May 20, 2018
Business

China & Hollywood: After A Topsy-Turvy 2017, What’s In Store For The Year Ahead

In 2017, China and U.S. relations stumbled from a combination of a new administration in the White House and the Chinese government pulling back on investment outside of its borders. And there’s yet more change to come in 2018 where the Middle Kingdom and Hollywood are concerned.

One of the key prospects to consider is a pending new agreement on film import terms to China which will help shape the next few years. Box office growth is expected to continue, with Hollywood maintaining a strong, if never dominant, position. Some believe Hollywood will emphasize a focus on locally-geared movies rather than trying to crack the elusive nut of the co-production that works around the world. Notably, given the way things went down in 2017, it’s unlikely we’ll see major investment flowing from China into Hollywood — but keep an eye on Tencent, we’re told.

At the end of 2016, we wrote that Chinese companies and their growing investments in the entertainment industry would face greater scrutiny in 2017. That certainly came to pass as we saw deals evaporate or announcements never bear fruit while outspoken Dalian Wanda Group Chairman Wang Jianlin took a precipitous public tumble. As China cracked down on capital flight, and with Wanda believed to be over-leveraged, Wang sold off billions in assets, saying the company would put the brakes on Hollywood investments. Also this year, Paramount and Huahua Media agreed to end a slate financing agreement that would have funded 25% of Par pics through 2019 and was to be part of a never-materialized $1B deal announced at the beginning of 2017.

Those are just two examples of once shiny prospects that took sour turns this year. Does it mean that the China-Hollywood relationship is doomed? While shifting, it’s not over. A constant refrain, despite the hurdles and hiccups of the past year, is that Hollywood simply cannot ignore a market of 1.3B+ people. “The health of the box office in China is important to the health of the entire industry,” notes an exec.

So what does 2018 hold in store?

BOX OFFICE

Beijing Century Media Culture

After a lackluster 2016, there was significant growth at 2017’s turnstiles largely led by local phenom Wolf Warrior 2 and its $854M. It also helped that a new ticketing fee, repping about 7% of grosses, was factored into the total pie (and is being counted by the studios so as to maintain a common baseline).

Continuing to bang the drum for homegrown movies, there’s a new government-mandated incentive coming online January 1 that will reward theaters whose intake is over 55% from local pics. China previously introduced such a scheme, but has lowered the threshold. A takeaway here is that it could potentially encourage fraud, a not uncommon practice at Middle Kingdom ticket counters. In 2017, however, the powers that be appeared to take a harder stance on manipulation and the studios for the first time availed themselves of a clause in the longform contract that allowed them to audit business in the PROC. The first audit reportedly found that ticket sales were under-reported in 2016 by about 9%.

There is a school of thought that Hollywood has incentive to become more involved in local production. Although The Great Wall was considered a disappointment, it made $171M in China after being released in late 2016. The Foreigner also performed well as a UK-China co-production that was released during Golden Week, ultimately getting to over $82M. Perhaps most significantly, however, is that the Russo brothers had a hand in the Wu Jing-directed-Wolf Warrior 2.

Says USC professor Stanley Rosen who specializes in China, “China is pushing for investments related to the One Belt, One Road project– the new Silk Road — and the relationship with Hollywood is now taking the form of using Hollywood expertise and collaboration in making blockbuster action Chinese films for the China market, with Chinese heroes, most clearly seen in the collaboration with the Russo brothers in the very nationalistic film Wolf Warrior 2.”

The United States Trade Representative, protectionist advocate Robert Lighthizer, has been involved in negotiations on behalf of the MPAA member companies which will result in a new contract at some point this year. Though talks slowed due to October’s National Congress of the Communist Party, it’s believed they will gather steam in the new year.

One school of thought is that both sides have a great interest in reaching terms sooner rather than later. From a pragmatic standpoint, part of the box office growth is the dynamic with Hollywood product which China needs, and so ultimately it makes sense to update terms so that Hollywood continues to participate actively.

What’s at stake is a potential raising of the quota floor from the current 34 imports which benefit from the 25% revenue share that flows back to the studios (this also goes for imports from other countries, like this year’s massive Bollywood hit Dangal). Thought to be high on the agenda for the studios is a hike in the revenue share percentage, but also more flexibility over release dates. Currently, studios are informed about 30 days out on the release date that’s fixed by China Film Group. That hampers marketing and the ability to get talent to Beijing to promote their product.

The tie-up between Disney and Fox is unlikely to be formalized this calendar year, so its consequences are as-yet unclear. But executives we’ve spoken to agree that there won’t be a sizable impact given all outside players are still constricted by the whims of the local authorities. Disney’s Marvel success in China may lend a hand to Fox which “really doesn’t” have a stronghold in China, says an exec who suggests, “Maybe they can Marvel-ize some of those Fox movies now.”

