China Rising: How Four Giants Are Revolutionizing the Film Industry

Chinese Film Industry Rising
Victo Ngai for Variety

China and the Hollywood film industry have engaged with each other for much of the past decade, with both sides slowly discovering the opportunities, learning the limits of cooperation and enlisting different business practices that best adopt this new intel. The relationship is replete with promise, yet still fraught with distrust, as Chinese investors have, with few exceptions, kicked more tires than written big checks. There’s plenty of reason to believe, however, that the entertainment alliance between the two powerful nations will inevitably grow closer and more symbiotic as their respective ambitions continue to coalesce.

Given China’s watchful eye on Hollywood, it is certainly not out of the question that someday a Chinese conglomerate will acquire a U.S. studio.

On the mainland, property and leisure industry giant Dalian Wanda, and Internet behemoths Baidu, Alibaba and Tencent (dubbed “BAT” in the Chinese press) are engaged in a race to change the way the country’s film industry operates. Their business models confound assertions that all Chinese companies are simply copycats of successful Western firms. Instead, they are soup-to-nuts integrators of all the components along the movie life cycle, either through organic growth, acquisition or alliance.

As Chinese society rapidly becomes more individualistic and consumer-oriented, these companies, which have the ability to connect the different segments of the local market, become an increasingly attractive partner to American entertainment outfits looking to get their content in front of as many global eyeballs as possible. Wanda, Baidu, Alibaba and Tencent’s assets are vast and powerful, giving them the ability to attract audiences across every major media platform. Wanda owns the largest cinema chain in China; Tencent boasts nearly 800 million social media subscribers, and is the largest online games distributor on the planet; Baidu is China’s leading search engine; and Alibaba is the world’s biggest e-commerce business.

Victo Ngai for Variety

Alibaba and Baidu have major stakes in two of China’s top three online video companies (which in turn are becoming leading film producers); Alibaba and Tencent control ticketing systems. And Wanda is building the theme parks and hotels that extend and monetize the brands they have created. Alibaba’s market capitalization is $246 billion, bigger than Disney and Time Warner combined, with $21.1 billion available in cash. Yahoo recently announced it is looking to spin off its 15% stake in Alibaba — a holding valued at $40 billion.

The four companies are involved in the commercial cycle of just about every film release in China: Wanda as financier, producer or exhibitor of movies; Alibaba as producer, ticket vendor or promotional partner (notably through its stake in online video platform Youku Tudou); Baidu as a marketing conduit, promotional partner or online video platform (it is owner of iQIYI, top rival to Youku Tudou); and Tencent as social media vector.

Online video is hugely significant in China. According to official statistics, by mid-2014, there were 439 million people consuming video content in that manner on the mainland. They enjoy a wider selection of programming than traditional TV provides, and shorter commercial breaks. And they tend to be a younger demographic.

The leading over-the-top video firms — which include Youku Tudou, iQIYI and the separately listed LeVision/LeTV — position themselves as the partners of the Hollywood studios, not just for the post-theatrical ancillary market, but as pre-release marketing platforms. With film fans as their core audience, they screen hundreds of trailers and teasers, and produce their own TV shows. Youku Tudou co-marketed “Despicable Me” and Disney’s “Captain America: The Winter Soldier” in China, carrying live footage of the film’s Beijing premiere and booking Scarlett Johansson on its hourlong “Star Talk” TV show.

Meanwhile, Tencent, as owner of messaging services QQ and WeChat, has the ability to communicate with just about every Chinese citizen with disposable income. It’s that kind of critical mass that helps bring viewers to its Tencent Video site. Since the launch of WeChat Film last year, backed by former News Corp. executive Jack Gao, Tencent also sells tickets though an app that links consumers to every major cinema chain in China. And it harvests the data on buyer behavior and location.

