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China Box Office Slowdown Yields Winners and Losers

The bad news about the Chinese box office has been trickling in steadily since mid-year, when it became apparent that the most optimistic projections — China to overtake North America by 2017, among others — were wildly off course.

But some industry experts are now describing the single-figure growth rate — after 49% in 2015 — as a much-needed correction. And many companies are looking forward to renewed vigor after a period of retrenchment.

The sharp contrast with a frothy 2015 makes the slowdown particularly apparent. Its causes include a reduction of the ticket price discounts offered by both distributors and online ticketing agencies, and a glut of me-too movies with the same stars.

Discovering the weakness of the movie slate has been a harsh reality check for filmmakers and investors who, since 2012, started believing that they knew what Chinese audiences wanted, and had become used to rising budgets and faster-rising receipts.

Where last year 13 Chinese-made films passed $100 million, so far in 2016 only 10 have achieved that target. And yet that should have been an easy one to beat given that the number of theaters in operation across the country has expanded by some 20%, from roughly 31,500 at the end of 2015, to close to 40,000 at the end of this year — not far short of the 43,000 in North America.

The poor performance of Chinese films has highlighted poor screenwriting and storytelling skills, and casting decisions based on fashion, social-media following, and commercial endorsements, rather than genuine craft.

Plus, the decade-long glut of finance pouring into Chinese movies from outside the industry has been blamed for encouraging production haste and creative shallowness. If those hot money flows now dry up, the argument goes, budgets may become more reasonable, weaker firms will quit the business, films will get better, and talent will rise to the top.

But it’s unclear when that inflection point will occur.

In the margins of the Shanghai film festival in June an unprecedented parade of corporate announcements were released. These ranged from massive production slates, to finance arrangements, to international co-production plans. They came from companies including Huayi Bros., Alibaba Pictures Group, Imax China, and South Korea’s CJ Entertainment — and from filmmakers such as Ang Lee, Renny Harlin, and Michael Uslan.

More recently, big slate announcements have continued from Tencent Pictures, ticketing firm-turned-producer Weiying, and India’s Trinity Pictures with China Film Group.

Yet other signs point to the beginnings of a shakeout getting under way.

This is most evident in the exhibition sector, which has seen box-office growth undershoot the expansion of screens and seats, and where consolidation is now occurring.

Some smaller cinema chains have already been acquired: Antaeus’ 217 screens by games-to-film company Perfect World; Shimao’s 18-complex chain by Wanda Cinema Line; and the Hangzhou Star chain by Alibaba Pictures.

Significantly, the moves by Perfect World and Alibaba represent first-time diversification into the exhibition sector, suggesting that the deep-pocketed conglomerates are using the new weakness to pursue further vertical integration.

Alibaba also bought a small minority stake in the Dadi cinema chain and said it would build its own theaters.

There has also been consolidation between online ticketing and marketing firms: online giants Meituan and Dianping announced a merger at the beginning of the year; ticketing specialist WePiao merged with Gewarra; and Wanda acquired Mtime, an information and marketing site that also sells tickets. Alibaba shifted its Taobao Movie business into Alibaba Pictures in order to achieve better integration.

In an interesting twist, Hollywood may also benefit from the Chinese slowdown. The distribution of imported movies is controlled by Chinese regulators and state-owned enterprises operating a widely misunderstood quota of 34 revenue-sharing films per year, as well as a somewhat smaller quota for titles imported on a flat-fee basis.

Throughout this year there have been signs that quotas are being operated more flexibly. More flat-fee deals are being converted into revenue-sharing deals. The summer blackout period, when only Chinese movies get significant releases, was shorter than last year. And September and October saw six consecutive weeks when Hollywood films were allowed near day-and-date outings, whereas in the past delays of up to three months was the norm. Now there is talk of the revenue-share quotas expanding in 2018.

Whether that is a byproduct of China Film Corp.’s recent semi-privatization, a negotiating tactic ahead of the 2017 Hollywood-China trade negotiations, or a sign of China’s film regulators hearing the pain of the exhibitors is a moot point. But if it helps kick the box office into a higher gear it will be widely welcomed.

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