Local B.O. experiencing supercharged growth

With the Olympics starting Aug. 8, all the world — including Hollywood — is focusing on China. But the U.S. studios face a dilemma in the world’s most populous market. China B.O. is experiencing supercharged growth, expected to climb 21% this year over last, and an astonishing eight times the total tally of 2001.

But while outsiders are in awe of China’s growing muscle and expanding economy, Hollywood congloms are wondering whether entertainment in China is worth the effort.

On the upside, five of the top 10 movies so far this year are MPA member productions and a sixth is a U.S.-Chinese co-production, “Forbidden Kingdom.” “Transformers” hit $37 million there last year (only three global territories delivered a bigger gross of the pic). There can be few other major territories in which Hollywood has enjoyed five-fold local currency earnings growth over the past five years.

And with the Chinese yuan now steadily climbing against the U.S. dollar, Hollywood’s gross revenues from China have grown more than six times since the beginning of the millennium.

Despite the apparent optimism, activity is substantially smaller than once envisioned: Sony has scaled back, Warner’s joint venture with state-owned China Film Group is not the force it set out to be and, after several years, Disney has recently greenlit only its Chinese second movie.

Unfortunately, that’s because the studios’ case against investment there is powerful.

Non-Chinese films are subject to import quotas (20 films per year, on a revenue-sharing basis) and it is Chinese bureaucrats, not commercial factors, that have the final say as to which films hit Chinese screens. Even though other non-Chinese titles can be released if they are bought at a flat fee, the theatrical market is subject to regular blackout periods, when Hollywood films cannot be released.

Most painful to Hollywood are the distribution terms. The studios earn rentals of just 13%-17% from those 20 films.

And there are bigger issues. These include what investment bankers would call “sovereign risk,” meaning a sudden regulatory change that can overturn any existing business plan.

Censorship is used as a socio-political tool, preventing certain genres of film (and perhaps certain people) from commercial exploitation. And while the red pen continues to be useful, there is little prospect of China developing the film classification system that it has long promised.

“China is no longer on top of the Hollywood studio’s priority list,” one exec tells Variety. “It just isn’t worth the corporate effort. You get better returns in Russia and better market access in India.”

And there is a chronically weak filmgoing culture.

At the Shanghai Film Fest in June, Han Sanping, head of China Film Group, said, “There are more than 300 cities in China with populations of over 1 million people without a single cinema screen.”

He added that if each were to have a multiplex, China’s box office could double current forecasts. (The implication was that his perhaps-to-be privatized company could help build them.)

He then suggested that rural areas are even more underscreened and if tens of thousands of additional mobile screening facilities were available, box office could be transformed still further. “If the Chinese film industry is really to grow up it needs to fall in love with capital,” he said.

Warner Bros Intl. Cinemas pioneered the idea of multiplexes, but decided to pull out of China two years ago because of regulatory issues concerning foreign ownership. Still, the company had the right idea. Theater building is gathering momentum. Last year saw some 493 new screens come on stream, compared with 366 in 2006.

So much potential

Per-capita cinema visits are among the lowest of any rich country. Since multiplexes are expensive and restricted to the biggest cities, moviegoing is an elite pastime. Disc piracy and now online piracy provide considerably cheaper alternatives. They also represent faster access to films.

Few movies are released in China day-and-date with the rest of the world — that even includes official Chinese co-productions like “The Mummy: The Tomb of the Dragon Emperor” or assisted productions such as “Mission: Impossible 3.” Currently there are no announced dates for “The Dark Knight” or “Indiana Jones” to be released in China.

The Hollywood movie congloms would be happier about investing in the Chinese film biz if they could also have a piece of the television market. Not only would it help them develop brands and characters, it would also allow them access to China’s booming advertising market. For the moment, foreign-owned TV stations are not permitted except in the kind of hotels that outsidersfrequent and in residential “foreigner compounds.”

However, the increase in screens is allowing wider film releases and box office records to be regularly broken. Less than five years ago, “Hero” became the first local film to exceed yuan 100 million ($14.4 million at today’s exchange rates, but less than $12 million at the time). Now part one of John Woo’s “Red Cliff,” released on 1,200 (digital and 35mm) prints, is heading toward $40 million, with a second installment due out in January.

Though Hollywood is wavering in its hope about China, such figures offer reasons for optimism. In addition, the rapidly-growing middle class may improve things, and there is a lure of so many potential audience members and an industry that is so young. The modern age of cinema in China is probably less than 7 years old.

When Chinese box office hit its nadir in 2001, at just $73 million, it was worth less in revenue terms than the Philippines or China’s own satellite Hong Kong, with a population of just 7 million people.

Box office this year is expected to hit $590 million, up 21% from last year’s $489 million.

The local industry is growing, with 400 local film productions expected this year, a big jump from 350 last year.

CFG is still the biggest player, but no longer the only game in town. State-backed companies such as Bona or private firms Huayi Bros., Chengtian and others have accessed foreign capital and are pulling together production and distribution slates that make them credible partners.

Rules and regulations

Hollywood was given hope for the Chinese industry — and for potentially lucrative co-productions — as China spent several years working to modernize its film market. It consolidated studios and freed up some of their operations, issued distribution licenses, allowed the rise of independent producers and experimented with ownership changes in the exhibition sector before deciding that movie theaters cannot be controlled by foreigners but may be owned by Hong Kongers.

But momentum was halted last fall. The media ministry State Administration for Radio, Film & Television took a harder line in late 2006, but it really flexed its muscles after political miscalculations allowed the release of “Lost in Beijing” (subversive) and “Lust, Caution” (decadent, and a major hit to boot).

New 10-point censorship rules allow no moral ambiguity and a tighter script approval system. Filmmakers have few options, though interpretation is still imprecise. And where previously censors were often praised by filmmakers who received discreet advice and guidance, regulators are now viewed as more likely to err on the side of caution.

The enforcement of content restrictions has also had an impact on co-productions and there is a tangible effect in the once free-wheeling Hong Kong industry. These days few Hong Kong films are made without an eye on the mainland market.

The Hollywood studios’ best prospects for improved market access and trade terms may lie with two factors beyond its control: the growth of Chinese-owned multiplexes with their demand for fresh product; and the emergence of strong private sector companies in the production and distribution sectors which can be flexible loc
al partners. But that is a long-term perspective and requires patience.

Meanwhile, film folk are waiting for the Olympic Games to be over. The Chinese government has spent considerable energy focusing on the Games and the opportunity to change its image. But only after the Aug. 24 wrap of the Games will the biz begin to see whether the brakes will be released and the charge for growth can restart.

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