Testing Beijing's Limits

By By Matthew Forney/Beijing

Rupert Murdoch's relationship with Beijing started on the wrong foot. The Australian-born mogul declared in 1993 that satellite-television networks, like the Hong Kong--based Star TV venture that he had purchased, would pose "an unambiguous threat to totalitarian regimes everywhere." Since then he has danced more carefully to Beijing's tune. Soon after his provocative comment, China's leaders insisted that he remove the BBC from Star TV's menu of channels after it aired a program critical of Chairman Mao Zedong. Murdoch complied, and has gone further since. On his orders, News Corp.'s publishing arm, HarperCollins, dropped a book written by Chris Patten, Hong Kong's last British Governor, in which Patten was critical of Beijing. In 1999 Murdoch even derided the Dalai Lama, Beijing's longtime foe, as "a very political old monk shuffling around in Gucci shoes." News Corp. hired an American adviser last year to help China's state-run TV station spruce up the propaganda on its English channel, which is carried on News Corp.'s DirecTV (as well as Time Warner cable systems).

All that goodwill, however, isn't paying off. Murdoch was testing the legal boundaries in China, where foreign TV broadcasters cannot distribute their programming without government permission. Uniformed officers raided News Corp.'s Beijing offices in June and confiscated financial records and equipment. Calling the investigation a "big and serious case," the government is focusing on a company registered to News Corp. employees with regard to its role in leasing satellite-TV channels in China. And China's State Administration of Radio, Film and Television terminated a deal that put News Corp. programming on a nationwide satellite channel based in the remote Qinghai province. Executives at Hong Kong's Star TV, a subsidiary of News Corp., declined to comment.

China is under no obligation to allow foreign broadcasters to operate, and by tightening regulations across the board, President Hu Jintao has shown his wariness about opening China's living rooms to Western culture. Multinational media companies are salivating over the $3.4 billion in TV advertising carried on networks in China last year, only 6% of which went to foreign firms, according to Vivek Couto, a Hong Kong--based media consultant. But government restrictions limit some News Corp. channels to the southern Chinese city of Guangzhou, luxury hotels, top government offices and approved apartment buildings. (Time Warner, owner of TIME, sold its controlling stake in a channel that also broadcast to Guangzhou in 2003.) Meanwhile, Beijing has left Disney in the cold by refusing to approve any more foreign satellite channels for even limited distribution. The government now requires pre-air approval for all foreign shows. Viacom last year announced a deal to produce children's programming but hasn't got approval yet. Now problems at News Corp., says a top Asia executive for a U.S. media company, "will spoil the soup for everyone."

News Corp.'s efforts to climb through loopholes in China were brazen, according to Jiang Hua, a former News Corp. distribution manager in China. Despite regulations forbidding direct sales, Jiang, who left the company 18 months ago after a disagreement with his boss, says he distributed News Corp. channels ranging from National Geographic (in which it has a stake in Asia) to an MTV-like music channel called Channel V. Two former News Corp. executives confirm Jiang's story. Buyers were cable-TV networks from the Tibetan Plateau to the South China Sea. "News Corp. called what I did gray-market distribution," he says, "but it wasn't gray. It was black."

Jiang says payments were channeled through a shell company, Beijing Hotkey Internet, which received nearly $1.5 million a year in illicit payments from cable operators starting in 2002. Jiang and another former News Corp. employee told TIME that cable operators occasionally paid with briefcases of cash. News Corp.'s relationship with provincial broadcaster Qinghai Satellite Co. was similarly opaque. It involved a company, Runde Investments Corp., that had as an investor Ding Yucheng, the son of former hard-line Communist Party Propaganda Minister Ding Guangen. Runde Investments helped deliver News Corp.'s programming to Qinghai Satellite, which had not received the government's approval to broadcast the shows, according to two former News Corp. employees with knowledge of the deal. Registration documents obtained by TIME show that Ding holds a 15% stake in Runde Investments.

Many foreign executives in China have hoped a political princeling might serve as a sort of insurance policy against regulators. "If you don't push the rules," says a former News Corp. employee, "the government won't respect you, and you won't get anything done." But it may turn out that even in China's freewheeling marketplace, bending the rules can put you in danger of a backlash.