This article originally appeared in ValueCap Research’s China Capitalist newsletter.
China’s film market is booming, but what do Chinese audiences want to see?
China’s film market is growing fast. According to the State Administration of Press, Publication, Radio, Film and Television, China’s box office revenue hit a record $6.8 billion in 2015, up 49% from the previous year. By comparison, the North American box office hit $11.1 billion in 2015, indicating growth of only 8%. China is currently adding 15 new movie screens daily, says a report by the U.S.-China Economic Security Review Commission. Box office revenue is second in the world behind only the U.S., and according to Bloomberg, is set to overtake the U.S. as early as next year. American studios are desperate to understand this large and growing audience, yet as with most things in China, the market is constantly changing.
One of the biggest recent changes to the landscape is the inroads made by China’s tech giants. BAT, as they are often collectively referred to – Baidu, Alibaba, and Tencent – are all vying for control of the entertainment market and hoping to transform the traditional filmmaking process by using big data at every step. Tech companies are in a unique position to do this because they have access to huge amounts of data. Each company has its own point of entry – Baidu with its search engine, Alibaba with online sales, and Tencent with social media.
Traditionally, the movie making process consists of three steps: production, distribution, and exhibition. In the past, these three steps have remained largely siloed. Now, BAT companies are looking to own every part of the process, and use data from content consumed in the exhibition phase to dictate further production by their own companies. All three have moved into production – Baidu with iQIYI Motion Pictures, Alibaba with Alibaba Pictures Group and Tencent with Tencent Movie Plus.
Data collection is made easier by the fact that a great deal of content is consumed online. While the Chinese theater audience is growing far faster than its Western counterparts, this is not to the exclusion of online viewing. According to research by the Interactive Advertising Bureau, 71% of Chinese consumers watch full-length TV shows on their cell phones and tablets on a weekly basis. In the past, content streaming was not a viable source of revenue due to a lack of IP protections and a huge volume of sharing sites that offered free content. In recent years, however, companies and regulators have become more vigilant about policing intellectual property, and many of these sites have been shut down. In their place, the internet giants have set up a variety of streaming services. Alibaba has a line of set top boxes and a 16.5% stake in the popular online streaming service, Youku Tudou, while Baidu owns iQIYI, Youku’s top competitor.
Additionally, data can be harvested from online theater ticket sales. The research firm EntGroup reports that the number of people buying movie tickets online grew by 43% in 2014, and the number of bookings completed with a smartphone grew 109%. Market research firm Analysys reported that in July 2015, online ticket reservations made up 75% of total ticket sales. WePiao, owned by Tencent, is one of the largest ticket-booking apps, connecting users with all the large theater chains. Tencent is also an investor in Meituan-Dianping, another dominant player in the industry.
In this new production model, film marketing is done largely through social media, which allows more directed advertising at target demographics. Tencent is especially well positioned to do this with its 800 million WeChat users.
The idea is to allow consumers to directly influence what content gets produced. Besides data analytics, users can also influence the production of content through small investments and crowdfunding sites, such as Yu Le Bao, launched by Alibaba in 2014. Users can invest as little as ¥100 in a film, receive a promised 7% return, and a chance to help determine the cast, as well as a variety of other perks. Baidu and Tencent both have launched similar products.
There are changes in China’s audience of theatergoers as well. Many of the new visitors to theaters are outside of China’s first tier cities.
According to a report by EntGroup, theater development in tier one cities has already reached a saturation point, but smaller cities have a lot of room to grow. 65% of new theaters opening in 2014 were in second and third tier cities, while only 10% were in first tier cities. The majority of Chinese film audiences are also relatively young. In 2013 and 2014, 87% of film audiences were aged between 19 and 40. Of those, more than 50% were aged between 19 and 30.
What do these young people in second and third tier cities want to see? It is always difficult to predict what will play well with audiences, but films that cover a wide variety of genres have been doing comparatively well. Because of the development of streaming sites and targeted marketing through social media, movies are likely to try and cater to a more diverse array of audiences. A publisher at Film Business Asia recently told the China Economic Review, “If you look at the top ten local films in China last year, there’s a remarkable range, especially when compared to the narrow range of films emerging from the Hollywood studios . . . The top ten Hollywood films last year across Asia were basically fantasy/science fiction films.”
IMAX and 3D films have also been doing well. It makes sense that this extremely tech savvy generation has high expectations for their films’ visual content. According to IMAX, its greater China (including Hong Kong, Macau, and Taiwan) box office reached $312 million in 2015, a 54% increase over 2014. The company had 307 theaters at the end of 2015 and plans to add 115 this year. According to the International Business Times, IMAX’s competitors Barco, Dolby Laboratories, and China Film Giant Screen also plan to build a large number of new screens in the next few years. IMAX reported a gross profit of $72.3 million for 2015, however, price wars between the previously mentioned ticket selling apps means that tickets are being sold at steep discounts.
Another potential area of growth is for locally made Chinese films. Local films have been competing more successfully against Hollywood productions in the past few years. Most notably Stephen Chow’s The Mermaid, which came out this year, is currently the highest grossing Chinese film of all time with over $526 million at the box office. China’s Monster Hunt hit the number two spot last year at $381 million. In some ways, it is surprising that Chinese audiences have put up with foreign film subtitles and occasional jokes that do not translate well. Hollywood’s special effects, big budgets, and industry experience have made for slicker films in the past, but many critics argue that the Chinese industry is growing up. In terms of finances, investment by the BAT and other large companies has given filmmakers room to develop their ideas. Domestic films might be especially appealing for the new audiences in second and third tier cities, who are less familiar with big name Hollywood actors and are more impressed by local stars.
Appealing to Chinese cultural tastes is one reason Hollywood studios try to work with Chinese film makers on co-productions, aside from the immediate goal of getting around China’s movie quotas. The Chinese government only allows 34 foreign films per year to be shown on a revenue-sharing basis. Films it deems as Chinese-American co-productions, however, are considered local films and are exempt. Even local films however, must pass through China’s censors who may deny release rights, either because they decide it does not meet co-production requirements or because they deem it socially or politically problematic. As a result, co-production is risky, and filmmakers must self-censor to give their film the best chance of making it past regulators. Still, many studios are trying it. The Great Wall, a co-production between China Film Group, LeVision, and Legendary, will be released in China in December and in the U.S. next year.
Additionally, the reality of American filmmakers trying to gear their movies toward Chinese audiences can be tricky. A Chinese studio executive was quoted in Variety as saying, “Audiences don’t like co-productions. They can smell them a long way off . . . And what is the point of making Chinese content in English? The Chinese public doesn’t like it and that doesn’t work for international audiences either.”
This is unfortunate because although the current quota agreement is set to expire next year, it is unlikely that the Chinese government will change it in any meaningful way. In October 2015, President Xi Jinping made a speech at the Beijing Forum on Literature and Art in which he emphasized that “literature and art cannot become slaves of the market,” and should instead fulfil a broader social purpose. This was followed by a draft law which would require theaters to devote two-thirds of total movie running time to local films. The law is still being reviewed by the National People’s Congress Standing Committee. Meanwhile, a tax incentive for theaters that generate at least two-thirds of box office receipts from local films has already gone into effect. According to the Hollywood Reporter, industry sources claim that the foreign film quota might go up by 10 movies per year, but that might only include “prestige” movies – Oscar winners and those considered art house movies. The thought is that these movies will not seriously threaten China’s own films. Additionally, the quota increase also will not be very significant if theaters are required to limit the number of foreign movies they show. In short, the quota may increase slightly, but the flood gates probably will not open.