PROSPECTUS SUMMARY
This summary highlights information about us and the offering contained elsewhere in, or incorporated by reference into, this prospectus supplement and the accompanying prospectus. It is not complete and may not contain all the information that may be important to you. You should carefully read the entire prospectus supplement and the accompanying prospectus, as well as the information incorporated by reference, before making an investment decision, especially the information presented under the heading “Risk Factors” beginning on page S-13 of this prospectus supplement, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012, and our consolidated financial statements which are incorporated by reference.
Company Overview
We operate in the Chinese media segment, through our Chinese subsidiaries and variable interest entities, or VIEs, (1) a business which provides integrated value-added service solutions for the delivery of pay-per-view, or PPV, video on demand, VOD, and enhanced premium content for cable providers, (2) a cable broadband business based in the Jinan region of China and (3) a television program guide, newspaper and magazine publishing business based in the Shandong region of China.
Through our VIE, Sinotop, and it’s 80% owned operating joint venture Zhong Hai Video, we provide integrated value-added service solutions for the delivery of PPV, VOD, and enhanced premium content for cable providers. Zhong Hai Video's revenue will be derived primarily from a VOD model, consisting of a fee to view movies, popular titles and live events.
Through our VIE, Jinan Broadband, we provide cable and wireless broadband services, principally internet services, Internet Protocol Point wholesale services, related network equipment rental and sales, and fiber network construction and maintenance. Jinan Broadband’s revenue consists primarily of sales to our PRC-based internet consumers, cable modem consumers, business customers and other internet and cable services.
Through our 30% owned Shandong Media, we operate our publishing business, which includes the distribution of periodicals, the publication of advertising, the organization of public relations events, the provision of information related services, copyright transactions, the production of audio and video products, and the provision of audio value added communication services. Shandong Media's revenue consists primarily of sales of publications and advertising revenues. As discussed in Note 5 to the unaudited consolidated financial statements, the Company has deconsolidated the net assets of Shandong Media as of July 1, 2012 and accounts for the remaining 30% interest in Shandong Media by the equity method.
Our Pay-Per-View and Video On Demand Business
Through the acquisition of Sinotop Hong Kong and its VIE Sinotop Beijing, we have an exclusive 20-year joint venture with CCTV-6's China Home Cinema, or CHC, to become the first national Pay-Per-View (PPV) and Video On Demand (VOD) platform in China. We operate under a national government license obtained by CHC to serve as their exclusive agent in the PRC, for operating and marketing PPV, Transactional Video On Demand, or TVOD, Subscription Video On Demand, or SVOD, Near Video On Demand, or NVOD, and related Value-Added Services, or VAS. Our platform and services include content and distribution agreements, governmental partnerships and approvals, infrastructure, encoding and transcoding, metadata management, marketing services, research and data. Our core revenues will be generated from both a one-time fee for our TVOD services, as well as a monthly fee for our SVOD services.
We are China’s most sophisticated aggregator of VOD content, offering a suite of services modeled after the most successful VOD platforms in the world. Led by extensive industry experience and comprehensive analyses of consumer viewing habits, our TVOD and SVOD services are designed to maximize buys and revenue. We currently provide cable television household subscribers the ability to view the best Hollywood titles, high-grossing domestic content and other popular movies, such as The Avengers. Our platforms provide viewers with access to the top selection of quality content during the earliest possible VOD windows for the best viewing experience with full DVD-like control. Top tiles are available in high definition with select content also available in 3D. We will also offer free content including trailers, behind-the-scenes footage, celebrity interviews and more.
We currently have distribution agreements with Warner Bros. Entertainment, Disney Media Distribution, Paramount Pictures, NBCUniversal, Miramax, Lionsgate, Magnolia Pictures, Screen Media Ventures, Gravitas Ventures, 3Net, Digitrax Entertainment LLC, K2 Communications and Film Buff. We currently reach 13.2 million cable television homes, having distribution agreements with Jinan Cable, Cixi Cable, Jilin Cable, Dalian Tiantu Cable and Hubei Cable. In addition, we plan to expand our content offering to include YOU 3D, YOU TV, YOU Kids, YOU Sports, YOU Music, YOU Karaoke and YOU Events. Currently, there is no other provider offering VOD or SVOD services on a national level in China.
