HOW CHINESE FILM IS REFUELING THE INDUSTRY
“The entertainment industry is a sunrise industry in China, while the steel industry is a sunset industry. The growth potential for the entertainment industry is still huge, despite a high growth rate of 17% [per year] in the past five years.” – Z. John Zhang, Wharton Marketing Professor
By Arindam Bhunia
Image (above) from the epic Chinese franchise “Red Cliff” (2009)
Modern cinema, progress in motion picture…when we talk about these terms, we always refer to the Hollywood industry as an icon. Since the creation of Hollywood itself, the United States has been the home to the world’s largest box office. Not only in all the rage movies, Hollywood is one of the most leading motion picture industries to date. But, its time to worship the rising sun in the economy of world motion pictures and that is the Chinese film industry. According to a recent study China’s media and entertainment industry is on track to reach $242.2 billion by 2019. So, friends in the third session of Filmonomics we will discuss the onward movement of the Chinese film industry.
“The entertainment industry is a sunrise industry in China, while the steel industry is a sunset industry. The growth potential for the entertainment industry is still huge, despite a high growth rate of 17% [per year] in the past five years,” says Z. John Zhang, Wharton marketing professor. Many experts believe China is on track to have the largest film audience in the world –- and by one estimate as early as 2020. China has seen rapid growth in the entertainment and media industry as well as film industry in recent years which is forecast to rise at a compound annual growth rate( CAGR) of 10% over the coming five years, compared to global with a CAGR of 5.1%. China is marked out by explosive growth in a number of key segments. It’s increasingly clear that consumers perceive no divide between digital and traditional media. What they want is more flexibility and freedom-for-which read “choice”- in when and how they consume. And they are choosing offerings that combine an outstanding personalized user experience with an intuitive interface and easy access.
The global outlook provides a single comparable source of a five year forecast and five-year history of consumer and advertiser spending data and commentary.
China has just become the world’s largest economies, according to the latest ranking by the International Monetary Fund (IMF), but its total B2B revenue in 2014 was only one-tenth of the US’ total B2B revenue. China was ranked fifth globally in terms of total B2B revenue in 2014, having overtaken Japan in that year. B2B was attributable to less than 0.1% of China’s GDP in 2013; however the Chinese economy’s growth will provide a stimulus to the sector. Between 2014 and 2019, total B2B revenue will grow at a CAGR of 6.1% to reach US$11.71bn in 2019.
As business markets grow, more companies aim to sell shares to the public and list shares on a stock exchange. 2014 was seen as the year of the IPO. According to ChinaVenture during the first 11 months of 2014, 224 Chinese film companies completed IPO’S globally. Domestically there were more than 100 IPOs which between them raised a total of around US$9.7bn in 2014. Therefore the the demand of business consulting increasing dramatically in 2014 and will continue growing over the forecast period, even despite the complexities of IPO listing in global markets and the policy changes by Chinese securities regulator. State-owned enterprises are still the pillars of China’s economy and sustain long term growth. There are several hundred consultancy companies in China including foreign companies such as McKinsey, Co and Boston consulting group and local companies such as Bexcel Management consultants and Alliance PKU Management consultants.
China’s filmed entertainment sector is expected to grow 14.5 percent by 2019 to reach just under $10 billion, nearly doubling from $5.8 billion in 2015. This enormous growth is the largest jump in the past five years, and 61 percent of it was generated by Chinese films, as American share of the market has continued to decline.
This growth is due to China’s policies to stimulate the sector, build its domestic movie production and digital theatres, and expand the role of co‐productions, as well as addressing their quota system and increasing revenue sharing imports.
China boasts the second largest theatrical market worldwide after the United States, and box office r-evenues are on a meteoric rise and are expected to reach $8.8 billion (15.5 percent) by 2019. Filmed entertainment is a main driver for the entertainment sector in China, and the government has invested a tremendous amount in new mega theaters and entertainment complexes, collaboration with U.S. media and entertainment conglomerates, and co-productions with foreign entities and domestic film production.
