On 9 March 2016, the State Administration of Press, Publication, Radio, Film and Television (SAPPRFT) issued a press release in the form of questions & answers (the “Press Release”) to clarify issues relating to the Administrative Regulations for Online Publishing Services (the “2016 Regulations”), just before the 2016 Regulations took effect on 10 March 2016.

Background

SAPPRFT issued the 2016 Regulations on 4 February 2016, which introduced more stringent licensing requirements and criteria for an unprecedentedly extensive scope of internet operators (click here for our previous analysis). The unduly broad definition of “online publishing service” has given rise to widespread concerns and speculations across the spectrum, most notably, as to whether an entity will be considered an online publisher and therefore subject to the licensing requirement. To relieve the anxieties, SAPPRFT issued the Press Release.

Highlights of the Press Release

  • Rationale for Regulating Online Publishing Services Revealed

SARPPFT considers that online publishing service is in essence an extension and development of traditional publishing service over internet and conforms to key characteristics of the traditional publishing service. This explains why unlike most other countries China creates the notion of “online publishing service” and the 2016 Regulations imposes on online publishers requirements that are usually applicable to traditional publishers, such as number of qualified publishing personnel and content censorship, proofreading and editor responsibility systems.

It also appears that the primary focus of SARPPFT would be on the online services that have a closer connection with traditional publishing services or involve publishing digitalized traditional publications.

  • Clarified Scope of Online Publishers
    • Importance of Classification Catalogue Highlighted

in light of the vagueness of the definition of “online publishing service/publication”, SARPPFT states in the Press Release that in addition to the definitions set out in the 2016 Regulations, an entity should determine whether it is engaged in online publishing service by reference to the classification catalogue of online publishing services (the “Catalogue”), which is yet to be published. As anticipated in our previous e-bulletin, the Catalogue is the most important document to clarify the scope of the online publishers subject to licensing requirement.

  • Owners of Self-media Channels Exempted

In the Press Release SARPPFT expressly states that owners of self-media channels, such as microblogs and Wechat accounts, are considered the creator or producer of the content of online publications and are not considered online publishers. It is further stated that the provider of the online platform service, e.g. the operators of microblog and Wechat, are considered provider of the online publications. This is in line with the regulatory focus of SARPPFT on companies whose business is specialized in publishing online publications, and also eases the anxiety amongst owners of self-media channels.

However, SARPPFT refuses to respond directly as to whether “providing industrial information or introduction of products will be considered online publishing services and simply restates that it will depend on whether the service falls into the scope of online publishing services as defined in the 2016 Regulations.

  • “Special Management Share”

According to the Press Release, the so-called “special management share” system will be implemented on online publishers under rules separately promulgated by SARPPFT, “after sufficient experience has been gained through pilot schemes”. Therefore, it is unlikely that SARPPFT will force the “special management share” requirement upon online publishers in a large scale in the near future.

Article 22 of the 2006 Regulations provides that online publishers must have a “special management share” system. The essence of the “special management share” system is to create a dual class share system, whereby the government will hold a special class of shares with a controlling or veto voting power over the management and operation of the state-owned media company. This is understood to be a tool to maintain the control over the media companies by the government and at the same time give away more shareholding to external investors, especially those from the private sector.

Until the publication of the 2016 Regulations, we have only seen the concept of the “special management share” being discussed in the background of state-owned enterprise reform. SARPPFT has yet to clarify the meaning of the “special management share” in the context of online publishing services. The key question is who should hold the “special management share” and consequently have the controlling /veto power over the online publisher. Should it be a state-owned entity or the founding shareholder or some other shareholder appointed by SARPPFT? This question is especially acute for privately-owned online publishers.

Our Observations

  • A Compromised Interpretation

SARPPFT narrows the scope of “online publication service” to some extent through its interpretation in the Press Release to ease the backlash that the 2016 Regulations have caused, but at the same time maintains definition of “online publication service” as the criteria for deciding whether a company is an online publisher. However, the definition on its face cannot lead to the conclusion that self-media channels are excluded and such interpretation is not entirely consistent with the broad definition. Now it appears that the SARPPFT has made a compromise in interpreting the definition, which also shows the great discretion that SARPPFT enjoys in enforcing the 2016 Regulations.

  • Clarified Enforcement Focus

The Press Release reveals that SARPPFT will likely focus its regulatory power primarily on those internet operations that have a closer connection with traditional publishing services or involve publishing digitalized traditional publications or those internet operations specialized in disseminating online publications. As discussed in our previous e-bulletin, SARPPFT is unlikely to spread its resources and personnel evenly and initiate a widespread crackdown on all internet operators that might be caught by the 2016 Regulations.

However, as the definition of “online publishing service” remains unduly broad, the boundaries of the scope of online publishers are still unclear at least until the publication of Catalogue. In the interim, to assess the applicability of the 2016 Regulations, it would be helpful if internet operators could answer the following self-check questions:

  • Does the online content, if taken offline, be considered a traditional publication and does the activity of providing such online content, if conducted offline, be considered a traditional publishing service and subject to a publishing license?
  • Is the online publishing business for profit or does the internet operator expect to derive other source of income from it, such as advertising?
  • Does the online publishing business account for the main business or income flow of the company?

If the answers to the above questions are negative, then it is less likely for the internet operator to be subject to the licensing requirement under the 2016 Regulations.

  • Uncertainty as to the “Special Management Share” Requirement

The “special management share” requirement, if implemented, will pose a challenge to the existing shareholding structure and the interest of existing shareholders of the internet operators holding the online publishing licenses. For privately-owned online operators, this could mean granting a “special management share” to a state-owned entity or to the founders or some other shareholder, depending on the interpretation of SARPPFT. Considering that the traditional publishing industry remains closely controlled by the government, it is hard to predict whether the introduction of the “special management share” requirement would render access of private sector companies to more shareholding in state-owned online publishers or grant control of government over privately-owned online publishers.

VIE Structure Targeted?

Due to the prohibition of foreign investment into the PRC online publishing industry, some foreign investors choose to invest in the PRC online publishers via the variable interest entity (VIE) structure, whereby instead of direct shareholding the foreign investor controls a license-holding domestic company using a series of contractual arrangement.

The 2016 Regulations are often considered creating three new obstacles for the current VIE structure that is often adopted by foreign investors: (i) the requirement that the licensed online publisher must own the technical equipment and have a substantial number of qualified publishing staff, (ii) the requirement that all “project cooperation” between online publishers and foreign-owned companies or foreign entities and individuals must apply to SARPPFT for approval; and (iii) the prohibition of lending, leasing or selling online publishing license to an unlicensed party. It appears internet operators established using the VIE structure would be subject to more scrutiny.

In the Press Release, however, SARPPFT made no reference to VIE structure. In fact, apart from the more stringent technical requirements applicable to all online publishers, it is uncertain whether the other “obstacles” are targeted at the VIE structure. For instance, the meaning of “project cooperation” is subject to the interpretation of SARPPFT and the prohibition of lending, leasing or selling of online publishing license may well be a reiteration of the similar prohibition under the traditional publishing regulations. It remains to be seen whether the 2016 Regulations has precipitated or indicated a policy change towards VIE structure in the online publishing industry.