Chinese Tech Giants’ Investments in Entertainment (2/2)
With $3.17 billion gross theater revenue in the first quarter of 2018, the China box office surpassed North America and became the biggest film market in the world.
In the past two decades, China’s economic rise has been staggering. Thanks to a booming middle class and influx of both domestic and foreign investors and film producers, China has become the world’s fastest-growing film market. With $3.17 billion gross theater revenue in the first quarter of 2018, the China box office surpassed North America and became the biggest film market in the world. In comparison, the aggregate gross theater revenues in North America (United States and Canada) were only $2.85 billion in the same period. Deutsche Bank analysts expected China box office revenue to continue to grow and reach $11.78 billion (RMB￥81 billion) by 2020.
In terms of movie theater investments, China’s total number of cinema screens exceeded those of the U.S. in 2016. According to PwC’s Global Entertainment and Media Outlook 2017–2021, by 2021, China will have more than 80,000 screens, nearly twice as many as the U.S.. Most of the expansion will take place in smaller cities (tier 3–5 cities) [Note: the central government has ranked more than 600 cities in China by tier according to population, personal income level and economic development. Tier 1 cities are the four biggest cities- Beijing, Shanghai, Guangzhou and Shenzhen. More than 20 cities were categorised as tier 2, while the rest were ranked between tiers 3 and 5].
More specifically, China is expected to have the most IMAX 3D screens globally by 2021. Chinese consumers have responded well to 3D films and ticket sales at IMAX theaters are estimated to surge 45%year-on-year. Thus, the Canada-based corporation IMAX has been expanding its presence in China with multiple long-term partnerships with local cinema chains. The domestic growth of movie theaters means an easier access to movies, helping the industry build an active movie-going culture in smaller tier 3–5 cities. The increase of IMAX screens provides a great opportunity to introduce customers to a more premium cinematic experience powered by new technologies.
Chinese Millennial Moviegoers
Without a doubt, China’s film industry is growing rapidly and has entered an unprecedented boom period. But compared to other countries which have a mature film industry and a moviegoing culture, the penetration of moviegoing still remains low in China. Statistics show that the average movie attendance in China in 2017 is 1.17 times per year, significantly lower than moviegoers in the U.S. (5.3 times) and Korea (4.34 times). But the low penetration rate also represents great potential in future growth.
For the post-80s and post-90s generation (millennials) in China, seeing a film in a movie theater is one of the mainstream forms of entertainment. As this new consuming class is rising, their demands and spending behaviors are reshaping movie theaters and film industry in China and even in Hollywood. According to the China Film Industry Report 2014 issued by China Film Association, women and millennials are the major driving forces for the Chinese box office growth. 53.6% of the sample audience were between 25 to 39 years old. In addition, female moviegoers accounted for over 60% of all survey participants, among which the majority was undergraduates, graduate students, and young professionals early in their career, with an average monthly spending for entertainment and leisure between $145 (RMB￥1,000) to $435 (RMB￥3,000).
Chinese Millennials’ Diversified Movie Tastes
The report also showed frustration about a lack of variety in movies released in China. To appeal younger populations, many Chinese investors and movie producers tend to focus on romance, comedy, and action films, which have a high chance to become a massive box office success but tell cliche stories and have no creative or artistic aesthetics. Out of a total of 250 domestic films released in 2013, nearly 90% were categorized as comedy, romance, and action films. A few box office grosses in that year include “To Youth (致青春)” “American Dreams in China (中国合伙人)” and “Tiny Times (小时代),” which ranked below 5/10 in IMDb but became box office hits.
While a lot of Chinese youth still enjoy consuming these commercial films and are willing to pay for them, another group of Chinese millennial moviegoers are less enthusiastic about blockbusters and commercial productions, and instead have more diversified tastes. According to ENT Group, an entertainment research agency, sci-fi, war films, disaster films, and fantasy films also have large audience bases but the release and distribution of these genres are very limited in China, with less than 5% of all movie releases in 2014. As for foreign movies, Hollywood movies haven’t entirely lost their ground, but they are no longer guaranteed hit-makers in China. Statistics and surveys showed Chinese audience are interested to consume more films from Japan, India, East Europe, and other countries.
