The legislature is expected to loosen the current restrictions on media shareholding by government or political entities.

BY TIMOTHY FERRY AND DON SHAPIRO

The Legislative Yuan is currently considering draft amendments to Taiwan’s three primary media laws that would allow limited investment in electronic media operations by government, political parties, and the military. Current regulations under the Radio and Television Act, the Satellite Broadcasting Act, and the Cable Radio and Television Act ban any investment by such entities, but critics maintain that these rules are a hindrance to market development of the telecom and media sector.

The current deliberations are expected to lead to revisions permitting limited investments by such entities, capped at either 5% or 10% of total shareholdings. Reportedly there is also likely to be a ban on management control of media companies by individual politicians, government officials, or military personnel.

Laws banning media ownership of these entities were passed in reaction to 40 years of government control over the nation’s media during the martial law era. Together with other regulations that targeted Chinese influence over the media landscape as well as anti-monopoly measures, the laws were aimed at ensuring that the media would reflect a multiplicity of views as befits a democratic society.

However, in some cases these laws have also been seen as stifling growth in the market by hindering the process of convergence between telecoms and broadcasting that is seen in most major markets. The current legal restrictions have also been regarded as excessive, as they extend to shareholdings by government pension funds or individual office-holders.

Over the years, Taiwan’s cable-TV sector has generated strong and stable cash flows that attracted a number of foreign buyers. Observers credit the foreign players – primarily private equity (PE) firms – with having introduced professional management into Taiwan’s pay-TV sector, which previously had a rather seedy reputation due to its start as an illicit business, and also investing heavily to improve the industry infrastructure, bringing digital service and high-definition transmission to Taiwan. In the process, the foreign investors substantially raised the value of the enterprises.

Many of these international firms have faced significant hurdles when trying to sell their investments, however. Because of the above-mentioned legislation, some prospective buyers were disqualified by the regulators if they had even small amounts of government-related investment. The investment applications were also rigorously scrutinized to ensure that Chinese interests did not hold even an indirect stake in the enterprise.

Jason T. Wang, a consultant with over 20 years’ experience in Taiwan’s telecom sector, notes that the ongoing trend of convergence between the telecom and media sectors has spurred interest among Taiwan’s telecoms in buying up the local cable-TV operations. Increased competition from OTT (Over the Top) providers such as Line for the voice and text market is driving them to seek alternative sources of revenue, including cable platforms as well as content.

“ATT is trying to buy Time Warner; Verizon owns Yahoo and AOL – you are seeing a vertical integration of content, going from delivery to platform to the actual content,” Wang says. “All of the telecoms are vertically integrating because if they can no longer make money on data, they are going to make money on content. Can you do that in Taiwan? No, because the law prevents it.”

The obstacles global PE firm Carlyle Group has encountered in Taiwan offers an example of the difficulties that investors in the sector have faced. Carlyle has been a player in the Taiwan market since its 1999 acquisition of Taiwan Broadband Communications (TBC), which it built into Taiwan’s third-largest and first professionally operated multiple-systems operator (MSO) cable-TV company before selling its stake to the private-equity arm of Macquarie, the Australian bank.

Carlyle then bought a controlling interest in Taiwan’s Eastern Broadcasting Co. (EBC) in July 2006. Three years later, it tried to sell off EBC’s affiliated cable operator, Kbro, to Taiwan Mobile Co., part of the large Fubon Group, but the deal was squashed by the Fair Trade Commission (FTC) on the grounds that it violated laws aimed at shielding media-related sectors from political influence by forbidding any degree of government ownership. Taiwan Mobile was affected because the Taipei City government received shares in its parent company in 2005 as part of the sale to Fubon of a city-owned financial institution now known as the FubonTaipei Bank.

The solution was for Fubon Chairman Daniel Tsai and his brother Richard to personally put up the NT$40 billion (US$1.25 billion) to purchase Kbro through a newly established company, Dafu Media, leaving Taiwan Mobile out of the deal. The deal also saw the Tsai family assume Kbro’s debt of more than NT$20 billion, according to media reports. Kbro refers to itself as the largest broadband and cable TV service provider in Taiwan, with more than 2 million residential and commercial customers

The FTC placed a number of conditions on the deal, including a requirement that Dafu invest US$160 million in digitizing the network, as well as bans on the company owning shares in any other cable provider or in Taiwan Mobile.

Carlyle subsequently tried to sell the rest of EBC but was again stymied in what has been a long and highly publicized ordeal. Two years ago, Carlyle had entered into an agreement to sell its EBC stake to film producer Dan Mintz, CEO of Los Angeles-based media company DMG Entertainment for US$370 million, but the transaction was held up by the regulators because of Mintz’s reported close connections with Chinese interests and eventually he bowed out of the deal.