Disney has made savvy in-roads with its Shanghai Disney Resort (where it’s adding a Toy Story land next year ahead of the 2019 release of Toy Story 4) and for two years running has been granted an extension on its animated titles that have overperformed. In 2016 it was Zootopia, and this year’s Coco is currently enjoying extra play, having topped all prior Pixar films by leaps and bounds. It’s important to bear in mind that China Film Group as a distributor is a commercial enterprise and needs Hollywood product to perform just as much as it needs local movies.

This year’s Top 10 has four Chinese titles in the mix, with five from Hollywood, and India’s Dangal. The full year is expected to be up as much as 20% or more to RMB 55B ($8.31B), the state media authority said in October. But one international distribution exec cautions, “I don’t think they should be patting themselves on the back about the growth. They got lucky with Wolf Warrior 2. Including the booking fee in box office reporting artificially inflates the number, and hence, growth.”

Another exec believes that continued strong growth is in the bag. “You’re still dealing with some 4th and 5th tier cities that don’t have theaters, so the growth is inevitable. You literally have the population of the U.S. that doesn’t have a movie theater yet. It’s just math; it doesn’t matter if there’s a Wolf Warrior.”

When those tiers come further online and with growth in Tier 3, China could ultimately be four times as big as North America, say in the next 20 years. While China is a leader in mobile and other forms of digesting content, it is not thought that theatrical is going away there any time soon.

One exec, nevertheless cautions, “Overtaking U.S. box office keeps getting pushed to another year. They’ve built the infrastructure in the lower-tier cities and now they have to wait for the moviegoing habit to take hold.”

Titles to keep on the radar as potential breakouts for 2018 include Warner Bros’ prehistoric shark thriller The Meg (made via its China joint venture Flagship Entertainment) and Legendary’s Skyscraper. The pics star Chinese box office favorites Jason Statham and Dwayne Johnson, respectively. Also to keep an eye on are local Chinese New Year titles Detective Chinatown 2, Operation Red Sea and Monster Hunt 2, the sequel to 2015’s monster $382M grosser, along with Pacific Rim 2 and Avengers: Infinity War, among others (the latter two are not yet dated).

Earlier this month, China Media Capital Chairman Li Ruigang spoke at the Fortune Global Forum in Guangzhou, predicting that going forward Hollywood and China “will work together more closely than before.” But China’s own industry still has much to learn. “Hollywood is a system. Everything is about an industry. It’s a systematic way of creating content. Education, talent management, creative production, financing. It’s industrial. China is still behind because it (needs) an industrial system for creating content in a sustainable way,” Li said.

Highlighting the disparity in views, Communist party mouthpiece The People’s Daily this month declared China in 2017 “proved it didn’t need Hollywood while showing how reliant Tinseltown dealmakers are in a country it doesn’t understand too well.” It contended that American studios need to drop an “us vs them” attitude and embrace “bilateral filmmaking.” The opinion piece further called China’s unofficial Hollywood blackouts a “win-win” that “pays for itself in terms of attention and generating interest” as U.S. media “carelessly jump all over the action, shocked and appalled by a country that would deny its citizens Hollywood entertainment.”

INVESTMENTS

Associated Press

In October 2016, Wanda came under scrutiny from 17 Washington lawmakers on both sides of the aisle who wanted the company investigated for possible violations of the Foreign Agents Registration Act. But it ultimately was not DC that clipped Wang Jianlin’s wings, it was his own government. Amid a crackdown on so-called “irrational investments,” the authorities in July ordered the country’s biggest banks to stop making loans to Wanda to finance foreign entertainment acquisitions.

Wanda at the time set plans to offload some $9.4B in hotels and tourism projects, this included the studios at Qingdao and the consolidation of its Chinese media assets. Also in July, Wang said Wanda was putting the brakes on Hollywood investments. “Wanda will respond to the state’s call and has decided to keep its main investment within China,” he told the Caixin financial daily. Further adding to the shifts of the past year, Jack Gao stepped down as the SVP of Dalian Wanda and as interim CEO of Legendary in October (he had taken over there when Thomas Tull exited Legendary in January). Also out, Legendary East CEO Peter Loehr exited in May.

(In August, Legendary said it was “well capitalized with liquidity to fund its film & TV slates and operate its business as usual.” Legendary has a hand in two 2018 Universal films that it co-financed: Jurassic World 2 and Mortal Engines, and has Skyscraper on the docket among other titles.)

Earlier this month, Wang outlined a new strategy for the brick and mortar business, saying 1,000 Wanda Plaza shopping centers will be under operation within the next 10 years in China. Observers see this as the Chairman laying the framework for the company’s future, particularly if he sells AMC. A sale, it’s suggested, would not include the Chinese cinemas which would stay with Wanda, the largest local operator.

It is understood that Wanda is looking at listing some of AMC’s international assets while we’ve also been told, “AMC is for sale and they are quietly shopping it.” Wanda denied that Wang was being pressured by the government to divest itself. (Further adding to the swirl around Wanda, just today, reports out of China suggest is downsizing its loss-making Internet Technology Group.)