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Table of Contents
China is the largest cable TV market in the world with 400 million total TV households and 202 million cable TV households with an untapped potential for premium content. China expects to be twice the size of the United States in terms of digital households by 2015. With the increase of middle class income and greater disposable budgets, we anticipate seeing greater demand for entertainment, including movies, concerts and sporting events. This projection has been reflected through box office receipts, up 29% in 2011 from 2010 according to China’s Film Bureau, and the exploding sales of flat screen televisions, with total television shipments to China increasing 19% in 2011, and 90% of all current televisions in the region being LCD, according to NDP Display Research. Premium content remains scarce in the market and we believe the key opportunity for growth is in China’s next generation broadcasting initiatives, which is expected to power 200 million digital cable customers with high definition television, internet and 2-way interactive service capability by 2020, according to the Chinese State Administration of Radio, Film and Television.
Our Broadband Business
Jinan Guangdian Jia He Digital Television Co., Ltd., or Jinan Parent, the entity that sold 51% of its cable broadband business to us, is an emerging cable TV consolidator and operator in China’s cable broadband market. Jinan Broadband, which is 49% owned by Jinan Parent and 51% owned by Beijing China Broadband Network Technology Co., Ltd., or wholly foreign owned entity, or WFOE, is operated in accordance with a cooperation agreement and one or more operating agreements, including an exclusive service agreement. Jinan Broadband operates out of its base in Shandong where it has an exclusive cable broadband deployment partnership and exclusive service agreement with Jinan Radio & Television Network, or Networks Center, the only cable TV operator in Jinan. Pursuant to the exclusive service agreement, Jinan Broadband, Jinan Parent and Networks Center cooperate and provide each other with technical services related to their respective broadband, cable and internet content-based businesses.
We believe that we compete on the basis of more favorable rates and our ability to provide a variety of interactive media services through a partnership with Networks Center. Finally, cable enjoys a high household penetration rate in urban areas and our internet service is competitively fast and reliable. (See www.jinan.gov.cn ). The broadband internet business in China has limited competition, since we were granted an exclusive service agreement with Jinan Parent which provide us the right and license to operate via cable and use of the cable resources in the Jinan region.
Our Publishing Business
Shandong Media, our print-based media business, is owned 30% by the Shandong Newspaper Entities (i.e., by Shandong Broadcast & TV Weekly Press, or Shandong Broadcast, and Modern Movie & TV Biweekly Press, or Modern Movie) and 70% owned by Jinan Zhong Kuan Dian Guang Information Technology Co., Ltd., or Jinan Zhong Kuan, an entity controlled by us through a series of contractual arrangements. Through Shandong Media, our print-based media business includes a television programming guide publication, the distribution of periodicals, the publication of advertising, the organization of public relations events, the provision of information related services, copyright transactions, the production of audio and video products, and the provision of audio value added communication services. Our cooperation agreement with Shandong Broadcast and Modern Movie also provides that these businesses will be operated primarily by employees contracted to Shandong Media through secondment by Shandong Broadcast and Modern Movie.
In addition to being the exclusive provincial television programming guide publishing group in the Shandong province, Shandong Media has:
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a combined subscription basis of approximately 225,000 subscribers; and
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five publishing assets focused on different entertainment readership segments.
Following is a description of some of our publications:
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Shandong Broadcast and TV Weekly (Newspaper). Established in 1954, Shandong Broadcast & TV Weekly is a provincial TV programming guide & general entertainment newspaper. Published on a weekly basis, it has maintained 85,000 average copies in circulation per week. Target readership of Shandong Broadcast & TV Weekly consists primarily of middle-age to senior readers in the Shandong region.
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TV Weekly Magazine. TV Weekly Magazine is a national PRC magazine title, ranked among China’s top 5 TV Guide & general entertainment magazines. Published on a weekly basis, this magazine’s average circulation is 40,000 copies in the Shandong region. The unique national publishing title encourages TV Weekly to expand its target market to neighboring regions in northern China.
