Value Creation vs. Value Capture in China’s Entertainment Market


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NYT Room For Debate

by Robert Cain for China Film Biz

June 2, 2013

Over coffee in Hong Kong last week I received some sage advice from my friend Cole Sirucek, a former investment manager for Singapore’s Temasek fund and now a successful entrepreneur. “Mind the difference between value creation and value capture when you do business in China,” he advised.

It’s a distinction that many in Hollywood tend to overlook. It’s fairly easy to create value in China with American entertainment content and ideas. But capturing that value and repatriating it to one’s own bank account remains a difficult challenge.

When the New York Times’ Hilary Howland asked me to write an opinion piece on U.S.-China entertainment trade, I thought value capture would be an interesting topic to explore. The Times published my op-ed essay today, and I’ve provided below a slightly longer version of the same piece.

Capturing the Value of American Movies in China

Transnational trade and investment between America’s and China’s entertainment industries revolve around four fundamental sources of value.

  1. Access to American content, particularly (but certainly not limited to) globally commercial “tent-pole” films, popular television programs, and reality show formats.
  2. Access to American creative and managerial talent, with their proven abilities to generate content and profitably exploit it.
  3. Access to China’s very large, rapidly growing market, soon to be the world’s biggest source of entertainment revenue.
  4. Access to production capital, with America’s investment capacity in relative decline and China’s on the rise.

American legislators, investors and entertainment industry managers must recognize the difference between value creation and value capture. America’s entertainment sector is by far the world’s greatest creator of value for distributors and audiences around the world, and it has traditionally succeeded in capturing much of that value wherever it has operated. Roughly fifty percent of all global filmed entertainment revenue currently goes to American companies.

But whereas Americans have been extremely successful in creating value in China, capturing that value has proven a much tougher challenge. With its protectionist policies, its lack of business transparency, and its indifference to intellectual property rights, China returns to American content owners not more than twenty percent, and probably less than five percent of all the value U.S. content generates there.

This value loss has serious long-term implications for U.S.-based entertainment companies. Until recently Chinese exhibitors and distributors needed American content to build up their domestic industry. American movies brought in the ticket revenues that built China’s movie theaters, and ad dollars from American TV shows helped develop China’s digital distribution infrastructure. But the Americans have missed the opportunity to leverage the value they’ve created, ceding profits and market power to Chinese suppliers who have not only amassed huge amounts of investment capital, but who have also gotten better at creating their own successful content, dramatically reducing their need for American programming.

Unfortunately for the Americans, they need China now more than ever. As our domestic market matures we must increasingly look overseas for growth. And no market offers better growth potential than China: in the next four or five years China will surpass the U.S. in absolute revenue, and by the middle of the next decade it will dwarf the American market.

U.S. government regulators should bear in mind the principle of value capture as they evaluate cross-border transactions. China prohibits U.S. investors from owning entertainment distribution companies in the PRC, effectively neutering their ability to capture value there. U.S. rules present few such prohibitions to Chinese investors, so it is entirely conceivable—and even probable—that more and more of the U.S. entertainment production and distribution infrastructure will come under the control of Chinese owners.

China treats entertainment as a strategically critical industry, and the U.S. should too, by insisting upon more fair and balanced value capture policies.

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.

DMG’s Chris Fenton Discusses the Bilateral U.S.-China Film Relationship


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By Robert Cain for China Film Biz

November 16, 2012

I recently came across a series of videos published online by the organizers of September’s Stanford Business School China 2.0 conference. The keynote speaker was a friend of mine, DMG Entertainment’s Motion Picture Group President Chris Fenton, who consented to my request to publish a link to his speech, a segment of which you’ll find here.

In the video Chris provides a brief overview of DMG and the activities of its 900 employees in China and the U.S: its businesses include a major advertising agency, media buying, production of local language films in the $2-6 million budget range, co-production and import of U.S. films, and most recently, building and operating theaters. He goes on to show the Chinese version of the trailer for Looper, a film that DMG co-financed and co-produced. And most important for Chris, he shares his thoughts on the importance of improved relations between China and the U.S.

As Chris put it to me, “It is crucial for the US to understand the Chinese point of view to successfully open their market to our exports, particularly with regards to the film industry because it’s so visible. The Chinese view the inference that there’s industry-wide corruption in China and the negative rhetoric of U.S. political leaders as impediments to smoother relations between us.”

Chris’ basic message, one I wholeheartedly agree with, is that if American producers and production companies want to continue to participate in China’s booming entertainment market, they need to meet their Chinese counterparts halfway, to understand and address their needs, and to behave in ways that are a little less foreign and a little more ‘Chinese.’ Of course the same can be said for Chinese companies that wish to participate in the global entertainment business. DMG is one of the few Chinese companies that has shown itself to be fluent in the U.S. and international business culture.

