.bloomberg.com/news/2013-04-24/disney-says-iron-man-3-will-open-in-china-on-may-3.html.
27
Peter White, DreamWorks Animation To Launch International Kids Channel, TBI Vision (April 8, 2013)
http://tbivision.com/news/2012/11/dreamworks-animation-to-launch-international-kids-channel/19138/.
28
China (April 6, 2013), http://en.wikipedia.org/wiki/China.

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gross domestic product averaging 11.2% throughout the 1990s.29
As China transitioned from an agrarian economy into an industrialized state, the nation’s
media apparatus expanded as well. China’s press agency began in 1931 as the Red China
Agency, changing its name to Xinhua in 1937.30
China Radio International (CRI) (originally
Radio Peking) was founded in 1941 as the state owned, externally broadcasting radio station of
the People’s Republic of China.31
China Central Television (CCTV), the primary state television
group in mainland China, began to broadcast in 1958.32
During the Maoist period of rule from 1949-1976, promoting government propaganda to
the domestic population was the main objective of these instruments. Coordinating masses of
people for vast development projects was essential for the Communist Party in China during this
period. Maintaining control over a large population and preventing destabilizing counter-
revolutions has been a fundamental goal in China’s rapid development since the 1980s.33
ii. Soft Power Expansion
In addition to managing the content consumed by the domestic population, the Chinese
government has also sought to increase their influence abroad. A key driver in crystallizing this
new goal has been Joseph Nye’s seminal piece on power politics differentiating between “hard”
power and “soft” power, which the Chinese government most likely found as a restatement of
ancient Confucius wisdom.34
According to Nye, hard power covers the traditional category of
29
Id.
30
Xinhua (April 6, 2013), http://en.wikipedia.org/wiki/Xinhua.
31
China Radio International (April 6, 2013), http://en.wikipedia.org/wiki/China_Radio_International.
32
China Central Television (April 6, 2013), http://en.wikipedia.org/wiki/China_Central_Television.
33
Susan Lawrence, Michael Martin, Understanding China’s Political System, Congressional Research Service
(April 6, 2013), https://docs.google.com/a/virginia.edu/viewer?url=http://www.fas.org/sgp/crs/row/R41007.pdf.
34
Joseph Nye, Soft Power, Foreign Policy, 90, 80, (1990); Samuel Tsoi, Confucius Goes Global: Chinese Soft
Power and Implications for Global Governance, Academia.edu (April 23, 2013),
http://www.academia.edu/2091732/Confucius_Goes_Global_Chinese_Soft_Power_and_Implications_for_Global_G
overnance; Joseph Nye, China’s Soft Power Deficit, The Wall Street Journal (April 23, 2013)
http://online.wsj.com/article/SB10001424052702304451104577389923098678842.html.

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coercion, through military or economic threats, as well as inducement, through investment, aid,
and other payments. Soft power, on the other hand, gets others to do what you want through
attraction and co-opting.35
Soft powers’ principal instruments are an entity’s values, culture, policies, and
institutions. Nye refers to these tools as “currencies” and notes that their value lies in their
ability to attract and repel others to do what you want on their own volition.36
A state with
bountiful soft power would, theoretically, have the ability to generate global norms, which
emanate their own civilization, creating a global environment mirrored from their own image.
Post World War II capitalist states fell under the spell of American soft power, developing a taste
for the Big Mac, rock and roll, and Jaws.
The Chinese government, led by an oligarchy run by the Chinese Communist Party,
noted Western culture in general, and American culture in particular, pervading every aspect of
their society as their society grew increasingly open during the reforms of the 1980s. Nye’s
concept of soft power influenced academics and technocrats globally as well, but in a closely
held government such as China, such theories have the potential to move from the textbook to
practice much more efficiently than a liberal democracy.37
This efficiency was demonstrated when General Secretary Hu Jintao spoke in 2007 a
major address about the importance of culture as laying a base for creativity and national
cohesion. Hu issued a political report in 2007 that also mentioned soft power or ruanshili for the
first time, adding additional gravitas to the movement, given China’s document based political
35
Soft Power, (April 6, 2013), http://en.wikipedia.org/wiki/Soft_power#cite_note-3. Joseph Nye, Bound to Lead:
The Changing Nature of American Power (Basic Books, 1990).
36
Joseph Nye. Soft Power: The Means to Success in World Politics 31 (New York: Public Affairs, 2004).
37
Susan Lawrence, Michael Martin, Understanding China’s Political System, Congressional Research Service
(April 6, 2013), https://docs.google.com/a/virginia.edu/viewer?url=http://www.fas.org/sgp/crs/row/R41007.pdf.

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culture.38
b. Building An Analytical Framework: Government Decisions, Directives, &
Investments As Data Points
Soft power, according to Nye, entails every form of influence that does not involve
coercion or inducement. What, though, are the Chinese government’s grand objectives in
growing and wielding this soft power? This is where an analysis of ruanshili takes a fascinating
turn, and creates both pit falls and opportunities for corporate actors on the world stage. From
publicly available information, I postulate that the Chinese government’s ruanshili designs fall
into both the political and economic categories. In both these spheres, the government has
domestic and international ambitions. Understanding the primary levers driving China’s soft
power intentions is fundamental to formulating a strategic plan which will maximize Disney’s
chances of launching a 24/7 network.
Discerning the government’s true intentions is possible through triangulation of publicly
available data. One source of China’s intentions with the media industry is the directives the
government issues publicly. Another source comes from the government’s actions restricting
foreign television dramas, children’s animated programming, and films. Finally, the
government’s past and announced investments in the media industry shed further light on their
intentions. Combining these various data points paints a picture of a broad range of competing
interests and objectives with one overarching motivation.
c. Central Committee Decisions: To Provide A Cultural Surge Breaker
A November 2011 decision issued by the Central Committee of the Chinese Communist
Party gives a lengthy account of one dimension of the government’s view point. According to
this decision “culture is the blood circulation of the nation” and has been integral to providing
38
Id.