That opened the way in October last year for another bidder, this time Taiwan Optical Platform (TOP), a publicly listed company that is Taiwan’s fifth largest cable operator. Again regulatory obstacles emerged, with the NCC expressing objections on a number of fronts, including potential over-concentration in the industry if the sale went through. Another problem reportedly was the presence among TOP’s shareholders of individuals with political ties, a potential violation of the legal restrictions on the ownership of media enterprises.

In early November, Carlyle and other investors in EBC announced plans to sell their stake in the company for NT$17 billion (US$563 million) to Mao Te International Investment Co., owned by property developer Chang Kao-shiang, according to local media reports. Carlyle holds a 62% share in EBC. The deal will now require approval by the relevant regulators.

Additional cases

The law against government stake-holding also came into play in February this year in structuring a deal in which Macquarie Media Group sold its controlling interest in TBC. The purchase was made by a partnership between Asia Pacific Telecom chairman Lu Fang-ming and Foxconn (Hon Hai) chairman Terry Gou, with Lu reportedly personally providing 80% of the funding and Gou the rest. Although the ownership changed, the original management team has mainly remained in place, led by Chairman Thomas Ee.

Still unresolved, however, is the struggle by Asian-based PE firm MBK Partners to dispose of its controlling position in China Network Systems (CNS), the second largest MSO with a 25% market share. In a saga with many twists and turns, MBK has been repeatedly foiled in its attempts to withdraw from CNS, which it acquired in 2006.

In 2013, it appeared that the large Want Want Group would take over control of CNS, but the deal provoked considerable public controversy due to Want Want’s large other media holdings and the perceived pro-China leanings of its chairman, Tsai Eng-meng. The NCC imposed so many conditions on approval of the deal that Want Want dropped its application.

The following year another contender emerged – the Wei family of the Ting Hsin International Group – but again the transaction was shrouded in controversy. Ting Hsin was implicated in the serious food scandals that erupted that year, and it too soon dropped out.

A third prospect was a consortium led by Morgan Stanley Private Equity, with some financial support through non-convertible bonds held by Far EasTone Telecommunications (FET), part of the Far Eastern Group. The offer reportedly came to NT$74.5 billion (US$2.39 billion). Some critics of the deal alleged that Morgan Stanley was simply acting as a front man for FET, which could not invest directly because of the law banning government holdings in media (government pension funds hold small stakes in Far EasTone).

Apparently persuaded of the legitimacy of the transaction, however, the Fair Trade Commission and the NCC gave their go-ahead. But when political pressure continued and the NCC withheld final approval, Morgan Stanley abandoned its bid. If the law against government shareholding is revised in the near future and if CNS is still unsold at that time, some industry observers speculate that FET might be able to come forward to make a bid on its own.

“The law is intended to protect the media environment from domination by any single point of view or by foreign interference in Taiwan’s media,” says Wang. In any revision of the legislation, he cautions, the specific wording will be crucial to ensuring that Taiwan’s media sector remains diverse, fair, and free.

While the cable sector has remained sufficiently profitable to attract investors, it has come under increasing pressure from new sources of competition, such as Media on Demand (MOD) and Over the Top (OTT) streaming. “The major concern for our industry right now is the lack of a level playing field since the different services are subject to different regulations,” says Kevin Lin, TBC’s chief legal officer. He notes that only cable is subject to periodic rate reviews and caps on the monthly rate that subscribers can be charged.

In addition, “some OTT is legal, but the most serious impact is from the illegal OTT content coming in from websites and servers overseas,” says Lin. “Many consumers conclude that ‘if I can see that content for free, why should I pay anything?’ The impact is not just on the cable operators, but on the channels, the content producers, and related enterprises. It’s a big problem.”

AmCham Taipei’s Telecommunications and Media Committee has proposed in the Chamber’s Taiwan White Paper that the government institute site-blocking of offshore websites that habitually offer copyright-infringing content. Such measures have been adopted by many countries around the world, including Singapore, Malaysia, and South Korea within this region.

In Taiwan, according to industry observers, the NCC and the Taiwan Intellectual Property Office (TIPO) under the Ministry of Economic Affairs have been unable to reach an understanding on which agency should take responsibility and how to proceed. The industry sources express hope that their concerns, although not currently addressed in new telecom bills drafted by the executive branch, will be taken up by the Legislative Yuan when it considers that legislation.