Also appearing at the Stanford conference are my friend Janet Yang, who spoke about her movie career in China, former U.S. ambassador Jon Huntsman, who discussed business lessons from Google’s China experience, and China Film Co-Production Company President Zhang Xun, who talked (in Mandarin only) about keys to U.S.-China co-production. All well worth watching.

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.

Interview on Hollywood’s China Aspirations


July 14, 2012

China Business Review,” the magazine of the US-China Business Council, recently published a feature story written by Editor Christina Nelson titled “Hollywood’s Script in China: Three experts discuss China’s rapidly evolving film industry and opportunities for US entertainment companies.“  In addition to attorney Mathew Alderson of Harris & Moure, pllc, and Brent Reynolds of distribution company Q Global Entertainment, I was also interviewed for the article, which reviewed recent developments in China’s film industry and in the U.S.-China film trade.

With the author’s permission I have re-published below the segment of the article in which Christine and I discussed co-production, piracy, and the challenges and benefits of producing in China.

There has been a lot in the news about Hollywood studios doing co-productions in China. Is there actually an uptick in this trend, and why would a film studio decide to pursue a co-production?

Cain: There’s certainly been an uptick in talk and announcements. The reality is there have been very few real US-China co-productions. You can really count on one hand the number that have been done in the last three or four years. What people tend not to know or talk about is that there’s a huge co-production business in China with companies from other places like Hong Kong, Taiwan, and [South] Korea.

The reasons for doing a co-production are pretty clear. There’s still a—and I think there will be one for a while— quota on the import of films into China. Even with the increased number of slots that are expected to open up this year, [the Chinese government is] still restricting the number of films that can get in. So doing a film as a co-production is a way of getting around the quota. If films qualify as approved co-productions then they are treated just like any domestic production with open access to distribution. And the other important reason is the economics are better. You get a better share of the box office.

Are American companies trying to model themselves after companies from Hong Kong and Taiwan that have done co-productions before?

Cain: No, in fact I’m not sure how aware they are of the existing, pretty successful approaches. Particularly in Hong Kong and Taiwan, there’s such a cultural affinity and understanding. They speak the same language, and it’s easier for them to work with each other. They also, in my experience, come with more of an attitude of meeting the Chinese producers at least halfway and making an effort to understand what their needs and the needs of the marketplace are. They really tailor their films and their approach to be successful in China. The Hollywood studios are still trying to figure that out.

Are we going to see more Chinese characters or plotlines that fit with Chinese traditions of storytelling in Hollywood films?

Cain: I think there’s an awareness in Hollywood that they need to figure out how to cater better to the Chinese audience. What I’ve been hearing is there’s been more activity around US-China co-productions. I don’t know what the result is from those conversations. But generally speaking, I think the studios are at least at the point where they now understand how quickly China is growing, and how important it’s becoming. You can’t ignore the numbers because they’re growing so fast. How that’s translating into effective action, I’m not sure. I haven’t seen very much of it yet.

Is piracy still a big industry concern? If so, what can you do about it as a foreign company?

Cain: There’s been a huge amount of pressure applied for many years. It is still a concern. It’s interesting that where online piracy is also a big problem at least there is a lot of spending and legitimate acquisition of film titles by online distributors. So where there was no money coming back to the studios from that, at least there’s some revenue stream [from online sources] and it’s one that’s growing from China. So much of the viewing in China has shifted from physical media to online—that change is happening really quickly.

What is it like to work with a Chinese company to make a movie? What are some of the challenges and benefits of doing this?

Cain: I’ve really enjoyed the experiences I’ve had working with the Chinese producers and crews. I can’t really say I’ve had any more problems or challenges than I’ve had elsewhere. The difficulty in working there is the infrastructure for making films is still at an early stage of development, and the talent pool is not very experienced yet. There are great film-makers and great writers, but there just aren’t many of them. It’s hard to find people at the level of skill and professionalism that you’re accustomed to finding here in Los Angeles. And that goes all the way down the line, sourcing cameras and equipment and sound stages. But that’s changing; there’s been a lot of investment in China so it’s getting better. It’s an issue that’s going to go away as they make more films there and get more experience. The opportunity, of course, is just to show a part of the world that people are eager to learn about and understand. They are also phenomenal locations. I made a couple of productions in Beijing and Shanghai, and they are really spectacular locations. Just having access to such a big and growing market is a real plus.

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.