Chinese companies are increasingly making inroads into the U.S. as well, some setting up shop in Hollywood’s front yard. Wanda, which acquired AMC Theaters in 2012 for $2.6 billion, last year paid $1.2 billion for a building in Beverly Hills that will serve as headquarters for its North American entertainment business. Wanda has mulled the possibility of buying into MGM and Lionsgate, and weighed a bid for Time Warner after Rupert Murdoch’s abortive offer for the media giant. In the not so distant past, Alibaba also was circling Lionsgate. The two companies partnered last summer to launch Lionsgate Entertainment World, a streaming service exclusively available on Alibaba’s set-top boxes.

Last fall, Alibaba founder Jack Ma met with a number of Hollywood executives, including the top brass at Sony Pictures. Alibaba and Sony are understood to have discussed co-investment in Adam Sandler’s computer-animated feature “Pixels,” “Spider-Man” spinoff “Sinister Six,” fantasy “Dragon Raja” and manga adaptation “One Piece.”

Other deep-pocketed Chinese outfits are early dance partners of global-minded Hollywood startups. Chinese conglomerate Fosun Intl. is investing $200 million in Jeff Robinov’s Sony-based production banner Studio 8. Private equity firm Hony Capital is a backer of producer Robert Simonds’ recently launched film and television studio STX Entertainment, with the goal to invest $1 billion over the next five years, according to reports. The Hony-STX deal also includes Shanghai Media Group, a leading state-owned film, media and entertainment player. (Disney is also in business with SMG, both in the film sector and as co-investor in Disney’s upcoming Shanghai Disneyland theme park.)

Taking into account Wanda’s AMC and property deals, along with Fosun’s Studio 8 pact and Hony’s STX agreement, China’s investment in Hollywood stands at about $5 billion, though most deals have been much smaller — in the tens of millions of dollars. “For a minimal investment, the Chinese companies are looking at getting in on the ground floor,” says Tuna Amobi, media and entertainment equity analyst at S&P Capital IQ.

Players such as Fosun, Wanda, the BAT trio and others, including Xiaomi, the world’s third biggest smartphone maker by volume, are now on a much more equal footing financially with the U.S. entertainment conglomerates than they were even a couple of years ago. And any one of these giants could afford to gobble up one of Hollywood’s major studios.

Last week, Hunan TV, the second-largest broadcaster in China, and Lionsgate were in advanced talks on a three-year deal in which Hunan would invest 25% in Lionsgate’s slate, and the Hollywood studio would distribute Chinese films produced by Hunan in overseas markets. The pact was valued at $1.5 billion.

Even a movie latecomer like Tencent can snare major deals — for example, the exclusive distribution agreements it signed recently with HBO, National Geographic and Sony Music.

In the near term, China’s major distributors, which now include Tencent, Wanda, Baidu and Alibaba, are hungry for content for their theaters or to exploit online in their home market.

From a longer-term perspective, these companies are seeking international distribution for the movies they invest in, and a bigger slice of the global entertainment pie.

“Chinese companies feel they have not brought storytelling to life in a way that has appeal to both Chinese audiences and, they hope, global audiences,” says Tom Connolly of EY global media. “So they look to the West; Hollywood has created these robust films and companies that have rich, deep libraries of content.”

With the Chinese government having added culture to its list of priorities over the past three years, all the players are in a hurry for prestige product — the kind that puts an Oscar in their trophy cabinet, or a global movie franchise in their library.

Chinese firms have made splashy, one-off investments in movies including “Karate Kid,” “Cloud Atlas,” and “The Expendables,” and have exhibited growing levels of cooperation on films such as “Looper,” “Iron Man 3” and “Transformers 4.” For their part, Hollywood studios have invested in a handful of Chinese-language titles intended solely for Chinese-speaking territories. But for all the talking, there has been little of real scale. That may now be changing.

Each of China’s big four approaches the film sector from a different starting point — Baidu from Web search, Alibaba from e-commerce, Tencent from social media, and Wanda from property development — but they have converged around entertainment, and the idea that demographics, mobile technology and global consumer aspirations give them the ability to change the market and deliver huge profits.

The four behemoths have reached a point where big data and network mass are being used to change how entertainment is conceived, sold and consumed. (Last year when China’s Film Bureau announced it would start providing more box office information, it was significant that it said it would publish via social media, rather than with a Web page.)