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spiritual strength to the nation for five thousand years. More interestingly, the report describes
radio film as a “mouthpiece for Party and people” as well as “an important cultural battlefield for
propagating ideology.” 39
Remarkably, this same report acknowledges a massive geopolitical evolution occurring in
which the world is moving towards a multipolar arena, science and technology are rapidly
changing, and various ideologies and cultures are interacting, exchanging, and blending. The
Central Committee recognizes that a shifting cultural dynamic represents an existential threat to
their conception of the nation. They specifically aim to protect “national cultural security,” and
fortify “national cultural soft power” as well as the “international influence of Chinese Culture.”
Culture is also seen as an “important source for ethnic cohesion and creative power” as well as
“comprehensive national strength” and an “important pillar for economic and social
development.”40
The Chinese powers have, undoubtedly, been paying attention to the influence America
has had over the last century, and have realized the troubling, (from their perspective),
implications for themselves. With their burgeoning middle class, and corresponding spending
power, China’s own population has the significant potential of evolving into a larger version of
South Korea or Japan, with its penchant for Coca-Cola, sushi, and anime. Building up a unique
Chinese culture would serve as a surge breaker in preserving a unique identity as well as serving
to increase their sway internationally.
d. SARFT Directives: To Limit Popular Entertainment
39
Central Committee Of The Chinese Communist Party Decision Concerning Deepening Cultural Structural
Reform, China Copyright And Media (April 10, 2013),
http://chinacopyrightandmedia.wordpress.com/2011/11/09/central-committee-of-the-chinese-communist-party-
decision-concerning-deepening-cultural-structural-reform/.
40
Id.

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i. Foreign Drama: Limit Entertainment Value
Communique issued by the SARFT has been another primary source of the government’s
intent. These reports are sent directly to Chinese media stations, but the rules are often
discussed, through news outlets, in public. Keeping the written reports secret gives the
government the benefit of plausible deniability, and the flexibility to shift positions.
A major SARFT directive issued in February 2012 increased restrictions on foreign
dramas. The SARFT directive stated that foreign television dramas should not exceed more than
25% of the total broadcast time, and must not be broadcast during peak times of 7:00 pm. The
directive also states that dramas should not be “overly entertainmentized” and that shows
targeting children, the countryside, and ethnic minorities amount to 15% of programming by
2013. This particular directive appears aimed at the satellite channels in the provinces, which
tend to be more entrepreneurial with their programming.41
ii. Children’s Programming: Limit Addictive Foreign Content
Holding the attention of children for any given amount of time is, universally, a
challenging proposition. Iconic American characters, ranging from Mickey Mouse to Bugs
Bunny, continue to be the gold standard in kids programming, and a level, thus far, unattained by
any emerging market, whether Brazil, Russia, India, or China. China’s initial response to the
addictiveness of animated shows such as The Simpsons has been both swift and harsh.
In September 2006, China banned all foreign cartoons, including The Simpsons and
Pokémon from prime time between 5 pm to 8 pm. While Chinese animation houses produce vast
amounts of programming each year, the stories tend to lack ingenuity. Chinese storylines
41
Notice Concerning Further Strengthening And Improving Foreign Television Drama Import And Broadcast
Management, China Copyright And Media (April 10, 2013),
http://chinacopyrightandmedia.wordpress.com/2012/02/09/notice-concerning-further-strengthening-and-improving-
foreign-television-drama-import-and-broadcast-management/.

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generally rely on traditional narratives such as Journey To The West, which is about the
adventures of the Monkey King. China’s national broadcast station, CCTV, has stuck to Chinese
developed animation shows. Local broadcasters, who have to shoulder more of their costs
through profits, have taken greater risks and opened the door to American, Japanese, South
Korean, and European shows.42
The action taken in response to the popularity of The Simpsons follows a series of
government actions constraining foreign animation. In 2000, when Japanese anime was
pervading the Chinese market, the government issued a directive to limit foreign animation
broadcasts. The Chinese government went a step further, quantifying their directive by ordering
at least 60 percent of domestic cartoons to make up prime time slots in 2004. In February 2006
the government issued another directive banning animation shows, which incorporate live
characters. This was done to, undoubtedly, to eliminate the wildly popular Blues Clues and
Teletubbies shows. 43
The ultimate arbiter of the content, though, is the audience, and, according
to the China Economic News, 89 percent of Chinese children in 2005 preferred foreign over
domestic animation.44
iii. Reality Programming: Limit Entertaining Domestic & Foreign Shows
More recently, in February 2012, SARFT banned all imported programming during
primetime hours, and placed a 25% limit on total foreign programming. Shows attracting the ire
of SARFT include a highly popular talent show Super Girl and an edgy dating show If You Are
The One. According to the state-run newspaper China Daily, these regulations seek to build a
42
Joe McDonald, China Bans ‘Simpsons’ From Prime-Time TV, The Associated Press (April 10, 2013),
http://www.washingtonpost.com/wp-dyn/content/article/2006/08/13/AR2006081300242.html.
43
Id.
44
Michael Keane, Re-Imagining China’s Future: Soft Power, Cultural Presence, & The East Asian Media Market,
Monash University Publishing (April 10, 2013),
http://books.publishing.monash.edu/apps/bookworm/view/Complicated+Currents/122/xhtml/chapter14.html.