Other Chinese companies like Fosun — which continues to be acquisitive, but has reportedly considered offloading its stake in Jeff Robinov’s Studio 8 — and Tencent, a major backer of STX Entertainment, are ones to watch in 2018. Tencent has become a media behemoth. This year, it acquired 10% of Snapchat’s parent company and in November became the first Chinese company worth over $500B. China Money Network ranks it as 2017’s most acquisitive company by number of deals at 34 worth some $17B (it is listed in Hong Kong). More than two-thirds of Chinese people use Tencent’s messaging apps WeChat and QQ. Collectively, Chinese users spend 1.7B hours a day on the company’s apps. Tencent also had a hand in global hit Kong: Skull Island this year.

Universal’s slate deal with Perfect World, meanwhile, is in good stead. All existing pacts that were already fully-funded before the government crackdown on capital flight are not believed to be in peril.

Still, one exec caveats the relationship between Hollywood and China will be “further drying up. Relations between the U.S. and China are going to become more pugnacious and frosty.”

This person continues, “You’ll see a movie here, a script purchase there, but you won’t see the kind of volume we used to see. It used to be that America was trying to reach their hand in and China was holding it back. They are going to start reaching out, but not like they’ve been doing, like the Chinese writing a check for rights. Now it will be looking inward.”

Another exec we spoke with adds that 2018 “will continue to be a challenging year…. Even if they scale back there, you still have a lot of Chinese investors who have some battle scars.” A lot of investors look at what happened with Wanda and Wang and say, “I don’t want to get caught up in massive debt. In China, it’s a survival of the fittest on the film front. For every Wolf Warrior, you have massive losses. There is an escalation of fees for talent for middle-range actors… and even on the television side. You have mid-range stars pulling in $20M to $30M a year… Talent fees have gotten out of control.”

DIGITAL/STREAMING

Netflix has continued to make in-roads into China, specifically under a licensing deal with iQiyi in April. Lionsgate has been streaming through that same company since fall 2014 and has a long-term output deal with the massive platform. IQiyi also has deals with Warner Bros, Fox, NBCU and the BFI and is said to be planning an IPO in the U.S. this coming year.

In a version of the U.S. battle among streamers Netflix, Amazon and Hulu, the three Chinese rivals — Alibaba, Tencent and iQiyi owner Baidu — have all invested in video content.

Jeffrey Katzenberg’s new venture, WndrCo, has been looking at China. Says Katzenberg who has vast experience in the market, “We are very focused on extremely high-end, super premium short form content to be delivered on a mobile platform called NewTv. There is high interest for this new service in China which as a mobile-first territory has been a leader in the digital mobile revolution.”

Also this year, Tencent entered a three-year pact to make Tencent Sports the exclusive digital streaming media partner of the NFL in the Middle Kingdom. This was in August, before the NFL was hit with a massive ratings decline domestically amid the escalation of the national anthem protests.

Certainly in the case of Netflix, it hasn’t been entirely smooth sailing. The service’s Bojack Horseman was quickly removed from the platform after streaming for just two days in June and with “adjustments” needed to be made to the content.

Says USC professor Rosen, there is a “tension between the growth of online video, which has been less censored, and the new regulatory crackdown to bring it in line with what’s been approved for radio, film and TV. The government has been more reactive and less proactive when it comes to what’s acceptable for online video, trying to get people and platforms to engage in self-censorship. The tug-of-war should continue in 2018.”

POLITICS

Rex/Shutterstock

Some points to consider: In late November, it was reported that the U.S. had filed arguments to the WTO over China’s future in the organization as to why it does not deserve the distinction of a “market economy” that would give it preferential economic treatment. In late December, the Chinese embassy in the U.S. said confrontation between the countries results in mutual losses. Xinhuareported that an embassy spokesperson said cooperation between Beijing and Washington leads to win-win outcomes, whereas confrontation results in mutual losses, and that the U.S. would be better advised to get accustomed to China’s development and accept it.

With regard to Donald Trump, says an executive, trade policy maker Peter Navarro (who penned the book and subsequent documentary Death By China) “has lost a lot of influence in China and Steve Bannon was also anti-China… so it seems that Trump has some pretty hard rhetoric on China ongoing. The tax bill definitely is about keeping business in the U.S. There is a lot of conversation about that in China and how much the corporate tax will affect business. There are those cross-currents.”

But Trump “will do whatever he can to keep good relations,” says another exec. “He’s already demonstrated himself to be someone who likes to be loved, so he will do whatever he can to keep that.”

On the China side, it’s been all about soft power. In August, however, Rosen made the point to Deadline that it was “extremely limited” because there are other interests that are even more important. “In the heirarchy of values in China, soft power is not as important as social and political stability” within China “and geo-strategic assertiveness of Chinese power in different parts of the world, retaliating in different countries when needed.” Today, Rosen expands, “In other words, even if arresting and imprisoning human rights lawyers leads to a bad press overseas and therefore hurts China’s soft power, that’s an acceptable price to pay because social and political stability at home is more important than soft power abroad.”

Original Article

Deadline

The post China & Hollywood: After A Topsy-Turvy 2017, What’s In Store For The Year Ahead appeared first on News Wire Now.

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