Big Trouble in Movie China


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By Robert Cain for China Film Biz

November 26, 2012

Crisis in China’s movie business was narrowly averted on Friday when the country’s film authorities announced that they will award performance-based box office bonuses to domestic film distributors and to theaters, ending a weeks-long dispute that had each side threatening to boycott the other over revenue splits. Thanks to the feds’ intervention, the eagerly awaited release of Feng Xiaogang’s Back to 1942 will proceed as planned on Thursday, and Chinese moviegoers will enjoy a normal December movie season,

Tensions were high in mid-November when five of China’s biggest film distributors banded together to demand an increase in their shares of box office revenues from 43 percent to 45 percent. The five companies—China Film Group, Huayi Brothers Media Group, Bona Film Group, Stellar Mega Films, and Enlight Pictures—told theaters that if they didn’t get their way they would immediately start withholding the releases of their blockbuster movies, including Back to 1942 and Jackie Chan’s China Zodiac, both of which are expected to be major holiday season hits.

In a notice issued to theater chains, the five film distributors said that China’s domestically-made blockbusters have contributed significantly to the nation’s film market. Yet, they complained, as they continue to produce films using state-of-the-art technology, production costs will continue to rise. “Therefore,” the distributors asserted, “In order to boost the creation and production of domestic movies, improve their quality and gradually smooth over the economic relationships between the stages of producing, distributing and screening, we five companies have reached the consensus that the profit share proportion for distributors should not be lower than 45 percent.”

Theater operators responded by holding an emergency meeting of their industry organization, the China Film Circulation and Projection Association, on November 17th in Guangzhou. They published a combative response (copied below) to the distributors’ demands and offered some choice words to reporters, with veteran Wanda Cinema salesman Liang Liang telling a reporter, “I have only three words [for the distributors]: Go to hell!”

In their declaration, the theater operators deemed the distributors’ demands unacceptable, for the following reasons:

  1. The five film distribution companies failed to follow the rules; without any attempt at consultation, they simply went ahead and gave the theaters an ultiimatum.
  2. The five film companies failed to consider that the industry’s current revenue split has been formed over an extensive period of trial and error and therefore any change in pattern would require adequate preparation.
  3. The five film distribution companies only took into consideration their own interests, without considering the challenges faced by theater operators. Most theaters are unprofitable due to the exorbitant rents they must pay their landlords.
  4. The distributors failed to use the correct method to address their grievance. They could have easily taken their request for a raise in revenue shares to China’s Movie Special Funds and apply for the increase in rates there.
  5. The distributors exchanged friendship for profit. China’s movie industry has always supported these five major players in film distribution. However, their actions showed how they have seemingly left behind their integrity when the temptation of personal gain showed its face.

Note that most of these objections are moral and ethical ones, not legal arguments. It’s an interesting example of how business operates in a country like China, where contractual obligations are usually less important than relational ones.

Civil war was ultimately prevented when the National Film Development Funds Management Committee (NFDFMC) stepped in and offered a solution in the form of bonus compensation to both sides, as follows:

For distributors of domestically made 3D and IMAX films 

If a film grosses RMB 50mm to 100mm , a RMB 1mm bonus

If a film grosses RMB 100mm to 300mm, a RMB 2mm bonus

If a film grosses RMB 300mm to 500mm, a RMB 5mm bonus

If a film’s box office gross surpasses 500mm, a RMB 10mm bonus

For theater operators

If at least 50 percent of a theater chain’s total annual box office gross is earned from domestic films, 100 percent of fees paid during the year by the theater chain to the NFDFMC (a straight 5 percent of every RMB of ticket sales) will be reimbursed to the theater chain.

If the percentage of box office earned from domestic films is between 45 percent and 50 percent, the NFDFMC will reimburse 80 percent of the fees a theater has paid to it.

If the percentage is below 45 percent, but the domestic film revenue is still more than last year’s, the NFDFMC will reimbursed 50 percent of the fees.

Both sides were apparently satisfied with this solution, and the show will go on. China’s theaters will continue to run films from the five distributors, and Back to 1942 will unspool on the 29th.

Having witnessed an endless string of financial shenanigans in China’s movie business, I can’t help feeling that this whole dispute was staged as a ploy to justify an end result that undeniably favors domestic films over imported ones. After all, China’s film regulators have for years twisted and strained to get around the WTO rules, and have often simply reneged on their legal obligations, in order to keep foreign films’ revenues below a 50 percent aggregate share of the box office.