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“favorable environment for TV shows made by companies on the Chinese mainland.” Only
thirty foreign shows were approved in 2011, and most of them originated in Hong Kong, Taiwan,
and South Korea. Assessing the actual effect of these state sponsored actions is difficult, though,
since numerous mainland Chinese utilize the internet and pirated DVDs to supplement their
entertainment fix.45
iv. Film: Limit Everything Foreign
On the film front, China has maintained a tight grip on the entry of foreign films. In
1980, no foreign films were allowed into the mainland. This number improved to a steady
twenty films throughout the 1990s till 2011.46
The US government, at the behest of the movie
industry, challenged China’s overall quotas and limits placed on distribution fees in the World
Trade Organization. The WTO ruled in favor of the US in March 2011, but China refused to
take specific action for almost a year.
In February 2012, after intense negotiations between US Vice President Joe Biden and
Chinese Vice President Xi Jin Ping, China relented to another fourteen films being allowed entry
each year. The additional fourteen films will be required to be produced in 3D or IMAX
formats. The distribution fees were also increased to 25 percent from 15 percent. (Foreign
distribution fees are normally at 30 percent in the rest of the world.)47
e. Domestic Media Industry Investments: Originate Media Titans
i. Animation Centers
The Chinese government began investing in the state’s domestic animation industry in
45
Andrew Jacobs. China Limits Foreign-Made TV Programs, New York Times (April 6, 2013),
http://www.nytimes.com/2012/02/15/world/asia/aiming-at-asian-competitors-china-limits-foreign-
television.html?_r=0.
46
China, Facts And Details (April 4, 2013), http://factsanddetails.com/china.php?itemid=241catid=7subcatid=42.
47
Sharon Waxman, How Hollywood And Joe Biden Got China To Drop A 20-Year Movie Quota, TheWrap (April
4, 2013), http://www.reuters.com/article/2012/02/20/idUS22096264620120220.

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2004. Following their development plan in other industries, China set up 15 animation centers,
anointed as “production bases.”48
Since then, China’s animation industry has grown to produce
220,000 minutes of animated pictures, and 600 movies in 2010. While these studios employ
thousands of animators, most of them work on a subcontracted basis for the major American
studios such as Disney and Warner Bros. The government recognizes this phenomenon and has
stated that their next goal will be to focus on quality over quantity in the coming years.49
In addition to laying the foundation for a domestic animation industry, China has
explicitly stated an ambition to build media and entertainment empires in the mold of News
Corporation and TimeWarner. These companies, as outlined by China’s State Council in
October 2009, intend to be market oriented and have minimal government backing so they don’t
have to be attached as “parasites.” The state plans, though, on spending billions of dollars in
making their media designs come to fruition. During China’s progression to this ambitious end
game, they plan to allow foreign firms to invest in media assets such as music, film, television,
and theater, through state-owned corporate vehicles. These joint ventures will be allowed
increased liberty to create a broader slate of entertainment content for the domestic and
international markets.50
ii. Shanghai Media Group
The initial point vehicle for these grand plans has been the Shanghai Media Group
(SMG), a large state-run news and media conglomerate. In August 2009 the government
authorized a split of the company into a news programming and satellite distribution segment,
48
Joe McDonald, China Bans ‘Simpsons’ From Prime-Time TV, The Associated Press (April 10, 2013),
http://www.washingtonpost.com/wp-dyn/content/article/2006/08/13/AR2006081300242.html.
49
Beijing Showcases Booming Animation Industry, CCTV (April 10, 2013)
http://english.cntv.cn/program/cultureexpress/20120312/109139.shtml.
50
David Barboza. China Yearns To Form Its Own Media Empires, New York Times (April 6, 2013)
http://www.nytimes.com/2009/10/05/business/global/05yuan.html,

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run by the state, and a for-profit segment, dedicated to advertising, developing and distributing
content. SMG had $1 billion in revenues and $100 million in profits, according to state sources
at the time of the split.51
iii. Network Infrastructure
What makes China’s aims striking is that, due to the confluence of vast natural resources
and economic growth, they have the unique potential to actually execute on their ambitions. In
October 2012 the Chinese Ministry of Finance announced spending more than $600 million
through 2014 on building out a new national cable operator called the China Radio and
Television Network (CRTN).52
The primary objective for the CRTN will be to integrate about
1,000 provincial broadcast networks and operators, as well as upgrade the backbone networks.
SARFT had initially asked for $11.8 billion from the State Council, but this offer was allegedly
rebuffed. Future development financings sent through the CRTN seem likely, though, given
China’s geographic size, and scale of their plans.
f. Synthesizing The Data
i. Soft Power Rules
The Chinese government recognizes that, even at conservative growth rates, their
economy is poised to become the world’s largest at the end of the decade.53
Yet while their hard
powers in military and diplomatic prowess have been steadily expanding, their influence on the
cultures of Western nations remains diminutive. Alternately, every time the bureaucracy raises
their content gates a notch, the Chinese population appears captivated by the incoming foreign
51
Id.
52
China’s Finance Ministry Invests RMB 4 BLN In National Cable Operator, Marbridge Daily (April 8, 2013),
http://www.marbridgeconsulting.com/marbridgedaily/2012-10-
19/article/60234/chinas_finance_ministry_invests_rmb_4_bln_in_national_cable_operator.
53
China, The Economist, Economist Intelligence Unit (April 8, 2013),
http://country.eiu.com/article.aspx?articleid=168986801&Country=China&topic=Economy&subtopic=Long-
term+outlook&subsubtopic=Summary.

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media. In the minds of China’s leadership, this cultural deficit is as real, and troublesome, as
trade deficits are to the U.S. government.
China’s seemingly dysfunctional predilections stem from the government’s often
conflicting desires to promote certain national based cultural values while impelling the
formation of a multiple domestic, media empires. While domestic scrutiny has remained at a
consistently high level, this ascent, on the international stage militarily and diplomatically, but
not culturally, has weighed in favor of the soft power side of China’s media equation, and is now
driving the overall game plan. Recognizing this tension and the fresh ethos at the core of the
Chinese leadership’s psyche is the first step towards crafting an effective network launch
blueprint.
ii. Soft Power’s Embodiment: Chinese Media Empires
Looking across the Pacific, the Chinese have noticed that the most dominant, high quality
content seems to be generated by massive media empires such as Disney, News Corp., Viacom
and TimeWarner. These firms regularly earn over $150 billion in revenues and $14 billion in
profit in addition to dominating the hearts and minds of the global populace.54
One does not
need to delve far into the collective logic of the Chinese rules to see that media represents the
ultimate one-two punch from a political and economic perspective.
These state custodians are looking out ten, twenty, even thirty years in the future and see
a near perfect multipolar political arena comprised of the United States, the European Union,
India, and Brazil. In this brave new world, smaller states will look to China for guidance. By
the Politburo’s calculus four of the top five media empires are American, so if their economy
will be bigger than the U.S.’ by 2025, then China should have at least one, and hopefully three or
54
The 10 Most Profitable Media Companies, Business Pundit (April 6, 2013) http://www.businesspundit.com/the-
worlds-10-biggest-media-companies/.