“The influence of Internet innovation on the culture industry is no longer restricted to movie ticket sales, but has expanded to investment and content production,” says Liu Chunning, president of Alibaba’s digital entertainment business group.

What these Chinese companies are thinking and doing matters hugely to Hollywood.

Already the largest international market for U.S. films, China saw ticket sales increase by 213 million admissions last year. It is the only significant theatrical growth market in the world. Box office improved by 33% last year to reach nearly $5 billion. Powered by the daily additions of 15 new cinema screens, there’s every reason to expect that growth will continue for several more years, and that by 2017, Chinese grosses will exceed those of North America. According to government data, China had 23,600 cinema screens at the end of 2014 — still small for a population of 1.3 billion, and compared with the approximately 40,000 screens in the U.S. But the total number of screens in China grew by 5,000 last year; in the U.S., the number of screens has been growing by less than 100 per year since 2010.

For many in China, the potential for profit from entertainment was driven home in late 2012 by the success of the $5 million screwball comedy “Lost in Thailand,” which grossed $200 million.

This return-on-investment lesson in demographically targeted film production and marketing was repeated throughout 2013 and 2014, when movies such as “Tiny Times,” “The Continent” and “Dad, Where Are We Going?” were driven to blockbuster status by social media and young stars from TV and new media, rather than by leaning on supposedly bankable actors or directors, big-budget special effects or traditional advertising. The first “Tiny Times” reached $79 million without the benefit of a single street-side poster.

Wanda and its counterparts are especially well-placed to benefit from this kind of economics.

Indeed, by 2020, “Wanda will no longer be a property company but a global technology service firm,” says its chairman, Wang Jianlin — with cultural tourism and entertainment commerce at its core.

At the end of 2014, Tencent, Alibaba and Fosun were three of the first six private companies in China to be granted banking licenses, something that will spur more online-to-offline commerce. Last month, Tencent launched WeBank.

Tencent and Alibaba both recently increased their equity stakes in Huayi Brothers, China’s leading private-sector film conglomerate. And last year, Xiaomi took equity stakes in rivals Youku Tudou and iQIYI.

Having largely established the new means of communicating with audiences, the four companies are working hard to understand what turns audiences into consumers, and to have the goods in place to sell to them. That has enabled the quartet to diversify, and become film producers and financiers.

Of the four, Wanda has made the boldest move into content. Due to a desire to ensure a steady supply of product for its 150 multiplexes, Wanda Movies has become a financier, producer and distributor of local films. And with one eye firmly on the underlying property-development angle, parent company Dalian Wanda is now constructing a huge production center in the coastal city of Qingdao. Set to open in 2016, the Qingdao Oriental Movie Metropolis will include a 20-stage studio to be designed by Pinewood Shepperton, and a festival venue, wax museum and film museum.

Meanwhile, Alibaba, also targeting content, spent $806 million to acquire a 60% stake in ChinaVision, a production company with a Hong Kong listing, some publishing assets and handful of first look deals — including one with iconic director Wong Kar-wai. In a rare coup, it hired Zhang Qiang away from his job as vice president of state-owned China Film Co. to become CEO of the newly christened Alibaba Pictures.

“The company will create a comprehensive ecosystem for its film and television production and marketing businesses,” Zhang says. “By using big-data technology to analyze consumer shopping patterns and behavior on (e-tailers) Taobao and Tmall, Alibaba Pictures expects to be able to create customized movies and TV programs while marketing and distributing them efficiently across Alibaba’s platforms.”

At a more grassroots level, Alibaba last year unveiled Yu Le Bao (literally “entertainment treasure”), a consumer financial product that sits somewhere between a savings bond and crowdfunding. Investors can put up as little as $16, and are offered as much as a 7% return, plus a chance to have input on a film’s casting choices. One of Yu Le Bao’s first investments was “Tiny Times 4”; another is Jean-Jacques Annaud’s “Wolf Totem.”

