For years, China has held substantial economic promise, with the outsized growth many have long envisioned only recently beginning to come to fruition. During this time, U.S. media and entertainment (M&E) companies have been quietly chipping away at the opportunity, navigating the market’s onerous regulations with high-quality brands and content, evolving government relationships and an increasing appreciation for local culture.
At present, the most immediate opportunity for U.S. M&E value creation in China resides at the local box office, where restrictions on foreign studios have eased (however, ample room for improvement remains). BofA Merrill Lynch Global Research estimates the Chinese box office could yield $5 billion in value potential for Hollywood studios by 2017 vs. approximately $2.2 billion today, including imported and local productions (with this figure potentially doubling under further relaxed regulatory conditions).
Following years of obscurity, China’s domestic theatrical market has transformed into a rapidly growing priority for U.S. film studios — a concept nearly unheard of just five years ago. From 2007-12, China’s box office has improved at a compound annual growth rate of 47%, to $2.7 billion (becoming second largest in the world), fueled by a 30% CAGR in screens, as well as loosened foreign import quotas and a fast-developing local production market.
Indeed, similar to Hollywood’s importance as a leading U.S. exporter, many see parallels to China’s theatrical “coming out” — as the government appears intent on fostering the development of China’s own world-class film products, rooted in local culture and values. At present, BofAML estimates nearly 560 films get made each year in China, with 150-160 releasing theatrically and 70-80 becoming notable box office contributors.
The top 10 Hollywood films in China generated a steady 30% share of the 2012 box office, whereas the top 10 local productions generated 26% of the 2012 box office (vs. 24% in 2011). The uptick in local hit movies reflects the expanding production industry (both in terms of quantity and quality) and preferential regulatory treatment. Regardless of product origin, though, the expanding exhibition footprint and rising consumer purchasing power are pushing all blockbusters into new territory, as the most successful films are now consistently generating more than $100 million in revenue at the Chinese box office.
Assuming the government continues to manage toward a 50/50 foreign/local box office mix, BofAML estimates U.S. studios could generate approximately $3.4 billion in Chinese box office in 2017 from imported fi lms, plus an incremental $1 billion from local co-production efforts (including international proceeds). Admittedly, and only time will tell, there are several variables that could cause this figure to change significantly, including box office shares and the international appeal of local co-productions that release outside of China (these estimates are made assuming modest performance).
Naturally, should the market become large enough where China believes less regulation is needed to achieve local growth objectives, potentially loosened import quotas and/or content-owner splits could drive U.S. studio value substantially higher, perhaps more than doubling to more than $10 billion using box office shares and splits that are more consistent with mature, international market standards.
Outside of the theatrical market, downstream potential for Hollywood studios still appears small, given historical intellectual property issues. Although China is home to a rapidly developing over-the-top market (including YouTube-like services such as Youku and electronic sell-through models), most services are dominated by locally produced television content that is free and advertising supported.
Outside of theatrical content, development of high-quality tourism/out-of-home entertainment destinations is also accelerating in China, leaving theme park operators with globally recognized brands well positioned to harvest demand.
To date, though, most of China’s theme park inventory has lagged behind Western innovation and quality, yielding an opportunity for U.S. operators to help drive the market to new heights.
Comcast Corp. is reportedly planning a Universal-themed park in Beijing (potentially taking a minority stake with a Chinese state-owned enterprise as partner), SeaWorld Entertainment continues to explore “cap-ex light” opportunities in-region (geared more toward warm-weather, unpolluted areas), and Disney remains solidly on track to open its Shanghai Disney Resort in early 2016.
In many respects, BofA Merrill Lynch believes that Disney Shanghai is poised to take the Chinese theme park industry to the next level, both from quality and attendance standpoints. After nearly a decade of negotiations, Disney Shanghai is the largest and highest-profile Chinese investment made to date by a U.S. M&E player.
Within the filmed entertainment and theme park arenas alone, BofAML estimates $10.6 billion in incremental value could be attainable over the next five years. BofAML estimates the Chinese M&E market at approximately $73 billion, and projects it will grow 10.2% over the next fi ve years vs. U.S. growth of 3.8% and global growth of 4.0%.
However, given regulatory restrictions, the opportunities for U.S. M&E companies are decidedly more unique relative to other emerging economies. For example, due to media controls and security interests, foreign programming networks are essentially restricted from landing feeds in the market, rendering China’s vast 386 million TV-household footprint (just 55% penetrated for pay-TV services) into an aspirational target for the time being.
Jessica Reif Cohen is senior media and entertainment analyst, BofA Merrill Lynch Global Research. This column is copyright 2013 Bank of America Corporation and reprinted by permission.