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How China’s Tech Giants Charged Ahead When Coronavirus Shut Down Cinemas

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Kirsten Ulve

Things got weird on the Chinese Internet in January.

With at least 760 million of the nation’s residents — a group more than twice the size of the U.S. population — stuck at home amid coronavirus-imposed restrictions, people got creative and let their freak flag fly on the country’s local version of TikTok.

As COVID-19 swept through China during the Lunar New Year holiday, typically one of the year’s biggest moviegoing periods, the country’s most engaging content ended up on mobile, not the big screen. Would-be moviegoers instead posted video clips of themselves going curling in their kitchen with pots and wet mops, or playing pool on the dining room table with cups and cherry tomatoes. Others channeled the vibrant spirit of the canceled new year’s temple fairs by staging ring tosses with milk cartons and dustpans, or re-creating traditional lion dances with improvised costumes: a trash-can head and a spare blanket for the body.

And then, in the three days between Jan. 25-27, a whopping 600 million people tuned into digital giant Bytedance’s various video platforms to watch, for free, the only new blockbuster they’d have access to for months: director Xu Zheng’s family comedy “Lost in Russia.” For the first time, people across the country were watching a big, theatrical tentpole premiere on their phones.

It was an unexpected cap to the most tumultuous week in Chinese box office history. Expectations of record-breaking numbers vanished as the virus spread, leading to mass refunds and cinema closures. It also offered a peek at how the coronavirus is catalyzing a tectonic shift in Chinese entertainment away from conventional models and toward digital ones.

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Variety

“Obviously, the world has changed. It will not come back to the way it was before,” predicts Smart Cinema CEO and former Wanda executive Jack Gao. “In the future, people will talk about ‘before 2020’ and ‘after 2020.’ It will be a big deal — a landmark.”

In aggressive moves to stop the spread of the coronavirus, which first appeared in the city of Wuhan late last year and ultimately resulted in more than 84,000 known cases and more than 4,600 deaths, China cordoned off entire regions, shut down most of its economy and finally, in late March, banned almost all foreigners from entry.

The country has suffered the permanent closure of at least 2,300 cinemas in the first two months of the shutdown alone — equivalent to the loss of up to 12,000 screens, or nearly 20% of China’s theatrical release capacity, says research consultancy Artisan Gateway. Fewer screens will mean a lower box office ceiling going forward, even when cinemas reopen.

China briefly attempted to restart about 4% of its cinemas in March in regions where the pandemic appeared to be under control. But business was dismal — at one point averaging less than one person per screening. With everyone likely fearing second-wave infections, authorities soon closed theaters again nationwide.

Authorities estimate ticket sales will drop by more than $4.2 billion this year, nearly half last year’s $9.2 billion annual total.

This is not the first time a major health crisis has fundamentally changed the nature of China’s economy and cultural habits. Though much shorter and less deadly, the SARS pandemic in 2003 caused a similar seismic shift, paving the way for China’s now-booming e-commerce sector.

At the time, the need for people to stay home, coupled with the increasing affordability of computers and connectivity, converged to get consumers to start rethinking what was possible online.

That turned out to be a boon for Alibaba, which launched its eBay-like Taobao retail platform amid the pandemic and began its shift toward the consumer-facing businesses for which it is now best known. Even today, the SARS era remains a key part of the firm’s origin story: Every year, it celebrates “Ali Day” with huge, staff-wide festivities on the date of Taobao’s founding to honor the tenacity of employees who worked from home.

These days, Alibaba and rival Tencent offer such a sprawling array of services and such widely used payment platforms that they are essentially part of the substrate of how the Chinese economy works.

Despite coronavirus slowdowns, Alibaba last month unveiled a further $28 billion investment into cloud computing, while Tencent has just this year bought control of gamer Funcom and game streamer Huya, and taken a 10% stake in Universal Music. The tech stocks have seen a quick, V-shaped recovery, while those of traditional film players such as Huayi Brothers and China Film Group have languished.

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Streamers have bought up rights in China to films originally scheduled to run in theaters, as with iQiyi’s purchase of action comedy “Enter the Fat Dragon,” starring Donnie Yen. Everett Collection

In several ways, now is the moment for Alibaba and Tencent to make further advances. Yet in this entertainment revolution from cinema to digital, they’re no longer the only game in town.