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four media kingdoms as well.
This rationale, though, totally glosses over the experiences gained by the Western film
and television firms and executives over the course of the twentieth century. Far encompassing,
global, ambition, though, is the one common denominator connecting trailblazers such as Walt
and Roy Disney, the Warner brothers, and Rupert Murdoch to the political leadership of China.
While these mammoths of media came from the private sector, on their own volition, China
seems to be attempting the unprecedented endeavor of cultivating their own Walts and Ruperts
with state funding. Whether there is a method of executing this plan successfully remains to be
seen, but this complex political economic environment is the one in which The Walt Disney
Company finds themselves operating today.
IV. DISNEY’S OPTIONS FOR LAUNCHING A NETWORK IN CHINA
a. Overview
Disney has a few critical options to choose from, in deciding how to propel their
animated content onto China’s television sets: first the timing of their entry, second, the
structure of their ownership, and third, the size of their investment. Each choice becomes clear,
though, after Disney recognizes that their counterparty’s principal desire is to create its own
Disneys.
b. Timing Options
i. Trail Blaze
1. Costs
Disney and the other media firms have all been racing to be the first to launch a major
national entertainment network in China. News Corp.’s experience indicates that there are
considerable risks with an attempt at being first in China. The politburo has proven to be

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incredibly mercurial, depending on how audiences react to certain programming. The whole
purpose of a media network is to produce addictive content and make data providers and
consumer product companies pay as much as possible for the privilege of gaining access to a
show’s audience.
One can reasonably presume that Disney’s kid focused network would be wildly popular
with Chinese children. Another reasonable expectation, at this point, is that even if Disney
received the green light to launch the network, there would be a significant chance that China’s
government would unwind the agreement after the fact. China is also likely to start forcing
Disney to put only certain programming at certain prime time spots, cutting into their overall
profits.
2. Benefits
Even with these risks, the benefits of being the first international firm to successfully
enter China are abundant. Buick cars were driven by China’s last Emperor Pu Yi, as well as the
first President Dr. Sun Yat-sen. Buick is viewed as a hot luxury car brand in China to this day,
and has been a major reason for General Motors’ success in the region. Audi was the first
automobile company to open up a manufacturing plant in China, through a joint venture with
First Automotive Works in 1986. Audi’s pioneering risk has paid off handsomely, as the firm
has a stronghold on China’s bureaucrats, and is regarded in the country as the ultimate luxury
vehicle maker. The government’s proclivity towards Audis has even influenced corporate
executives to favor the cars as well in order to not appear to be attempting to outdo their public
sector counterparts.55
55
Adam Century, Andrew Jacobs, In China, Car Brands Evoke an Unexpected Set of Stereotypes, The New York
Times (April 24, 2013), http://www.nytimes.com/2011/11/15/business/global/in-china-car-brands-evoke-an-
unexpected-set-of-stereotypes.html?pagewanted=all&_r=0; Zhang Ranran, China Crucial Chapter In Audi's 100-
Year History, China Daily (April 24, 2013), http://www.chinadaily.com.cn/cndy/2009-06/29/content_8331816.htm.

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As Buick and Audi’s experiences suggest, premium brand first entrants may seize a slice
of history, as well as the loyalty and imagination of China’s government leadership and greater
population. Disney is a premium brand, and has already taken the important act of breaking
ground on the towering Shanghai Disneyland. This resort will serve as a historic bulwark in
China’s cultural conscience and as a must do vacation for the upwardly mobile middle class.
By the time the resort opens, thousands of visitors have traveled through the magical
experience and told all of their friends, Disney should have a tight clasp on the children
entertainment space in China. The primary advantage of starting the first kids’ network in China
would be to cement this early lead. Disney would be, for decades into the future, known as the
premier brand for children.
ii. Follow The Leader
If Disney finds themselves in the situation of being the first resort in China, but the
second or even later kids’ focused network, the results would most likely be very mixed. The
lead entrant would be taking on all the risk of having their channel shut down due to
overwhelming popularity, but they would also have the ultimate advantage of being the elite
brand in the soon-to-be-largest economy in the world.
Disney would be astute to not allow a firm such as DreamWorks Animation, potentially
teaming up with News Corp., to swoop in and start the first kids focused network in China.
DreamWorks Animation could very well find themselves in the position of Audi, as the
preeminent brand in China, but a close second in the rest of the world. This threat is greater than
mere speculation as Mr. Katzenberg has expressly voiced his intent on launching an animated

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kid’s network internationally, especially that they have now acquired the Classic Media
properties.56
c. Ownership Options
i. Go It Alone: Wholly Owned Foreign Entity
1. Costs
After Disney decides to continue attempting to be the first mover in the China kid’s
network space, they should assess how they want to structure their ownership. The company
appears to have, to date, been attempting the go it alone strategy, most likely through a Wholly
Owned Foreign Entity (WOFE), and have been running into serious governmental opposition.
From publicly available English translations of the Catalog for the Guidance of Foreign Invested
Enterprises of 2007, the publishing and media sectors are on China’s restricted and prohibited
list. The WFOE approach is, therefore, most likely out of reach for any company in the media
space, including Disney.57
I postulate, though, that Disney may be attempting to create a
separate investment carve out category just for themselves.
If, for some reason, Disney were able to get an exemption to the WFOE rule, the
preeminent risk to the flying solo course is that the Chinese government decides to never grant
the firm access to their airwaves. Other risks, which are almost as fatal, are the continued
meddling by the government depending on audience size, timing, and types of content available.
If Disney owns the entire network, the government would also be more likely to be receptive to
elements within their halls of power calling to revoke access at a future date.
2. Benefits
56
David Lieberman, DreamWorks Animation Channel Idea Is “Being Realized”, But Katzenberg Also Wants To Be
On Fox In Primetime, Deadline (April 24, 2013), http://www.deadline.com/2012/11/dreamworks-animation-
channel-idea-is-being-realized-but-katzenberg-also-wants-to-be-on-fox-in-primetime/.
57
Dan Harris, Breaking News: China Changes Foreign Investment (FDI) Rules, ChinaLawBlog (April 25, 2013),
http://www.chinalawblog.com/2007/11/breaking_news_china_changes_fo.html.

