‘Tiny Times,’ Gargantuan Grosses

Follow me on Twitter @robcain or Sina Weibo @robcain, or connect with me on LinkedIn.Tiny Times

by Robert Cain for China Film Biz

July 4, 2013

Happy 4th of July everyone, it’s America’s Independence Day. As a person who enjoys the uninfringed right to express my thoughts to readers around the world, I’m extremely grateful for the precious freedom America’s founders fought for and bequeathed to their descendants.

On another note, I’m dedicating this post to Dominic Ng, Bennett Pozil, and their superb team at East West Bank. They recently hosted me at two of their events and made invaluable introductions for me to their clients. Dominic was kind enough to publicly recognize my work in a room full of heavy hitters at his “U.S.-China Economic Relations“ summit at the Biltmore Hotel in downtown Los Angeles. And since Bennett has been after me to keep writing this blog, pleading that in its absence he’s been forced to read trade papers like the Hollywood something-or-other and another thing whose name I forget that starts with the letter “V”, I suppose anyone who gets some use out of this humble publication should thank Bennett for his persistent cajoling.

It has been an eventful month or so since I last wrote about China’s film biz. In recent weeks Iron Man 3 finished its run at $121 million, edging out local romantic drama So Young to become the second highest grossing film of the year so far behind Journey to the West. Dreamworks’ animated movie The Croods defied everyone’s expectations, including my own, running up a magnificent $63 million, which places it among the highest grossing animated films in Chinese history. Legendary East announced a partnership with China Film Group; local film American Dreams in China ran up an $86 million gross; Man of Steel opened on 6,500 screens, the biggest launch to date in China; and Paramount’s World War Z was barred by the censors, despite the producers having made pre-emptive changes to avoid offending them.

Also, the July release schedule was announced, and with four big Hollywood titles opening (After Earth, White House Down, Fast and Furious 6, and Pacific Rim) the U.S. studios might finally get a chance to make up some ground against their Chinese competitors. Finally, the release schedule for December 2013 has been set, and it looks to be a blockbuster holiday, with Tiny Times 1.5, Jackie Chan’s Police Story 2013, mega-director Feng Xiaogang’s Personal Tailor, and possibly Overheard 3 and the star-studded Monkey King (with Donnie Yen, Chow Yun-fat and Aaron Kwok) all set to open within a two-week period. My Chinese correspondent Firedeep predicts that four of these five films will wind up out-grossing Iron Man 3.

Which brings us up to the present. China’s exhibitors and producers are enjoying another stellar year so far, with almost $1.7 billion in grosses in the first half, nearly 40 percent ahead of the first half of 2012. Given the patterns of prior years, I expect a $3.7 billion final tally for the year. It’s worth noting that China is now routinely grossing more each month than it did in the entire year of 2006. At the current rate of growth the PRC market will surpass North America as the world’s largest territory in 2017, and even if growth slows considerably the succession will take place in 2018 or 2019 at the latest.

The week ending June 30th was the third biggest so far this year, at $87.5 million. Tiny Times set new records for the opening day of a local film at $12.4 million, and went even wider than Man of Steel, running on nearly 50 percent of China’s 15,000+ screens. Look for the teen female oriented Tiny Times to wind up at around $100 million when its run ends.Box office week ending 6-30-13

Man of Steel continued strong, with $21.1 million in its second week. Heavy competition from Tiny Times will curtail its grosses, and it will likely finish in the $55 million to $60 million range, which is where many recent U.S. blockbusters have settled.

Star Trek Into Darkness finished up its run right in that same range, with $57 million. To the surprise of many observers Star Trek outperformed in China, earning a healthy 13 percent of its worldwide gross in the PRC. Compare this to, say, Skyfall, Oz the Great and Powerful, and The Hobbit, each of which earned only 5 percent of their respective worldwide totals in China.

In the coming days I’ll write more about China’s first half results and the U.S. studios’  performance. Until then, happy independence day!

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.

Legendary East’s Fortune Cookie Crumbles

By Robert Cain for China Film Biz

December 30, 2011

Legendary Pictures’ China ambitions ran into a great wall of investor resistance yesterday, as Hong Kong financing partner Paul Y Engineering (PYE) announced that it has been unable to raise sufficient investor interest to complete its $220 million investment in Legendary East, a planned three-way partnership with Legendary and Beijing-based Huayi Brothers.

Here’s the first part of the press release that was issued by PYE and its parent company, PYI:

The most revealing phrase in the press release is the statement that “some or all of the parties… may continue, in the near term, to discuss potential changes in the transaction structure…”

While PYE Chairman James Chiu blamed “the current difficult environment of the capital markets” for his failure to raise the necessary funds for the joint venture, I strongly suspect that other factors were the real reason for his quashing the deal. As I wrote in a previous post, the deal terms as originally announced were decidedly lopsided in Legendary’s favor, and in any event it made no sense for a construction firm like Paul Y to be putting shareholder money into movies, a business about which PYE’s senior executives openly admitted they know absolutely nothing.

