Hollywood blockbusters appeared poised last year to take over China’s box office, but something unexpected happened on the way to the bank: demand tapered off sharply. “They want to see films that challenge them”

April 21, 2013

U.S. Box Office Heroes Proving Mortal in China


LOS ANGELES — Hollywood’s global business strategy, which counts on huge ticket sales in China for high-budget fantasies in 3-D and large-screen Imax formats, is coming unhinged.

Last year, helped by a high-level deal that expanded the number of foreign films for release there, American blockbusters like “Mission: Impossible — Ghost Protocol” led the Chinese box office for 23 straight weeks, and received a disproportionately large share of their ticket sales from China.

More big releases were on the way, and the floodgates in the world’s second-largest film market appeared ready to swing open.

But something unexpected happened on the way to the bank: demand tapered off sharply.In the first quarter this year, ticket sales for American movies in China — including films as prominent as “The Hobbit: An Unexpected Journey” and “Skyfall” — fell 65 percent, to about $200 million, while sales for Chinese-language films rose 128 percent, to well over $500 million, according to the online publication Chinafilmbiz.com.

The weekend brought one sign of a rebound for Hollywood: “G.I. Joe: Retaliation” from Paramount Pictures, took in a respectable $33 million at the Chinese box office, matching roughly 75 percent of its ticket sales when it opened in the North American market on March 28.

But if the preferences of Chinese moviegoers continue to shift to domestic releases, China will maintain control of its own film market just as Hollywood was ready to seize it.

When “Iron Man 3,” an action heavyweight from Disney’s Marvel Entertainment, opens in coming days, it will slug it out with a small, domestically made romance called “So Young,” about a Chinese woman who reconnects with her college sweethearts. It is hard to be certain which film will be the underdog.

In fact, a succession of domestic Chinese films, including the comedies “Lost in Thailand” (a close cousin to “The Hangover Part II”) and “Finding Mr. Right” (China’s answer to “Sleepless in Seattle”), have unexpectedly clobbered expensive American fare like “Oz the Great and Powerful,” “The Hobbit” and “Jack the Giant Slayer” on Chinese screens.

The abrupt shift toward local favorites may have something to do with market manipulation. As American films gained traction in China last year, alarmed officials imposed an unusual two-month blackout that kept most foreign movies off screens during the summer season.

They also forced “The Dark Knight Rises” and “The Amazing Spider-Man” into direct competition with each other, and promised to pay theater owners an annual bonus if their receipts from domestic films matched revenue from foreign films for the year.

Still, executives and China watchers here suspect something potentially more threatening to Hollywood: a rapid evolution in the tastes of Chinese audiences, which are quickly turning away from the spectacles American companies have assumed they crave.

“I know what they don’t seem to want,” said Rob Cain, who runs Chinafilmbiz.com and is a consultant to producers and others doing business in China. “They don’t want the same old thing, over and over again, the action blockbusters with lots of explosions.”

The apparent shift is helping Chinese films like “Lost in Thailand,” which was an eye-opener last year when it posted more than $200 million in ticket sales in China. It surpassed “Avatar” to become the country’s best seller in terms of total admissions (though not revenue, as “Avatar” had heavy 3-D sales at premium prices). It led a string of Chinese-language hits that outstripped Hollywood films like “Stolen,” “Jack Reacher,” and even “A Good Day to Die Hard,” which briefly claimed the top spot in China.

Richard L. Gelfond, chief executive of the Imax Corporation, whose screens in China play both American-made and Chinese-made films, said he was confident that viewed over a long period of time, “China is opening up to Hollywood.”

But lately, Mr. Gelfond acknowledged, the shift toward domestic films has been “dramatic.” In early 2012, he said, American studios did well in China partly because the available Chinese films lacked audience appeal. Later, he noted, Chinese officials delayed the release of “Skyfall” and “The Hobbit” until those films had played elsewhere, which allowed video pirates time to put a dent in the potential audience.

Mr. Gelfond said he expected American films to rebound in China over the next few months, as more of them are released on or near their opening dates elsewhere in the world.

But others say that will happen only if American studios acknowledge the sophistication of Chinese viewers, a large number of whom are college-educated, and not easily beguiled by routine action and fantasy imports.

“The change is that Chinese audiences want more from Hollywood movies — not just spectacle, but stories that engage them,” said Michael Andreen, a consultant to the Chinese media firm Le Vision Pictures, which will make and acquire films for release both in China and around the world.

Correctly gauging the Chinese market is crucial for big American studios, which have banked on rapid growth in revenue there to shore up relatively stagnant domestic returns. Last year, China’s box office reached about $2.7 billion. Ticket sales there are expected to surpass those in the United States by about 2018.

For the moment, Hollywood’s best hope remains “Iron Man 3.”

Shot partly in China, “Iron Man 3” has been heavily promoted there for the last year, including at a star-studded event at the Tai Miao temple in Beijing this month. It will also have extra scenes tailored to the Chinese audience, with an assist from a financial backer based in China, DMG Entertainment.

The first two “Iron Man” films did well in China, and “The Avengers,” which included the Iron Man character, took in about $90 million at the Chinese box office last year.

But Marvel and its backers have to sweat out their matchup with “So Young.” Partly, they will have to be sure theater operators do not assign some of the revenue from American movies to other films to protect the bonus tied to the success of domestic movies.

Whether the two films will be released head to head on April 26, as widely reported, remains unclear. After some last-minute work on a Chinese-language version, “Iron Man 3” still awaits an official opening date in China.

At the same time, “So Young” has some inherent advantages. It is the first film directed by a popular actress, Zhao Wei, who is known for her performances in “Red Cliff” and “Shaolin Soccer.” And it is based on a much-read novel, whose title is sometimes translated “To Our Youth That Is Fading Away.”

Still, it is impossible to tell whether those advantages are strong enough to give it an edge on Marvel’s juggernaut, given the lack of sophisticated prerelease tracking in China.

Regardless of which movie wins the face-off, Mr. Cain of Chinafilmbiz.com said, Hollywood will have to accept that Chinese viewers are perhaps even less predictable than those at home.

After all, their favorite English-language films of late have included the time-bending epic “Cloud Atlas,” which did little business in the United States, and the fable “Life of Pi,” whose spiritual themes might seem at odds with China’s governing principles.

“They want to see films that challenge them,” Mr. Cain said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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