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The firm would, clearly, prefer to retain full control over the networks’ management.
Decisions ranging from what content to air, to when to air that content, to how much to charge
advertisers, would be made by Disney’s management team, based in China or elsewhere. The
chief benefit in this tack would be that Disney maintains full creative and managerial flexibility
of their network.
This would increase the likelihood that shows are popular, and maximize profits.
Disney’s ability to control their content, though, would be tempered by the fact that they would
be seeking to conform, in some fashion to the government’s directives on content for children,
such as pastoral scenes, and showing China in a positive light. Alternately, Disney would be
forced to completely avoid some topics, such as political liberties, and geopolitics. As a kid’s
focused companies, though, Disney already has the benefit of generally avoiding political
concerns. Maintaining full control over the network has, therefore, the highest potential risks
and rewards.
ii. Representative Office
Setting up a Representative Office (Rep Office) in China is the least common route for
foreign companies entering China. Rep Offices are not actually independent legal entities. They
merely represent foreign companies in China. Rep Offices are a cheap and rapid method of
developing a Chinese presence, but they are limited to conducting research, promoting the
foreign enterprise, coordinating activities for the foreign firm, and other non-profit generating
activities. Rep Offices are expressly forbidden from any activity which generates a profit, which
is why they tend to be rare. This option would not be able to be used as a platform for Disney’s
potential network in China, and therefore should be avoided.58
58
Dan Harris, How To Form A Representative Office In China, ChinaLawBlog (April 25, 2013),
http://www.chinalawblog.com/2010/01/how_to_form_a_representative_o.html.

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iii. Partnership/Term Sheet?
Disney’s could decide to maintain the status quo, and utilize their partnership with
Tencent. The publicly available information on the agreement between Disney, Tencent, and
China’s Ministry of Culture is vague, expressing the objectives of “nurturing local talent,”
“developing original local animation content,” “nurture the local animation industry,” and
creating content for domestic and international distribution. No mention was made of the profit
sharing or ownership structure of the Cooperation, and neither Disney nor Tencent have publicly
committed any significant resources.59
My suspicion is that Disney was perturbed by the speed and specificity of the Oriental
DreamWorks announcement in February 2012 and that Disney’s international team received a
directive to put together a deal for announcement in a short time frame. The April 2012 Tencent
and Ministry of Culture Cooperation announcement may, therefore, be more of a term sheet than
an actual joint venture.
The plan does, though, appear to be garnering some measure of favor with the Chinese
government. This strategy provides only slightly more risk than the solo option, and could be
cheaper as well. This approach could also, given Disney’s prior decades torturous negotiation
experience with Shanghai Disneyland, provide a route to practice what working with a Chinese
partner would be.
The fatal flaw in sticking with the current partnership or term sheet route, though, is that
Disney is not operating in a vacuum. Viacom, TimeWarner, NBCUniversal, DreamWorks
Animation, News Corp. and other powerful firms are bearing their sights on the Chinese
landscape. If Disney waits too long, Viacom, through their Nickelodeon division could pursue
59
The Walt Disney Company (April 25, 2013), http://thewaltdisneycompany.com/disney-news/press-
releases/2012/04/walt-disney-company-china-named-founding-partner-chinas-animation.

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the DreamWorks road map on a bigger scale. Once one of the major conglomerates gets their
own foothold in China, all of Disney’s goodwill built up over the Shanghai Disneyland
investment could be significantly eroded.
iv. Joint Venture
1. Types
Joint ventures (JVs) in China come in the form of Equity JVs (EJV) and Cooperative JVs
(CJV). Both EJVs and CJVs are independent legal entities allowed to conduct business in China.
The primary distinguishing characteristic of EJVs is that representation on the board, profit
sharing, and liquidating rights are formulated strictly based on each party’s relative equity
contribution.60
CJVs, though, are allowed to distribute profits in proportions that vary from the
original equity contribution. The downside with CJVs is that they tend to alert China’s
authorities and lead to protracted negotiations, so Disney would be wise to utilize the EJV
route.61
1. Costs
A major downside to the joint venture route is that Disney does not, historically enjoy
partnering with state backed entities in producing content. What goes on in the creative halls of
Pixar, Marvel, and Lucasfilm are very much part of the magic that makes up Disney’s DNA.
Disney considers itself, and rightly is the blue blood of kid’s entertainment. They do not need
any assistance in in the creative process. Any outside executives or creative talent that Disney is
forced to work with, would almost certainly, at least in the initial stages, create a hindrance to
production.
60
Legal Guide To Doing Business In China, M&A Law Firm (April 25, 2013),
http://www.huiyelaw.com/file/obse2011/LEGAL%20GUIDE%20TO%20DOING%20BUSINESS%20IN%20CHIN
A.pdf.pdf.
61
Id.