With the attractive NFDFMC bonuses to tempt them, it’s hard to imagine that any theater chain in China will ever again submit an annual report with a domestic film box office share of less than 50 percent. The new rules give them powerful incentive to under-report the grosses of the foreign films they exhibit (if they aren’t already doing so) in order to maintain the desired balance and win their juicy year-end spoils.

As if this shift against the interests of foreign distributors wasn’t injury enough, I’m also hearing rumors that SARFT is planning to find ways to roll back the 25 percent share it pays foreign films to a somewhat lower rate. If you’ve heard anything about this please write me at the email address below.

Robert Cain is a producer and entertainment industry consultant who has been doing business in China since 1987. He can be reached at rob@pacificbridgepics.com and at www.pacificbridgepics.com.

China’s Media Stocks Are Sizzling in 2012


by Robert Cain for China Film Biz

May 18, 2012

This week I’m inaugurating a new stock index to track the performance of equities in China’s entertainment and media industry. The new index is called the Cain China Media Index (CCMI), and it comprises the stocks of 20 companies in China’s advertising, broadcast & cable, games, motion pictures and online media industries. Most of the stocks are in the mid-cap range (with a few small cap exceptions), trading on the Shenzhen, Shanghai, NASDAQ and New York stock exchanges.

The CCMI will be set at 100 as of the close of today’s markets in the U.S., and it will track the movements of the aggregate market capitalization of the 20 stocks.

My reason for starting the CCMI is to fill what I see as a gaping hole in the universe. I’ve been combing the web lately looking for useful coverage of the growth stocks in China’s media sector and I haven’t been able to find anything interesting or reliable.  So I’ve decided to step into the breach

Here’s why I think this is important, and why you should pay attention: 

  1. China is fast becoming the world’s most important media and entertainment market. In contrast with the low single-digit growth in North America, Europe and Japan, China’s media sector has grown at a compound annual rate of better than 30 percent for more than a decade. By 2020 China’s movie, game and online media markets will be larger than their counterparts in the U.S.
  2. China’s media sector is still in its early growth stage, which means that there is plenty of opportunity ahead for well-positioned Chinese companies in film, TV, and mobile and online content businesses, and for the investors who back them. All of the stocks in the CCMI are actively traded and can be purchased on the above-mentioned exchanges.
  3. Now is the time to invest in Chinese media. According to a recent McKinsey & Company research report, between 2010 and 2020 China’s GDP will double and 170 million Chinese households, or some 500 million people, will move up into the “mainstream” middle class and affluent class. That’s 500 million new buyers of movie tickets, video games, premium TV services, , and other forms of entertainment. Put another way, the next 8 years will offer the biggest surge in entertainment and media consumption the world has ever seen.

Even if China’s economy slows down, the entertainment business will keep growing, because the Chinese market is still extremely under-saturated and under-served by entertainment businesses.

The CCMI stocks, their ticker symbols and market caps are listed in the table below.

CAIN CHINA MEDIA INDEX

 

Investors in the sector have had a very happy 2012 so far. The stocks in the CCMI have risen by an average of 21 percent so far this year, compared with an 8.8 percent gain in the Dow Jones U.S. Media Index, a 6 percent gain in the Shanghai Composite Index and a 3.8 percent gain in the S&P 500.

Investors in certain Chinese online media stocks have been particularly well rewarded, as digital online video company Tudou has gained 188 percent in the past 4-1/2 months, and social media site RenRen has gained 76 percent. Bona Film Group has also performed well, gaining 55 percent since the beginning of the year.

I plan to update the index each week and to keep a close eye on trends in China’s media stocks, so keep checking in.

Robert Cain is a producer and entertainment industry consultant who has been doing business in China since 1987. He can be reached at rob@pacificbridgepics.com and at www.pacificbridgepics.com.

China’s Box Office: Hong Kong Director Derek Yee Works Comedy Magic


By Robert D. Cain for China Film Biz

January 18, 2012

Hong Kong director Derek Yee spun gold last week with his new film The Great Magician, which knocked The Flowers of War out of the top spot and led the Chinese box office with $11.5 million.

For Yee, a writer-director- actor-producer who is perhaps best known for producing the hit Hong Kong crime dramas Overheard (2009) and Overheard 2 (2011), The Great Magician was something of a departure. It is the first comedy he has directed in over 20 years, and also one of the few films he has made on the Chinese mainland. SARFT censors required him to make numerous changes to the film before they would allow its production and release.

