AOL Time Warner retreats from China

US media giant AOL Time Warner is abandoning its dreams of becoming a big player in Chinese TV after selling the controlling stake in its Chinese TV arm, leaving Rupert Murdoch's Star TV with the upper hand.

AOL sold a 64% stake in the TV company to an outfit backed by Asia's richest man, Li Ka-shing.

As part of the deal, Li Ka-shing's internet, publishing and advertising group, Tom.com, will pay $6.8m for the stake and promise to invest $30m into the loss-making broadcaster over the next 30 months.

AOL's decision to sell its controlling stake in China Entertainment Television continues a retreat from China by the media giant, which had high hopes for the market when it won the right to broadcast in the southern province of Guangdong.

In common with Mr Murdoch's News Corporation, which won the right to broadcast its Star TV channels but has pursued a much more aggressive strategy, AOL saw the province as a beachhead for expansion to reach China's estimated one billion-plus viewers.

China is the world's fastest growing media market and AOL has switched strategy in an effort to appeal to Beijing lawmakers, who exercise a tight grip over ownership and content regulation.

CETV is making heavy losses and has managed to capture just 2% or less of the market in the southern city of Guangzhou after a year and a half of operations, according to US analysts.

AOL will continue as a stakeholder in CETV, which provides Mandarin language entertainment programming to the province, with an option to buy back the controlling stake in 2007 at its market value or at 150% of Tom.com's original investment cost, whichever is the greater.

It hopes that by that time, it will have made inroads into the Chinese mainland.

AOL's strategy differs markedly from that pursued by News Corp.

The move also takes Li Ka-Shing back into direct competition with Mr Murdoch's Star TV, which the News Corp chief purchased from the Asian mogul over a decade ago.

Analysts say Mr Murdoch's company has pushed a typically aggressive strategy in the region.

It has bent the rules with its Mandarin language channel, Xing Kong Weishi, or Starry Sky Satellite TV, which broadcasts markedly different shows from the usual local fare and has pushed to reach an audience beyond what is allowed by the Chinese government.

Since purchasing Hong Kong-based Star TV from Li Ka Shing over 10 years ago, Mr Murdoch has made careful steps towards winning favour with the Chinese government to establish a television business.

This included dropping the BBC's world news service from Star TV's platform after its stringent criticisms of the Chinese regime, and backing out of a deal to publish the memoirs of the former Hong Kong governor, Chris Patten.

AOL, by contrast, has stuck rigidly to the rules in an effort to avoid offending Beijing.

"We have always taken the view with China that we wanted to go in the front door, even if it may take a little longer," Stephen Marcopoto, the head of Turner International Asia Pacific, the AOL division that controls its Chinese broadcasting interests, told the Wall Street Journal today.