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Next, one of the primary objectives of creating a national network would be for the
immense profit potential available. An EJV would be sending at least half of the profit stream to
outside entities. The return on invested capital would necessarily be lower than wholly owned
network.
Lastly, the biggest risk, in the long term, to Disney is the reason the EJV option is so
enticing to China: they may inadvertently spawn powerful competitors. Disney enjoys a near
monopoly, currently, on the premium kid’s television space. Nickelodeon and The Cartoon
Network firmly occupy the lower brow, but still highly entertaining segment, and DreamWorks
Animation has yet to make any entry. By letting Chinese executives into the executive level
creative and business decision making process for the China market, Disney could be spawning
dangerous competition.
This breeding of competitor risk, though, is somewhat mitigated by the existence of
Oriental DreamWorks’ formation. China’s business talent will already be privy to a former
Disney star, in Mr. Katzenberg through his EJV. The biggest risk, in my opinion, therefore, is
that the Chinese government decides to make DreamWorks Animation their exclusive partner in
training them in the ways of the media mogul. Being forced to watch a competitor execute on
Disney’s proposed grand undertakings now could be more painful than seeing a competitor
evolve over the next few decades.
2. Benefits
There are some key benefits in forming an EJV for Disney’s kid’s network. First, this
will help assuage, to some extent, China’s skittishness over some foreign media company
brainwashing all their children. Disney could address all of China’s stated and unstated content
concerns point by point through the EJV contract. Disney could make explicit positive and

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negative promises such as agreeing to not address certain topics, such as Taiwan, at all, while
agreeing to include programming which is educational to children.
Second, an EJV formed with the right investment fund would open up doors through the
Chinese executives’ personal networks. For example, one of Oriental Dreamworks’ Chinese
investors is the Shanghai Alliance Investment, Ltd., which just so happens to be founded by
Jiang Mianheng (the former Chinese President Jiang Zemin’s son). With partners of the caliber
as Shanghai Alliance Investment, Disney would be de-risking the overall investment.62
Disney would increase the speed of gaining overall governmental approval, as well as
dial back the chance that China would nix the entire operation at some date in the future. The
importance of strong government advocates, behind the scenes, was highlighted by an
anonymous source referring to the Oriental DreamWorks venture “Politically speaking, this is a
good project.”63
An EJV would give Disney the platform to recruit their own government
advocates to push their network ambitions through to final approval.
Third, and perhaps most importantly, an EJV would fit neatly into the government’s long
term appetite for producing multiple media empires if Disney advocates that the venture be
utilized for developing both film and television content. Disney could sell an EJV with them as
the first stage in building up the resources and skills necessary for setting up China’s domestic
industry. China has been attempting an animation go-it-alone strategy, with minimum to show,
to date. Disney could play up the successful examples of Audi and Buick, as providing the
catalyst for jumpstarting China’s now vast automobile industry.
d. Size Of Investment Options
62
63
Id.

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After deciding to attempt to be the first entrant, through and EJV, Disney must then
decide the size of their capital commitment. The minimum bar for investment size has been set
by the Oriental Dreamworks deal, which involves DreamWorks Animation contributing $50
million in cash and $100 million worth of intellectual property for a 45.45% stake. Shanghai
Alliance and Shanghai Media Group are putting up $150 million in cash, and $30 million in
intangible assets for a 54.55% stake.
Matching the Dreamworks’ investment size would benefit Disney by limiting their
downside risk and allow a graceful exit should China change its mind about foreign entrants in
the next few years. Taking a tentative approach, in my opinion, though would be suboptimal.
Disney has a major advantage over DreamWorks in that they generated more than $4 billion in
free cash flows in 2012. Disney has an opportunity to seize the upper hand decisively by
committing an unprecedented amount of cash to developing original film and television on
Chinese soil.
As the Oriental DreamWorks deal demonstrates, Disney could spur China’s investment
firms to at least a 3:1 ratio.64
Placing an order of magnitude more than $50 million cash to work,
perhaps in the range of $500 million to $1 billion could significantly tilt Disney’s bargaining
position. China’s State Council has explicitly stated their grand schemes to build domestic
media giants, so Disney should express an interest in infusing capital commensurate with those
ambitions. $500 million invested by Disney and $1.5 billion invested by China would lead to an
EJV firm with more cash than DreamWorks Animation’s entire current market capitalization.
The leverage from a major capital commitment would also give Disney the firepower
they need to agree to the television network side of the EJV. Wooing the Chinese state backed
investment firms to place billions of dollars of investment into their project would also create a
64
$150 million:$50 million = 3:1.

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virtuous cycle in the government approval process and heighten the possibility that their content
sails onto national airwaves. My hypothesis is that, after spending more than a billion dollars,
the Chinese government would use retroactive logic in voting to permit the EJV’s content to
reach their populace, since blocking the content would be a waste of their capital and efforts.
e. The Ultimate Route: Go Fast, Go EJV, Go Big
To recap, for all the benefits experienced by companies such as Buick and Audi as first
movers, and for the fact that clear and present competition exists, Disney should strive to be the
first entrant. Disney should seek to move, though, through the EJV route. The geopolitical
forces at play in China are too strong, and too opposed to each other, to be neutralized by any
private corporation.
My hypothesis is that Disney was unable to lever their multibillion dollar investment in
the Shanghai Disneyland negotiations into a network because capital in China is bountiful. What
China lacks, though, in the media mogul development department, is know-how.
Disney should parlay their world class know-how and leapfrog DreamWorks Animation
by forming a pioneering EJV that will produce an aggressive number of both movies and
television shows for the Chinese and global audiences. Forming this EJV, with the right Chinese
corporate and political players, would move Disney dizzyingly close to coaxing the government
into allowing them onto the national network.
V. EQUITY JOINT VENTURE: CRITICAL NEGOTIATING POINTS
a. Overview
Disney’s negotiations in forming this EJV will likely be complex and intense, but there
are a few operational, financial, and legal points which will be imperative to monitor. According

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to legal columnist Steve Dickinson, China’s investment groups are incredibly savvy at
negotiating key issues in EJVs.
b. Operational
i. Control & Ownership: Representative, General Manager, Seal
Chinese investors’ tried and true strategy is to act as if an ownership interest of 51% is
the primary objective for them. Foreign investors, after winning a 51% stake in the EJV, will
then trade the rights to appoint a representative director and a company general manager as
concessions. Granting the Chinese parties the two top management roles places them in the
driver’s seat of the EJV, though.65
The primary control issues to fight for in the negotiation are, therefore, the appointment
and removal power for the EJV’s representative, the appointment and removal power for the
general manager of the EJV, and control over the company’s seal. The EJV representative is
vital because they are heavily involved in operations. The EJV general manager should be
explicitly employed by the EJV at the behest of the representative director. The company seal is
the imperative dark horse issue of the negotiation, since this power presents the holder with the
power to make binding contracts, deal with banks, and other service providers. The seal, should
not, under any circumstances, be ceded to the foreign partners.66
Arguments made by the Chinese counterparties that without a local representative and
general manager, they will be unable to bring the political connections known as “guanxi.”
According to Dickinson, these arguments are fallacious, and have caused serious problems to
investors in the past.67
65
Dan Harris, Chinese Joint Ventures — The Information The Chinese Government Does Not Want You To Know,
ChinaLawBlog (April 25, 2013), http://www.chinalawblog.com/2008/04/chinese_joint_ventures_the_inf.html.
66
Id.
67
Id.