Like millennials in many other countries, most of the post-80s and post-90s generations in China are tech savvy digital natives and social media is a big part of their daily lives. They like to read comments before purchasing and leave reviews after their visits/purchases. Both studies and industry reports also concluded that social media marketing is playing an important role in moviegoers’ decision-making process and will affect the box office. According to a report by Alibaba Pictures and H. Brothers Research on the Chinese movie industry in 2015, 70% of moviegoers 25-years-old or under, commented on a film on social media after they went to the movies. Among these moviegoers, female audiences were more enthusiastic to share and recommend movies they enjoyed. A research published in Chinese Journal of Management Science in October 2017 studied over 614,982 reviews on 43 movies posted on Douban, China’s most active and influential social platform for media reviews. Based on data modeling and analysis, researchers suggested that both the numbers of short reviews (comments under 140 characters) and the content quality of short reviews have an impact on movie’s box office results.
The Role of the Internet in China’s Film Industry
Driven by policy, capital, and technologies, Internet companies in China pose a serious threat to the “traditional giants” in the film industry, which are state-owned production companies and state-operated theaters.
China’s tech giants BAT, Baidu, Alibaba, and Tencent, have been the major entertainment industry disruptors. With resources and advantages in user information, big data, channels, and capital, BAT are gradually penetrating the movie industry and are actively building their entertainment ecosystems.
Due to cultural differences between China and foreign countries, legal considerations, and other factors, China has a longstanding quota system designed to protect domestic movies — only a total of 34 foreign movie releases are allowed to be distributed and screened on a revenue-sharing basis. In recent years, analysts and reporters noticed that regulators have allowed more international releases than the permitted quotas and indicated that China tends to ease the restrictions in the future. Foreigners in the movie industry, by law, are not allowed to operate independently in China, and any film-making activities and distribution of content are subject to laws, regulations, approval and censorship.
In short, to tap into the world’s biggest movie market, foreign filmmakers have three options: getting selected as the quota-based revenue-sharing films, being imported as flat-fee movies, or producing a movie with a Chinese company. This situation leaves plenty of opportunities and potential for cooperation and partnership with Chinese giants, including Dalian Wanda, the property and leisure industry giant, and the BAT, one of the top three Internet behemoths in China.
Trends and Innovations in Production
Under the quota system and other restrictions, co-productions are the most commonly used way for foreign film companies to gain access to China and for China’s films to enter the global market. Co-productions can achieve “win-win” outcomes for both domestic and foreign filmmakers: co-produced films are considered as “Made in China” and enjoy the same treatment as domestic ones. In addition, the growth of foreign co-productions will drive up the quality of movie contents and attract foreign investments into Chinese films.
Hollywood and BAT co-productions have witnessed great success and paved the way for more co-productions in the future. “Venom,” a superhero origin movie released in 2018, was produced by Columbia Pictures in association with Marvel and China’s Tencent Pictures. As of December 5, 2018, this movie has earned $212 million in the U.S. and an incredible $262 million in China alone, making it the year’s second-biggest Hollywood import in China. Alibaba Pictures’ “Journey to the West: The Demons Strike Back (西游伏妖记),” a fantasy action movie, was co-produced with a Hong-Kong production studio and released in 2017. Although the box office in China started declining since the third day after screening, it has earned $248.8 million worldwide. Baidu’s iQiyi also has released movies co-produced with Hong Kong and Taiwan filmmakers.
Film crowdfunding was another innovative experiment of China’s tech giants. Launched in 2014, Yulebao (娱乐宝), a Kickstarter-style crowdsourced fund for film investment, allows ordinary Chinese to invest and finance popular movie projects, ranging from $15 (RMB￥100) to $150 (RMB￥1,000). The most popular projects were the two “Tiny Times (小时代)” film sequels, which attracted over 100,000 investors in five days. In the same year, Baidu launched a similar film crowdfunding investment fund called Baifa Youxi (百发有戏; translated means “Baifa Me”) but the most popular movie project was never produced.
No recent updates about these two crowdfunding platforms were found from open sources. It is believed that crowdfunding may be an experiment to promote and test market response. But in the long term, both companies appear not to see it as a robust strategy to support the development of their movie business.
Data-driven Promotion and Online Ticketing
Closer ties between the Internet and the film industry not only brought more partnerships and investments into the industry, but also provided studios a better understanding of audiences and exciting new potentials in promotions, distribution, ticketing, and screening.
Filmmaking is costly ,and many people underestimate the costs of movie marketing. With a budget of millions to spend on marketing, Hollywood is still struggling with how to efficiently reach audiences without soaring market costs. Traditional calculations for a movie marketing budget are to allocate 50% of the total of the production costs. Over the years, the budget for movie promotions and marketing has been continuously rising. According to The Hollywood Reporter, studios need to spend an average of $200 million per picture on international movie marketing in 2014, a 33% increase from 2007.
