In the Global Movie Business, China Aims for a Starring Role

In the Global Movie Business, China Aims for a Starring Role

Oct 29, 2013 Strategic Management Asia-Pacific China

“Chinese Titan Takes Aim at Hollywood,” said a New York Times report last month, referring to the plans of Wang Jianlin, China’s wealthiest investor and founder of the $30 billion real estate group Dalian Wanda, to build a movie-themed real estate project in the upscale seaside town of Qingdao. Price tag: 50 billion Yuan ($8 billion). “It is estimated that China’s film box office revenue will surpass North America’s by 2018 and will double it by 2023 — that is why I believe the future of the world’s film industry is in China,” the Times quoted Wang as saying.Hollywood has suffered declining fortunes with the death of video stores, the rise of distribution on the web, higher production costs and piracy, among other woes. Meanwhile, China’s box office is showing big gains — but not for all players. A recent report in Variety magazine says ticket sales this year for local Chinese films increased 144% to $1.12 billion, while imported films saw a 21% slump to $670 million, despite the relaxing of quotas.

Could a country best known for low-cost manufacturing take on the creative genius of Hollywood? “China’s movie market is growing, but it cannot match Hollywood’s,” says Wharton marketing professor Qiaowei Shen. Adds Wharton professor of operations and information management Jehoshua Eliashberg: “While the Chinese movie business stands to gain from the huge local market, it is not obvious that the content they produce there has a global appeal.”

Wang’s project, called the Qingdao Oriental Movie Metropolis, will include the world’s largest studio (among several others), resort hotels, an indoor amusement park and movie theaters on a 930-acre site. Big-name Hollywood stars such as Leonardo DiCaprio, Catherine Zeta-Jones and Nicole Kidman were present at the project’s launch ceremony last month in Qingdao. Wang described the ceremony as a symbol of his country’s plan to become a leader in the movie business. Last year, he bought U.S. cinema chain AMC Entertainment for $2.6 billion.

“While the Chinese movie business stands to gain from the huge local market, it is not obvious that the content they produce has a global appeal.” –Jehoshua Eliashberg

While the Chinese movie market has experienced tremendous growth in recent years, 2013 has been “a particularly spectacular year” for local Chinese movies, says Shen, adding that locally themed films in particular are popular and in some cases have even surpassed Hollywood movies in number of tickets sold. “The extremely successful local movies tend to be low-cost, story-based movies directed by young directors, which differentiate them significantly from typical Hollywood movies.”

However, she notes, China’s movie industry “is still in the growing phase and is far from mature. It can hardly compete with Hollywood in many [categories] … in the short run.” At the same time, Shen sees a huge desire among Chinese consumers for good movies, both home-grown local ones as well as those that are Hollywood-produced.

Quality, Marketing and Piracy

Quality is key when it comes to determining market share in the film industry. Shen points to the 3D version of Titanic last year, which “easily reached” sales of one billion RMB in the Chinese market. Hollywood is “very advanced in movie production” compared with its counterparts in China, she adds.

Eliashberg notes that Chinese movie executives lag behind Hollywood in terms of creative work, marketing skills and technology development. Those who claim the future of the movie business resides in China are “a bit too optimistic,” he says. “If Bollywood has not done it, it is not very likely that Chinese movies will set the global tone.” Bollywood, whose name is a combination of India’s Hindi-language film industry capital of Bombay and Hollywood, produces about a thousand movies annually, or roughly twice the output of Hollywood, according to one trade estimate. Bollywood celebrates its centenary this year.

How movies are marketed is another important element in the drive to establish supremacy, Shen notes. “The success of several low cost local movies, to a large degree, is due to the successful marketing in social media like ‘Weibo’ [China’s version of Twitter and Facebook], which creates huge word-of-mouth [promotion].”

“The success of several low cost local movies, to a large degree, is due to the successful marketing in social media….”  –Qiaowei Shen

Meanwhile, the biggest threat to China’s movie business is piracy, according to Shen. “Copyright protection is not as well implemented in China as in the U.S.,” she says. Even though pirated movie versions are freely accessible, a mitigating factor is that Chinese consumers are spending “more time and money in theaters” than previously, she adds. “They now value the theater experience more. New distribution channels [like digital screens] seem to expand the overall movie market instead of simply diverting consumers from the theater to home.”

Rewriting the Script

Investors like Wang bring competition, but the China market also holds promise for Hollywood studios, movie experts suggest. The Chinese market “presents a large opportunity” for Hollywood, says Shen, adding that Chinese movie audiences will keep growing, especially with an increased number of screens and new theaters in second- and third-tier small cities and towns. Could China and Hollywood be collaborative instead of combative? “The Chinese market seems to be both problem and solution for Hollywood,” says Eliashberg. “Hence, joint collaboration is mutually beneficial.”

Meanwhile, Hollywood studios are scrambling to find new ways to convert the threat of digital distribution into an advantage. In 2010, Epix, a venture that features the libraries of Paramount, Lionsgate and MGM, forged a multi-year agreement with Netflix to distribute movies.

Hollywood could also re-engineer itself to lift its fortunes, according to Eliashberg. He offers a three-point formula: First, “produce and release movies that are based on good storylines rather than those based on comic books, which are released in sequels and prequels.”

Second, “market movies more effectively instead of simply raising the marketing budget. With social media so popular these days, [there is] no need to spend so much on TV ads, for instance.” And third, “manage the release of a movie more efficiently. One size does not fit all, but there are certain types of movies that can be released simultaneously in theaters and VOD ” to the benefit of everyone.

Shen has the final word. In the competition between the Chinese and Hollywood movie industries, she says, what “ultimately wins is good movies.”

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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