UPDATE 4-Disney takes China stride as Shanghai park gets nod

Wed Nov 4, 2009 5:14am EST

* Park may take years to contribute to Disney bottom line

* Approval marks small milestone for foreign media in China

* Disney must still work out detailed deal with Shanghai

* Park cost estimated at $3.6 bln - media (Adds Shanghai, villagers, graphic link)

By Samuel Shen and Sue Zeidler

SHANGHAI/LOS ANGELES, Nov 4 (Reuters) - The Walt Disney Co's (DIS.N) breakthrough deal to build one of its signature theme parks in Shanghai marks a major advance for Western media and entertainment firms trying to crack a tough China market.

Wednesday's government approval for the theme park caps years of on-off talks between Disney and Chinese authorities, who are wary of too much foreign influence in the highly sensitive sectors of media and popular culture.

The new park planned for the Pudong new district of China's financial capital will take years to contribute to a company that rakes in more than $30 billion in annual revenue.

But analysts see the move as an important step forward for Disney and other Western media firms to make inroads into the vast and untapped Chinese media and entertainment market.

"They've been laying the groundwork for a park for many years by exposing the population to Disney properties, film, TV and merchandising," said Christopher Marangi, senior analyst with Gabelli and Co in New York.

"Adding a physical presence in the form of a park would really complete and add to the value chain in China."

The breakthrough comes just two weeks ahead of a scheduled trip to China by U.S. President Barack Obama, a visit analysts had expected to help spur a decision on the park.

The deal has been seen by some as a feel-good bilateral story, highlighting U.S. cultural influence and an investment that does not entail U.S. manufacturing job losses, while China gets a boost to its leisure sector and to domestic demand as it tries to trim its dependence on exports. [ID:nSHA289860]

For Shanghai, China's financial hub, Disneyland could keep tourists coming after the curtain falls on the 2010 World Expo.

And Disney will hope the park, with an estimated price tag of $3.6 billion, will fare better than its Hong Kong property, which has struggled with lower-than-expected attendance and financial losses since it opened in 2005.

SMALL STEP FORWARD

Disney, Time Warner (TWX.N) and News Corp (NWSA.O) have surprisingly little to show for their years of effort and extensive investments in China.

"I wouldn't say this is a one-off gain," said Vivek Couto, executive director of Media Partners Asia, on the deal's broader significance for foreign media's drive for a foothold in China.

"But it's in a non-sensitive space. It's a theme park. It's got nothing to do with television content that can be politically sensitive or competitive with other major Chinese companies in the space."

Even privately held domestic media can find the going tough, as leading Internet portal Sina (SINA.O) found recently when it scrapped a merger with Focus Media FMCN.O due to government stonewalling over a deal that would have created a major new domestic media player. [ID:nLS260924]

The central government's approval must still be followed by more detailed talks between Disney and Shanghai.

Specifics still to be finalised include ownership structure and local partners for the park, a source close to Disney told Reuters on condition of anonymity as talks were still ongoing.

In the meantime, Beijing has handed down guidelines it wants followed on the deal's financial structure, as well as infrastructure requirements, the source said.

"This means we have a new place to party and a new theme park to play," said Amanda Zhang, a Shanghai resident in her 30s. "I think whether it is for the government or for consumers like us, this is a very good improvement."

But villagers at the planned park site more than an hour's drive from central Shanghai fear for their homes and farms, and are already talking about compensation.

"If they want to demolish this place, those who have to move will have to move. There's no choice," said one villager, who gave only her surname, Zhou.

"If the country wants to develop this place, of course we have to support this," added 62-year-old villager Shen Jinbao. "But the government must also treat the residents and villagers here well."

HONG KONG COMPETITOR

Disney's Hong Kong operation, which cost $3.5 billion initially and is preparing for a $465 million expansion, has not been as successful as initially envisioned.

The new Shanghai park, which would be Disney's sixth, will inevitably affect the Hong Kong park, although the impact will be limited as they will draw from different areas, observers said.

For a Graphic on Disney theme parks, click here

"Visitors from Guangdong and southern China will still find Hong Kong more convenient, while Shanghai will attract visitors from northern and eastern China," said Paul Tang, chief economist at Bank of East Asia.

Shanghai is close to a number of other major cities within easy driving distance, including Nanjing, Suzhou and Hangzhou.

Shanghai's own population of around 19 million, combined with tens of millions more within a three-hour driving radius, would provide a more-than-ample base of local users for the park.

Disney also doesn't view the two parks as competitors.

"The Hong Kong and Shanghai parks are not competitors, they're complementary," said a Disney spokeswoman in Hong Kong. (Additional reporting by Royston Chan in SHANGHAI and Doug Young, Don Durfee and Alison Leung in HONG KONG; Editing by Jonathan Hopfner and Ian Geoghegan)

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