With the high penetration rate of smartphones and the rapid growth of social media, the digital marketing expenditures are also escalating. However, compared to traditional media, social networking platforms and online video platforms collect and analyze data from users. Powered by machine learning, the digital platforms will learn consumer patterns and help brands and marketers understand more about their target audience so they can reach and market appropriately to audiences online.
Driven by data, China’s leading online video platforms, Tencent Video, iQiyi, and Youku Tudou, have been serving digital advertisements for a long time. Convinced by data and results, advertisers from consumer brands are also shifting to digital advertising. According to consultancy eMarketer, advertisers in China will spend more on digital video ads than traditional TV commercials in three years, reaching $17.6 billion by 2021.
Besides running ads on BAT’s multiple platforms, online ticketing has also been a powerful tool for the movie business. According to industry research agency iMedia Research, 78.2% of moviegoers bought movie tickets online by the second quarter of 2017. According to Tencent-backed Maoyan Weiying, the largest online movie ticketing app in China, tier 1–4 cities have seen an increase in the penetration rates of online movie ticket purchases from 2016 to 2017.
Online ticketing platforms are also powerful marketing tools. During the promotion period for Alibaba-invested “Dying to Survive (我不是药神),” Tao Piaopiao, an online ticketing platform backed by Alibaba, launched a campaign to allow users to earn ticket vouchers by watching trailers, leaving reviews, or playing games on the app. After completion, customers can redeem the voucher and/or purchase a movie ticket on Tao Piaopiao and pay through Alibaba’s digital wallet, AliPay.
Competitive Differentiation Analysis
Leading the top online video platforms in China, Baidu, Alibaba, and Tencent have capital resources and competitive advantages to expand to the movie industry. To transit from content distributors to content producers, these tech giants all invested in well-established movie studios and movie industry veterans back to early 2000s, including Polybona Films, Enlight Media and Huayi Brothers.
Meanwhile, these tech companies are working their way onto the big screen, especially after the rise of online video platforms. They all established separate legal entities to prepare for their own productions and more movie-related business and investments. Tencent has developed two productions arms: Tencent Pictures, which co-produces films and original TV series, and Penguin Pictures, which allies to Tencent Video. Alibaba bought a majority stake in ChinaVision Media Group, a Hong Kong-based production studio produces Chinese-language TV shows and movies, which was later named as Alibaba Pictures. Baidu’s iQiyi also launched iQiyi Motion Pictures to produce films for cinema release and expand cooperation with overseas filmmakers.
According to China Film Insider, Tencent and Alibaba have been actively investing in domestic entertainment companies, covering the enter supply chain from pre-production, post-production, to distribution and exhibition. In 2018, Tencent invested in 51 entertainment companies and a large portion of them are animation studios. Alibaba has invested in 48 entertainment firms. Baidu has only invested in 18 entertainment companies, and most of the investments went to content creation firms in support of its video site iQiyi.
Although Hollywood has been criticized for many reasons, the tech giants are partnering with Hollywood filmmakers and production companies in many ways. Alibaba Pictures began investing in Hollywood films in 2015 with its stake in ‘Mission: Impossible — Rogue Nation’. Later on, it invested on other blockbusters like ‘Star Trek Beyond’ and ‘Teenage Mutant Ninja Turtles: Out of the Shadows’. Moving from an investor to a co-producer, news reported that Alibaba Pictures will launch co-production films with Steven Spielberg’s Amblin Partners, STX, and Entertainment One. According to Cheng Wu, CEO of Tencent Pictures, the company plans to deepen cooperation with Hollywood by investing, financing, co-producing and hopefully inviting Hollywood talents to participate in movie projects led the Tencent Pictures. While the competitors are collaborating with Hollywood on promoting and co-producing English-language films, Baidu’s iQiyi is supportive of local-language series and announced a partnership with Sony for co-production. However, iQiyi is still a major distributor of Hollywood movies in China, with licensing agreements with Warner Bros., Lionsgate, and other other major movie studios in Hollywood.
Driven by data, social media, and other Internet-based products and services operated by these tech giants, BAT has been both innovative, aggressive, and disruptive, posing a serious challenge to traditional giants in the industry. Reports and analysts like to compare and argue who will make it to be the next Netflix or China’s YouTube, but entertainment and media are so important that they bring people together, create a strong bond, bring happiness, and shape people’s views and perspectives. While all the capitals and technologies are penetrating into our daily life and revolutionizing the entertainment industry, decision-makers should respect the power and remember good stories never die and encourage different generations in a positive way.