One company poised to gain momentum from COVID-19 is “Lost in Russia” buyer Bytedance, the world’s largest unlisted tech unicorn, and the only company other than Apple to have more than 100 million subscribers both within and outside China. Though layoffs are the norm for many firms as the Chinese economy struggles to regain momentum, Bytedance is on a global hiring spree. It plans to add 40,000 more to its workforce this year, which would give it a staff equal to Alibaba’s and far above Tencent’s.

Just a few months ago, Bytedance had no idea it would be shaking up the movie industry. Huanxi Media’s “Lost in Russia” was one of seven films vying for a cut of what was predicted to be a record-breaking Lunar New Year box office period, worth perhaps $2 billion in ticket sales — a single week in which many exhibitors reap as much as 40% of their annual profits.

Facing stiff competition, the film’s distributors had decided to release the blockbuster 12 hours earlier than its rivals, in the hopes of gaining an edge.

But the coronavirus, which previously had been likened to a winter flu, was revealing itself as a fast-moving killer with no respect for public holidays or box office hauls. Ticket sales began dropping off as the public realized the severity of the disease, and distributors made the unprecedented decision to pull their films in response.

Huanxi CEO Steven Xiang Shaokun thought he was sitting pretty going into the biggest holiday of the year: He had two of the seven major titles set to debut and all the necessary government approvals, with marketing work well underway. Then, everything turned upside down.

“It is Jan. 20; I’m in Beijing. I’m looking forward to a prosperous season after seeing my mother on Chinese New Year Eve, and then taking a holiday in Sri Lanka with my wife,” recalls Xiang. “We were not thinking at that time of the virus as a prominent factor. We were thinking it was just too many good movies jammed together. So if we moved the release of ‘Lost in Russia’ 12 hours earlier [from Jan. 25 to Jan. 24], that would break the logjam.”

He knew the move would not be popular with cinemas, as it would give staff one less day off, but he contacted the film’s director anyway.

When he woke up on Jan. 23, he learned that Wuhan and some other cities were to be sealed. The same day, distributors of two of the other big seven movies announced the halt of their releases. “We didn’t really have a choice,” says Xiang. “Not only were tickets slow in selling, people were actually returning them to online vendors in a big way.” Online ticketer Maoyan reports that it refunded more than 5 million holiday tickets in just three days.

Obviously, the world has changed. It will not come back to the way it was before. In the future, people will talk about ‘before 2020’ and ‘after 2020.’ ”
Jack Gao, Smart Cinema

Fortunately for Huanxi, Bytedance was in the market for a publicity stunt. Its short-form video rival Kuaishou was set to steal the spotlight with an expensive coup of its own by partnering with state broadcaster CCTV on its New Year’s Eve gala — the entertainment spectacular that is the world’s most-watched TV show (reaching 1.23 billion viewers this year). During the broadcast, Kuaishou doled out a total of $142 million to viewers who had downloaded its app and were lucky enough to receive a digital “red envelope.”

The day of the gala, Xiang and the Bytedance bosses hammered out a deal.

“We had three choices. One was to [delay release], like the other movies. This had pros and cons, but the drawback was that we couldn’t know when it would be able to open. Another option was to put the film directly on our own platform. For sure that would lift our platform to another level, but it’s a $48 million [RMB 350 million] movie, and we’d have to charge people to watch it,” Xiang explains.

The solution was announced shortly before midnight on Jan. 24, as families across the nation tuned into the Kuaishou-branded CCTV gala. Bytedance would pay Huanxi $90 million — surpassing the original $85 million minimum guarantee from theatrical distributor Hengdian — for “Lost in Russia” and a small number of other titles, accelerating earlier plans to establish a wider content- and traffic-sharing agreement. Both Huanxi and Bytedance would stream the film immediately and free of charge on Huanxi.com and Bytedance’s suite of video apps, including Douyin, Toutiao and Watermelon Video, bypassing theatrical altogether.

Three other smaller theatrical films meant to hit in February and March have also jumped into the arms of the online platforms, including “The Winners,” which was also bought by Bytedance, and Donnie Yen-starring martial arts comedy “Enter the Fat Dragon” and sports drama “Knockout,” both of which were picked up by iQiyi.