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The Oriental DreamWorks deal, though, is being run by China Media Capital’s Mr. Li
Ruigang.68
Whether Mr. Ruigang is the general manager or representative and whether
DreamWorks Animation retains the right to remove him is not available from public information.
Given that Cravath, Swaine & Moore, Morrison Foerster, Paul, Weiss, Rifkind, Wharton &
Garrison were legal advisers on the deal, DreamWorks Animation, presumably, found a manner
of protecting their interests. Disney should attempt to retain one of these law firms, so that they
have an EJV template to work from.
ii. Unanimous Approval Issues
Another method of protecting Disney’s interests would be to force certain important
corporate events to require unanimous board approval. Amendments to the EJV contract,
decisions to liquidate or dissolve the EJV, changes to the amount transferred to outside parties of
any registered capital, and any merger or sale of assets should fall under this category.
iii. Film Release Issues
Disney should also seek ironclad guarantees to ensure any movies and television content
produced do not fall under the quotas in place for foreign firms. An EJV produced film that is,
for some inane reason, blocked from domestic release, could be nearly catastrophic, from a profit
perspective. Disney should also seek equally strong language from the Chinese partners
certifying that their films will receive the most lucrative release dates. China has a habit of
placing foreign blockbusters up against each other to depress box office results.69
c. Financial: Profit Sharing
68
69
Robert Cain, Big Trouble In Movie China, Chinafilmbiz (April 25, 2013), http://chinafilmbiz.com/tag/china-film-
group/.

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If Disney takes the go big approach, they should have a significant lever to maximize
their profit stream. Ideally, they should seek to maintain greater than 50% of control over the JV
in addition to controlling the appointment powers of the key management personnel. Based on
the equity split in both the Shanghai Disneyland and Oriental Dreamworks deals, China seems
keen on only allowing foreign firms to invest in JVs on a minority basis.
Disney could turbo charge profits in an EJV by contributing a higher percentage of
intellectual property to their equity valuation, while requiring the Chinese partners to put up a
greater percentage of cash. The know-how and intellectual property that Disney provides should
be vigorously advocated for as extremely valuable in any potential deal.
d. Legal
i. Dispute Resolution
Disney’s ultimate stop gap measure, in case the Chinese totally reverse course on their
media ambitions, is the EJV’s legal dispute resolution. Disney should make adopting the New
York Convention as the legal resolution method as a non-negotiable point. China has adopted
the New York Convention as well as the U.S.70
Disney should seek to have an American venue
such as New York or Washington D.C. as the location for any arbitration as well.
The importance of following the New York Convention is that arbitral awards may be
enforced in any of the 146 United Nations Member State signees.71
In case Disney’s EJV
completely goes bust, they could, at the very least, hunt down arbitral awards around the world,
and attempt to enforce seizures on China’s assets. Since Disney has already committed billions
70
China, New York Convention Guide (April 25, 2013),
http://www.newyorkconvention1958.org/index.php?lvl=more_results&look_ALL=1&user_query=*&autolevel1=1
&jurisdiction=12.
71
Jurisdictions, New York Convention Guide (April 25, 2013),
http://www.newyorkconvention1958.org/index.php?lvl=cmspage&pageid=9.

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of dollars to the Shanghai Disneyland project, the possibility of this scenario coming to fruition
is remote.
ii. Technology Protection
Elements within the EJV will most likely be communicating, in some manner, with the
Chinese state. The strongest, and most risk averse, protection Disney could take would be to
never place the most advanced, full, software and hardware packages on Chinese soil. The most
state of the art systems, produced by divisions such as Industrial Light & Magic and Pixar,
should definitely not be placed into any Chinese based EJV, since these will most likely be
transferred out of the venture through illicit means and into China’s domestic animation
companies. For technology that is transferred into the EJV, the contract should include clear
language that the assets are retained by Disney and are only deployed on an as needed basis.
Potent language protecting know-how and other intellectual property in the form of
tangible and intangible assets should be written into the EJV as clearly as possible. One
potential trip wire to protect Disney’s intellectual property would be an automatic increase in
their EJV ownership and a change in the representative and general manager if a transfer
happens through nefarious means. This ratchet could be agreed to be activated only upon an
decision by an arbitral body.
VI. EQUITY JOINT VENTURE: STRATEGIES FOR LONG TERM SUCCESS
a. Achieve The Role Of Consigliere
While pitching the film and television JV to Chinese investment groups, Disney should
also be selling themselves as the trusted adviser to China’s government. Their current attempt to
be a trusted advisor through the Tencent partnership is being diluted down by their lack of actual
capital commitment, an actual slate of announced movies and programming, and DreamWorks