“Yu Le Bao aims to provide a grassroots investment platform to bring the public closer to the cultural industry,” says Liu, who is also expected to take Alibaba into talent management.

Alibaba has a 16.5% stake in Youku Tudou, which owns a five-year track record in film production. Last year, the video-streaming company was co-producer of “Old Boys: The Way of the Dragon,” which made $32.8 million at the Chinese box office. In August, Youku Tudou launched Heyi Film, a development and finance company that aims to incubate more of its shorts and series into properties that can be exploited both online and off.

Baidu’s involvement in movie production is largely through iQIYI, which unveiled production company iQIYI Pictures in July, and announced at the time that its initial slate comprised seven local movies and one unspecified Hollywood title. Baidu and Tencent have both launched products similar to Alibaba’s Yu Le Bao.

Moving into production brings several advantages to the online groups. Not only do they obtain rights to exclusive content and premieres, but by dealing with censors at an early stage in the production process, they may avoid being tripped up by regulatory issues at a later date. Additionally, international co-productions with such companies could avoid import quotas or Film Bureau-imposed date restrictions of imported movies.

“Long term, we expect to be in business with some of these online companies like Alibaba or Baidu,” says Steve Ransohoff, co-chair of completion bond company Film Finances, which opened its first China office last month. “They may adopt the negative pickups model, as it allows them to minimize production risk and pay on delivery. It helps to have credit-worthy companies whose contracts banks can discount.”

Whether the financial firepower of Wanda or Alibaba will next be trained directly at a Hollywood studio is still a matter of conjecture.

“There is this odd perception in Hollywood that China is a giant ATM. It is not,” says Marc Ganis, co-founder of Jiaflix, a transactional VOD company with close ties to China Central Television’s online unit. “These are sophisticated companies that are not going to throw huge gobs of money at simply anything. … One major deal has occurred — Wanda’s takeover of AMC — and that was a real estate and currency deal.”

While another sizable deal or outright acquisition could be in the offing, a more likely route into Hollywood seems to be through business partnerships and strategic stake-buying that over time may evolve into something bigger.

Fosun’s deal with Robinov already has meant that “Overheard,” an action thriller from Bona Film Group (in which Fosun also has a percentage), is one of the first pictures on Media 8’s debut slate. Wanda may not be prioritizing Hollywood investments, but it has quietly taken a position in Antoine Fuqua’s upcoming boxing drama “Southpaw,” starring Jake Gyllenhaal.

“Chinese companies are acutely aware of corporate history and the track record of foreign investors in Hollywood,” says one Hong Kong-based executive who is close to both Alibaba’s Ma and Lionsgate CEO Jon Feltheimer. “As much as they would like to have an Oscar, they are even more careful not to lose face and prestige through an ugly foreign misadventure.”

So the Chinese route to Hollywood may continue to be a learning experience that combines a mix of organic growth, opportunistic movie investments and modest dealmaking.

That stands in contrast to the picture back home, where Wanda, Baidu, Tencent and other well-equipped power players are expected to wreak further revolutionary changes on the Chinese film scene.

“Like it or not, the time to shuffle has come,” says Yu Dong, founder and CEO of Bona Film. “Traditional film companies in China will eventually have to work for the three tech giants’ film branches.”

Todd Spangler contributed to this report.

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  1. john okafor says:

    HOLLYWOOD MOVIE INDUSTRY
    Hollywood is currently looking for young talented persons that are best for acting in movie please the FORM is currently going on, so if you really want your dream to come through get your FORM.
    JOHN OKAFOR

  2. Steve Chicorel says:

    Great market summary Patrick. Yet, I think Yu Dong’s last comments is not quite right.. Like our unveiled new China US IP company and from what I know about other emerging funds and local Chnese companies thinking & acting big… I think we are going to see stratification of power rather than consolidation or control by a small group… It is like early Hollywood on steroids… studios emerging, technology & money leading the way… Rags to riches production models, 800,000,000 active internet users – the new theater of the future… and instead of being a purely USA inspired phenomenon — the new Hollywood a hybrid bi product of China and the USA, “communist capitalism” at its finest.

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