Y.C. Chu of Media Asia, the distributor behind “Knockout,” says the decision allowed the company to at least get a minimum-guarantee deal. “Nearly all cinemas on Earth are closed right now, and we don’t know when they’ll reopen,” he says. “We needed revenue flow now — and BAT [Baidu, Alibaba and Tencent, China’s equivalent of the FAANGs] are hungry for content.”

Such decisions to jump the theatrical ship have angered cinemas and film studios, which is potentially a dangerous move in a country where typically 80% of a theatrical film’s revenues come from the box office, rather than ancillaries.

Some 23 firms went so far as to write a joint letter complaining about Huanxi’s “Lost in Russia” ploy. While not illegal, the move “goes against the payment and revenue model that the movie industry has cultivated over many years, trampling and intentionally destroying the movie industry and premiere models,” read the missive, signed by heavyweights such as Bona Film Group and Wanda Film. Zhejiang province’s film industry also issued a statement that threatened to boycott future Huanxi films.

Traditional film companies are particularly defensive because they are in deep trouble.

Last year was already one of the hardest yet for China’s film industry, as it struggled to bounce back from new tax schemes and regulatory changes that sent many less-solvent companies underwater. Now, with cinemas closed for the foreseeable future, the exhibition sector is being gutted.

As of early April, more than 5,300 film and TV companies have disbanded in 2020, nearly double the number that went under in all of last year. Furthermore, there were fewer than 8,000 registrations of new movie exhibition-related companies in the first two months of the year, down 25% from the same period in 2019.

“This year is truly going to be hard to overcome, because it’s a total reshuffling and do-over for the industry,” says Christopher Young of state-owned streaming firm CIBN. “If it weren’t for the internet, the whole entertainment sector would have completely collapsed” amid prolonged physical shutdowns.

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Daniel Zhang, chairman and CEO of Alibaba Group, has seen the company’s fortunes rise during the COVID-19 crisis and may target investment in foreign companies. Kin Cheung/AP/Shutterstock

Grace Zhang, CEO of production at Dadi Films, one of China’s largest exhibitors, feels there won’t be much expansion in the near future, due to the crisis.

“I don’t think people will be rushing to build cinemas the way they did before the pandemic; everyone will pull back and focus on running the ones they already have,” Zhang says. “I used to think that by 2020 we’d have 80,000 screens. There’s no way we’ll reach that number — not necessarily even in 2021.” Huayi Brothers co-chief Wang Zhonglei echoes the sentiment, telling Variety that the firm plans to “slow its expansion” in theaters.

However, swimming against the current, exhibition-driven Wanda Film Group intends to keep growing. Despite massive losses of $668 million last year, it hopes to move ahead with plans to build 162 cinemas by 2022, if it can raise the more than $400 million needed to do so. One thing is certain: After the losses in exhibition due to the pandemic, authorities have ominously been calling for a reorganization of the sector.

COVID-19 lockdowns have also reinforced another ongoing trend: the rise of made-for-streaming films and series.

In China, online movies are typically shlocky genre affairs more in the vein of American B movies than of “Roma.” Although theatrical directors and stars have hitherto snubbed the format, this is changing as traditional film and TV firms thirsty for cash are drawn by its lower costs, quick turnaround and habit of paying upfront.

Huanxi’s Xiang predicts China will see more American-length drama series, with eight to 24 episodes — better suited to streaming — rather than China’s typical meandering 80-episode arcs for shows made to attract commercials on TV.

Theatrical-level directing talent will also give the sector a boost. Cinema icon Wong Kar-wai (“The Grandmaster”) is now doing an online series for Huanxi; Peter Chan, after directing unreleased sports feature “Li Na: My Life” and Chinese New Year title “Leap,” is expected to debut a series for his next effort with the company.

“After the pandemic, the boundary between online content and theatrical will be blurred, with celebrities and talent moving more freely between them” as online content quality improves and its audience broadens, predicts Michelle Yang, president of Starwise Entertainment.

Though China’s major streamers have gained significant numbers of subscribers due to the COVID-19 lockdowns, it’s hard to translate more subscribers into tangible profits because user gains hit a bottleneck.