Second place was also claimed by a new market entrant, the fourth installment of the popular Pleasant Goat and Big Big Wolf children’s animation franchise, which took in $11.3 million. Based on a long-running Chinese children’s TV series, the Pleasant Wolf franchise is the only home-grown animated property that has managed to generate consistent, repeated success at the box office.

Taiwanese romance You Are the Apple of My Eye maintained its 3rd place rank with $5.6 million, for a $9.9 million cumulative gross.  Already this year’s Taiwanese films have exceeded the total gross for all of 2011’s Taiwanese releases in China. Quite a change from the days not so long ago in the PRC when mere possession of a cultural artifact from Taiwan could be construed as a political crime punishable by imprisonment.

Flowers of War and Flying Swords of Dragon Gate fell to 4th and 5th place, with respective weekly revenues of $4.5 million and $4.3 million. Flowers has now reached a $93 million total gross, but doesn’t have enough steam left to challenge Let the Bullets Fly as the all-time Chinese language box office champ. And unless it achieves the unlikely feat of grossing at least $100 million outside of China, it will fall well short of financial breakeven.

Flowers of War had a rough week in awards competitions: It lost out to the far superior Iranian film A Separation for the Golden Globes’ best foreign language film awards, and it failed to make the cut for the Academy Awards foreign language shortlist of nine films. For several years in a row the Chinese have tried to win over the Academy with big, crowd-pleasing melodramas. Perhaps they’ll learn their lesson next year and submit a movie that might actually have a prayer of winning. It must be particularly galling to the Chinese that a Taiwanese film, Warriors of the Rainbow: Seediq Bale, did make the shortlist.

American entry Sherlock Holmes: Game of Shadows, grossed a decent $2.9 million in its first day of release in Chinese theaters. If it performs as well in China as it has elsewhere, it should wind up with at least $15-18 million in total receipts there.

Independent distributor Bona Film Group had a rare indie trifecta with the number one, number two and number five films for the week.

Aggregate box office for the frame was 59 percent higher than the same period last year. With Enlight’s next installment of its hit All’s Well Ends Well franchise opening this weekend (last year’s sequel wound up with nearly $25 million) and with Mission Impossible: Ghost Protocol arriving on the 28th, January is shaping up as a very big movie month overall.

Robert Cain is a producer and entertainment industry consultant who has been doing business in China since 1987. He can be reached at rob@pacificbridgepics.com and www.pacificbridgepics.com.


Chinese Audiences Screaming For “Vengeance”


By Robert Cain for China Film Biz

December 9, 2011

Writer-director Daniel Lee’s period action epic White Vengeance led a crowded field of new entrants to take the Chinese box office crown last week with a gross of $13.1 million. This was enough to give the China/Hong Kong co-production the 7th best opening week for a non-Hollywood film this year, and the 13th best opening week amongst all films.

The rest of the field, which included a total of 7 new films, failed to excite moviegoers. Second place went to another China/Hong Kong co-pro, holdover East Meets West, which took in $3.4 million. Two of the openers were foreign imports: the critically panned Screen Gems action-horror flick Priest, which grossed $3.1 million for DMG, and Terry Gilliam’s France/Canada co-pro fantasy The Imaginarium of Dr. Parnassus, which picked up just $1.2 million for Huaxia.

Still, total box office for the top 10 films amounted to $30.6 million, a decent if not spectacular week.

It will take some major hits in the next few weeks for China’s total theatrical revenue to cross the $2 billion mark in 2011, but that’s exactly what might happen, with two big Chinese blockbusters slated to open against each other on December 15th. Tsui Hark’s $35 million action film Flying Swords of Dragon Gate, starring Jet Li, will go up against the $100 million Zhang Yimou-Christian Bale historical epic Flowers of War.

The rivalry between the producers of these two films will add some spice to next week’s box office competition. The feisty and outspoken Zhang Weiping, producer of  Flowers of War, has banned Bona Group, the producer-distributor of Flying Swords from carrying his film in Bona’s company-owned theaters, claiming that Bona has dragged its feet in paying Zhang monies owed on previous films.

Whatever happens, look for box office records to be broken as these two highly anticipated movies kick-off China’s peak holiday season.

Robert Cain is a producer and entertainment industry consultant who has been doing business in China since 1987. He can be reached at rob@pacificbridgepics.com and at www.pacificbridgepics.com.