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Animation’s rapid maneuverings in the region. All is not lost, though, and Disney can still
appropriate the high ground and achieve the status of consigliere to the Chinese government’s
media focused leaders.
By explaining Disney’s core competencies, while also providing an honest appraisal of
what needs to be done for China to attain their own goals, both parties, should, by my
assessment, come to an agreement rapidly. Disney’s core advantages are how to create and tell
stories, how to monetize franchises that are borne from that brew of stories, and how to develop
and deploy technologies to tell those stories in innovative ways. Disney could offer to help
China in some, all, or none of their three core competencies. I would advise them to sell their
skills at storytelling and monetization to the furthest extent, but to keep their technology cloaked
in as much secrecy and legal defenses as possible.
b. Story Telling
i. Working With The Chinese JV Members In Story Development
The core ethos of multimedia corporations, unlike any other industry, is the story. For
every classic character, and the story around that protagonist, there were hundreds or even
thousands of discarded ideas that have been pitched during the brainstorming phase. Going even
further, for every person sitting at an elite movie studio’s creative story department, there are
thousands of others who never made the cut, or decided storytelling was not for them.
Disney should clearly detail how Chinese executives will actively participate and be
mentored in this complex creative process. This story generation and identification is what
separates a media firm such as Disney from a pure technology or manufacturing company. Very
few companies outside the U.S. consistently originate stories that become embedded in the
conscience of children everywhere. This creative process is what China’s State Council should

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want ultimate access to, and Disney should play up this point to the maximum in the JV
negotiations.
ii. Seeding Domestic Creative Talent
The American higher education system, which revolves around liberal arts in addition to
science and engineering, is an essential building block to a content company such as Disney.
Disney should, therefore, also advise China on setting up a liberal arts education system, which
will produce the Walt’s of the future, perhaps assisting in setting up partnerships between elite
creative writing programs such as The Johns Hopkins University and the University of Iowa and
Chinese universities. These schools will help provide the raw storytelling talent to the animation
schools and parks that are already being built throughout China.72
c. Franchise Monetization
i. Executive Talent
The second most important piece to building a media empire, other than the timeless
story, is the talented executive, who understands the quantitative aspects of their business as well
as well as the subjective features. Executives such as Mr. Eisner, Mr. Katzenberg and Mr. Iger
had powerful mentors at critical phases in their careers.73
If Disney were to explain exactly how
vital executive level talent is to building a diversified global company, and then commit to
coaching a half dozen or so Chinese executives in the art of media corporate management,
China’s government would develop even more trust for the company. Gaining this trust and
giving China’s leadership a realistic timeline of at least a decade for this talent development
process to play out, would also increase the likelihood of opening their air waves to Disney’s
72
Yao Lu, China Releases 12th
Five-Year Plan For Animation Industry, China Briefing (April 10, 2013),
http://www.china-briefing.com/news/2012/07/16/china-releases-12th-five-year-plan-for-animation-industry.html.
73
Steve Lohr, A New Role For The Go Between At Capital Cities, New York Times (April 9, 2013),
http://www.nytimes.com/1995/08/07/business/a-new-role-for-the-go-between-at-capital-cities.html.

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content.
ii. Synergistic Businesses
What the State Council ultimately wants are companies in the mold of Disney and
TimeWarner. To achieve that, their media companies and executives need to learn how to run,
and then build, complementary businesses. Disney is the master of maximizing profits across a
range of businesses, dispersing intellectual property throughout theme parks, network television,
live musicals, and consumer products, in addition to films. As the global leader in content
monetization, Disney should be able to make a strong case for the benefits of an EJV partnership
with them on agreeable terms.
They could crystallize this commitment by offering to train top performing Chinese
executives in the EJV in a global rotational program. These executives could be given
opportunities to rotate throughout Disney’s vast global businesses, such as theme parks,
networks, and consumer products. By giving leading Chinese managerial talent the experience
of working abroad, they will gain critical experience to build their own Chinese media
conglomerate. More importantly, Disney would be selling the benefits of remaining in-house to
the executives, which will create fewer Chinese competitors in the long term.
d. Retain Mr. Iger
Mr. Iger is scheduled to leave his post as CEO at Disney in March 2015, and Chairman in
June 2016. I would advise Disney to utilize Mr. Iger as an Executive Chairman for as long as
possible.74
This will free the next CEO to focus on running the overall company and allow Mr.
Iger to focus on government relations and diplomatic building along the lines of Eric Schmidt at
74
Marc Graser, Will Disney’s CEO Shuffle Stay on Course for 2015?, Variety (April 24, 2013),
http://variety.com/2013/biz/news/will-disneys-ceo-shuffle-stay-on-course-for-2015-1200328718/.

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Google. While DreamWorks Animation is a far smaller firm, in terms of market capitalization,
Mr. Katzenberg is a fierce competitor, and has the ears of both D.C. and Beijing.75
e. Continue Opposing Censorship & Quotas
Disney should, and most likely does, reaffirm their belief that quotas, and protectionist
regimes are not successful in cultivating artistic endeavors. Mexico, South Korea, Spain, and
even Britain have all attempted to place movie quotas, and other restrictions on foreign media, to
only end up aggravating their own populace and failing to build a domestic film industry.76
If
China hopes to create their own Disney corporations, they need to foster the creative spirit and
idea generation from the ground up, in schools, universities, and even the general society.
Creativity does not often arise upon command.
VII. CONCLUSION
While China’s political and legal system is multifaceted in nature, the government’s key
motivators originate from a desire to be influential on an absolute and relative global scale.
While their economy is on pace to become the largest within the next decade, the government
has realized that, from a cultural perspective, the world is still dominated by a distinctly
American influence. Addressing this short fall in cultural influence will continue to provide the
primary impetus in China’s interactions with Disney and other major media conglomerates.
Recognizing China’s desire to build their own media companies, in the image of Disney,
will allow the firm to step into a trusted advisory role through a massively capitalized EJV
focused on both film and television children’s entertainment. Once they attain this position of
consigliere and partner to the cultural capital leaders within in China, Disney will then be able to
75
Erica Orden, Peter Nicholas, Movie Mogul's Starring Role in Raising Funds for Obama, The Wall Street Journal
76
Phil Hoad, Will Relaxation Of ‘Great Wall’ Quota Set Chinese Film-Makers Free?, The Guardian (April 9, 2013),
http://www.guardian.co.uk/film/filmblog/2012/feb/29/great-wall-quota-chinese-film-makers.

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gain the level of credibility necessary to disseminate their exceptional content onto the nation’s
airwaves.

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