Chinese authorities are especially cautious about what music can be played on the country's airwaves. As a result there are tight controls on the infrastructure serving the mainland's audio-visual products industry and state-owned entities usually get right of way. For years, the world's top music companies have watched with keen interest as China welcomed foreign investment in a host of industries except the audio-visual market. Changes, however, are on the horizon. In January of this year, foreign music companies received some good news from the Ministry of Culture (MOC) and Moftec who jointly announced the long awaited promulgation: the 'Provisions for the Administration of Sino-Foreign Co-operative Enterprises for the Distribution of Audio-Visual Products.' The edict, despite it convoluted title, essentially allows foreign investment in the distribution of audio-visual products with the foreign party restricted to no more than a 49 per cent stake. The ruling also clarified the government's official definition of audio-visual products stating 'any recording media with audio and/or visual content, which includes cassettes, CDs, VCDs, DVDs and VHS tapes, but does not include CD-ROM and DVD games, which are classified as 'electronic publications'. Sony Entertainment USA, a division of the Japanese hardware giant, Sony, was quick to capitalise on the government's gesture, establishing China's first ever Sino-foreign audio-visual distribution company, Shanghai Epic Music Entertainment Company, a US$30 million dollar deal backed by two mainland partners, Shanghai Synergy Multimedia Group and Shanghai Jingwen Investment Company. 'The significance of our joint venture,' said Andrew Wu, Sony Music's chief China representative and Shanghai Epic's general manager, 'is being licensed to distribute audio-visual products. In our industry, production of content is not like manufacturing any other consumer product. Because of the sensitivity involved, just gaining clearance to distribute the products takes on a whole new meaning,' Mr Wu emphasised. Industry players admit Sony's lead could pave the way for other recording companies and movie studios. However, to date, no other major music companies have announced new investments, apart from Tom.com's recent purchase of Hong Xiang New Company, a Guangzhou based AV products distributor. A major determent is the laborious process in obtaining official approval for the joint venture as well as securing other necessary permits. Though Sony is the first, their joint venture actually received official approval in May 2001 but didn't obtain the remaining business licences until April 2002. Mr Wu compared the situation to discos operating as a business, but also needing a dance and liquor licence to operate as a fully-fledged entertainment venue. Despite the obstacles, foreign players are knocking China's AV door as evidence by Zhang Xinjian, a vice-director of the MOC's marketing department, commented that the top five music labels and eight US movie companies, including Warner Brothers and EMI, are currently seeking local partners. China's audio-visual industry is in pitiful shape and needs help if it's to compete in the post-WTO environment. Piracy and bureaucratic red-tape have stifled the sector so much that less than 10 per cent of the 295 domestic AV companies are profitable. The loosening of restrictions and allowing foreign capital into the AV sector is directly in line with China's WTO commitments. Piracy has flourished because of the government's antiquated approval process, whereby the Ministry of Culture, China's watchdog for entertainment, is responsible for approving all new music titles available for distribution. The top five record labels produce a combined 10,000 new titles per year, while the MOC manages to approve less than 400, virtually starving domestic AV companies of fresh product. 'Foreign music retail heavyweights like Blockbuster, HMV and Tower Records have concluded until the MOC upgrades its approval process there's no point investing in any domestic retail chain,' one Shanghai based-lawyer familiar with the situation claimed. Sony's Mr Wu described the market anomaly this way: 'Where else in the world do you create the demand and then not allow the customers to legally buy the product. Chinese are treated to new music on the radio, TV and in the bars, but if they want to purchase the CD, more oft than not they are forced to buy a pirated version.' 'To combat piracy, AV products need to progress from being treated as raw materials to a finished good. It wasn't so long ago Chinese purchased vegetables in street markets. Now, they go to supermarkets. It's all about providing a service that customers want,'' Mr Wu surmises. As opposed to building their own platform or investing in retailing, Sony has opted to work with the existing distribution system by improving the situation from within. Mr Wu admitted part of Sony's initial success has been a strong slate of 2002 releases including a new album from Celine Dion, a collection of World Cup anthems and the introduction of Asia's hottest act, the Taiwanese quintet, F-4. 'Truthfully,' Mr Wu said, 'the market expected us to fail.' It was a bold move on our part raising the cassette price by 80 per cent from 10 yuan to 18 yuan. But we knew if the right experience was created backed by proper distribution, the public would buy through proper channels.' According to company statistics, Sony has sold 600,000 F-4 cassettes, of which 20,000 were CD(s) set at the astonishingly high price of 68 yuan compared to the black market price of 10 yuan for an excellent copy. Though proud of Sony's accomplishments thus far, Mr Wu thinks the true test will be handling niche products. 'The present distribution system, is set up for big name releases and puts limitations on niche products,' Mr Wu said,' Sony is here to sell a range of products not just hot releases.' Sony's limited success bodes well for competitors and places the onus on the government to continue developing the backward industry. In fact, there are other pressing reasons besides accordance with WTO to continue prying open the audio-visual market. For starters, Hong Kong and Taiwanese artists at one time merely looked on China as gravy to existing revenues, preferring to make profits in their respective home markets. Nowadays, these same acts are increasingly relying on China for bigger and better things, despite the risks of turning a profit. Mr Wu pointed to the trend of 'overseas' stars- albeit Chinese ones -sponsoring domestic consumer products as evidence of their intentions. Sony, like other industry counterparts, is in China for the long haul and overall success largely depends on developing a thriving local talent scene. This is something that most major labels, including Sony, have failed to do. Sony is betting the government will keep opening the doors, encouraging the development of local artists, thereby lifting the entire industry in the process. 'Either way Sony's advancement benefits the industry. If a success, others can follow. If not, a lesson was learned,' Mr Wu concluded.