PYE had originally explained its participation in the Legendary East joint venture as an effort to diversify its business into a more profitable industry sector with less cyclicality than its core construction operation. But as my former boss, Harvard Business School professor Michael Porter, would tell you, this is just the sort of misguided thinking that almost always leads to ruin.

In a study I conducted for Porter that led to a seminal article he wrote for the Harvard Business Review, we found that corporate diversifications like the one PYE proposed most often dissipated instead of created shareholder value. Investors are almost always better served by making their own diversification decisions within their personal stock portfolios instead of having corporate managers try to make these diversifications for them.

PYE’s and PYI’s investors no doubt took issue with their management team’s intentions and refused to go along.  PYI Chairman Tom Lau made himself an easy target for investor revolt in November when he said. “We do not understand the business of motion pictures nor do we pretend that we can contribute anything more than money.” It was one of the most candid statements I’ve ever seen from a major company Chairman, and also one of the least confidence inspiring.

I’m a big fan of Legendary, and I hope they find a way to realize their ambitions. My friends at the company tell me they’re pushing ahead with their China plans, and for their sake I hope that either PYE or other investors will provide the capital they need. But for Legendary to succeed in the long run in China they’ll have to do so on business terms that make sense for both sides. Even if the initial capital raise had succeeded, the PYE-Legendary East deal wasn’t a good one for PYE or for Huayi Brothers, and therefore looked to me like a partnership that would have been doomed from the start.

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.

Legendary East Deal Terms Unwrapped

By Robert Cain                                                                                                      November 17, 2011

In an announcement that was remarkable for its candor and for the amount of detail disclosed, Hong Kong construction firm Paul Y. Engineering (PYE) revealed on Tuesday the terms of its $220.5 million investment in Legendary East, Ltd., the film co-production joint venture that will be co-owned and managed by Legendary Pictures and Beijing based Huayi Brothers.

The joint venture aims to produce two films per year through 2017, and three per year thereafter, to be shot in English and “based on Chinese culture, mythology and history, with a view on distributing globally,” according to PYE deputy chairman Tom Lau. By qualifying these films as locally made ‘national productions’ the company will be able to avoid China’s stringent import quotas so that it can freely distribute in China.

Outside of China the films will presumably be released by Legendary’s studio partner Warner Brothers, though there has been no official announcement about that yet.

PYE, which has no prior experience in entertainment, will retain a 50 percent stake in Legendary East, with Legendary Entertainment taking 40.1 percent and Huayi Brothers 9.9 percent.

PYE explained its investment as an effort to diversify its business into a more profitable industry sector with less cyclicality than its core construction operation. Although PYE has been a major player in shaping the skyline and infrastructure of Hong Kong over the past six decades, it presumably sees China’s booming film industry as a more promising area of growth and profitability than its traditional business of building skyscrapers, airports and tunnels.

The terms of the deal appear to be very favorable for Burbank based Legendary, which maintains a great deal of control while shouldering little risk. In assuming the chairmanship of the new venture, Legendary Entertainment’s chairman Thomas Tull will control the company’s board of directors and he will exercise full greenlight authority, but will take on little to no financial exposure.

Minority partner Huayi Brothers, on the other hand, appears to be hungry to participate because it will make substantial sacrifices for its relatively small stake in the deal. In exchange for its right to distribute Legendary East films throughout the mainland and greater China, Huayi Brothers’ will be required to:

  • Give Legendary East films ‘first priority’ over its own titles by carving out a two week blackout period ahead of each Legendary East film during which time Huayi will be prohibited from releasing any other films.
  • Put up a minimum of 5 percent of the negative cost of each joint venture film, with budgets set at a floor of $50 million and a cap of $150 million.
  • Invest 100 percent of each film’s P&A, while limiting its distribution fees to 11 percent.
  • Shoulder the responsibility of taking each script through the government’s censorship hurdles, production approval process and distribution license authorization, in return for which it will earn producing fees of $500,000 per picture.

For its part, U.S. based Legendary Entertainment will take a $3 million producing fee from the budget of each film.

The partners had previously announced that their first joint production would be The Great Wall, to be directed by Edward Zwick (The Last Samurai; Blood Diamond) and based on a screenplay by Zwick and Marshall Herskovitz. Other early Legendary East investments will include co-financing two existing Legendary projects: Paradise Lost, to be directed by Alex Proyas (Dark City; I, Robot) and star Bradley Cooper; and Seventh Son, which will be directed by Sergei Bodrov (Mongol) and star Jeff Bridges.

In a curious display of candor, PYE Chairman James Chiu seemed to go out of his way to explain how little he knows or even cares about movies.

“I have no patience to sit in the cinema for two hours,” he is quoted as saying.

With $220 million at stake, perhaps he can be persuaded to show up and sit through a premiere or two for the company’s benefit.

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.