In 2014, 67 foreign films were released in China; 33 of those were released on a flat‐fee basis and 34 on revenue‐sharing basis, meeting the full quota of films. China’s overall import quota on a revenue sharing basis now stands at 34 films annually for all countries. Co‐production is gaining in popularity, and several major Hollywood studios as well as indie film makers engage in these deals with China. Whether importing or co‐producing, foreign firms interested in working with China will have to understand how to address State Administration of Press, Publication, Radio, Film and Television of the People’s Republic of China (SAPPRFT), regulations for the industry, including cultural and content restrictions, a quota system for foreign films, and garnering data and earnings from unclear box office reporting.
There are two major modes of co‐production in China: joint production (collaboration) and assisted production (entrusted production). Joint production, or “co‐pro,” is considered a domestic film and not subject to the quota and will also be at least 51 percent Chinese‐owned. In an entrusted production agreement, the foreign party puts up 100 percent of the capital; the Chinese side produces the film, but it counts as a foreign film under the import quota.
Dalian Wanda Group, China’s largest cinema owner and commercial real estate developer, which acquired the U.S. company AMC in 2012, is building a movie studio to rival Hollywood studios in Qingdao, a major port city in eastern China, with a $160 million fund to attract producers. Qingdao Oriental Movie Metropolis, an enormous film studio development owned by the Dalian Wanda Group, is set to open in Oct 2017. The complex will include a theme park and entertainment center, a 4,000-room resort-hotel complex, a shopping mall, a 300-berth yacht club, a celebrity wax museum, and a hospital. Wanda Studios Qingdao is going to be one of the largest and most technologically advanced feature-film-production facilities in the world, encompassing 30 sound stages; an enormous, temperature-controlled underwater stage; a green-screen-equipped outdoor stage that is still larger at 56,000 square feet; a permanent facsimile of a New York City street; and much more.
Currently the Chinese film industry relies almost entirely upon box office revenue and therefore the risks are high. However, using the business model of international companies like Disney as a blueprint and taking advantage of the growth of Internet technologies and Big Data domestically, film companies are now restructuring their revenue structures and will continue to do so in the future.
Though the domestic film market is thriving, only a few film companies actually make profits and the risk involved is very high as in China, covering film production costs relies heavily on box office revenue. However, the Disney model offers a successful blueprint for the Chinese film industry to follow. At present, Disney’s production and entertainment business only contributes 15 percent of its total revenue, the rest comes from diversified business including theme parks, toys, books, video games, and media networks. Core IP, derivative products, licensing, and entertainment projects also help provide Disney with stable sources of income.
Extended development, China’s film companies have opted for three other ways to re-balance their revenue structures:
1. Video on demand: In 2015, the number of Internet video subscribers in China exceeded 500 million, and competition for exclusive film content royalties rose accordingly, providing a reliable source of income for film producers with on demand content.
2. TV networks: In 2015, over 30 provincial and municipal broadcasting and TV network companies co-established the “China TV cinema alliance”, enabling them to purchase film content or adopt revenue-sharing methods with film producers to generate new sources of revenue for the film industry.
3. Derivative products: As China pays more attention to copyright protection and intensifies its crackdown on pirated movies, various enterprises are trying to develop derivative product markets and reap more film-related revenue. These three methods have helped improve the post-film market and in the future will continue to fully develop potential markets. Together with the extended development of enterprises, China’s film revenue structure is expected to re-balance through a shift from “long tail” to “thick tail.”
So, what does all of this mean for the film industry? Well, for one, in the not-too-distant future, Hollywood won’t be the only one cranking out international hits. While Chinese filmmakers haven’t had too much success at international box offices that will soon change as their focus turns to the global market. Moreover, Chinese production companies will be paying premiums to attract Hollywood talent.
In the global film market, the Chinese film industry is gaining more and more importance. The Chinese box office and film admissions are growing year after year and Chinese film and related companies are able to make business more and more abroad. Since the creation of Hollywood itself, the United States has been the home to the world’s largest box office. That will change in coming years when China is widely expected to take its spot.
*References: Pwc China, Deloitte Perspective, ITA Media Report
Arindam Bhunia is a marketing manager in an MNC with more than eight years of work experience in electrical field. Apart from his corporate job, he has interest in cultural activities so he joined Human Lab Corporation as Chief Executive Officer. He oversees strategic planning for film, television and video game production, marketing and distribution for the company’s business verticals worldwide. He is also responsible for overseeing finance, legal, labour relations, technology and HLC Studio operations.