If it weren’t for the internet, the whole entertainment sector would have completely collapsed.”
Christopher Young, CIBN

“Once you reach a certain level of memberships, your growth is very challenged,” explains Gao. “Every single [streamer] is losing money like hell.” Vivek Couto, executive director of consultancy Media Partners Asia, says the big three streamers have become focused on increasing subscriber spending, if possible.

Alibaba clearly sees entertainment as a loss leader that both benefits from and enhances its mainstay e-commerce businesses, akin to the “flywheel effect” that supposedly drives Amazon and Amazon Prime Video. The company touted cutting digital entertainment and media sector losses from $855 million to $468 million in the third quarter of last year as an achievement. Tencent, in its latest earnings call, similarly made a virtue of losing less than $425 million on video in calendar 2019.

From Alibaba’s video services to an app that can prove a clean bill of health — required to enter public spaces like shopping malls and transit — these are first-line products likely to have second-order impacts across its ecosystem of businesses.

The battle for users probably matters most to iQiyi, which in 10 years has never made a profit, and doesn’t have gaming like Tencent or e-commerce like Alibaba to fall back on. (The company was recently accused of fraudulently inflating its financials by short sellers Wolfpack Research and Muddy Waters. It denies the accusations, but may face several class-action lawsuits from U.S. shareholders.)

Although they remain fierce competitors, the three streaming leaders have established an informal content-buying truce in order to reduce their acquisition costs. Instead of fighting to outbid one another, they now coordinate to drive down content prices.

But Bytedance is shaking things up by moving into their long-form fiefdom, following up its “Lost in Russia” stunt with the release of 100 classic movies free to stream on Douyin and Watermelon Video. Another platform, Bilibili, has already been diversifying from social video into professionally generated content. It recently received a $400 million investment from Sony and aims to accelerate its expansion in gaming and animation.

“It’s like you finally got your garden in order, and a buffalo comes in,” says Gao. “It took BAT years to finally get consumers to pay a few dollars to become members. Then [Bytedance] tramples over their barely established alliance.”

Couto estimates that Bytedance, which makes most of its money from ads on Douyin and Toutiao, doubled its first-quarter advertising revenue by taking ad share away from the long-form platforms. Yet its move into the film sector likely springs from a desire to further monetize the impressive labeling and segmentation of its existing user base, since more lucrative ads can be played during long-form content, observers say.

The BBC recently struck two license deals with Bytedance’s Watermelon, including one for its latest prestige documentary series “Hubble” — further cementing that app’s status as an up-and-comer.

Bytedance has now established its name alongside heavyweights Alibaba and Tencent, which rank among the 15 biggest companies in the world, earning better than $1 billion of net profits per month. “Before, we used to say BAT. Now it’s all BATB,” says CIBN’s Young.

China is ahead of the world in its deployment of 5G cellular networks, which will help BATB in major ways, including giving rural communities internet access on par with city dwellers’. Such technological development is a clear national priority for Beijing, which could give the Chinese firms an edge over U.S. competitors.

China’s cash-rich tech giants may seize this moment to make bigger plays overseas. While hostile maneuvers on American soil would likely rile the FAANGs and the Committee on Foreign Investment in the U.S., which blocked Alibaba’s purchase of MoneyGram, battle lines are likely to be drawn in South Asia, Africa and parts of Europe. If anyone doubts the government’s willingness to defend Chinese firms, its dogged support of 5G telecom equipment supplier Huawei should dispel that.

But perhaps just as influential overseas as direct Chinese investment will be the indirect impact of China’s digital success stories, as others study those business models and behaviors. “Increasingly, we’re looking to Northeast Asia as kind of a new California when it comes to trends,” says Duncan Clark, biographer of Alibaba co-founder Jack Ma and chairman of consultancy BDA. As the rest of the world is in some ways literally behind China in terms of weathering the pandemic’s course, perhaps COVID-19 will cause a psychological shift, “even in the U.S., that it’s no longer always C2C — ‘copy to China,’” he says. In the future, it may be necessary to copy from China, though that may evoke “real resentment and anger” for many Americans, says Clark.

What’s clear at the end of the day is that COVID-19 has boosted demand for online entertainment — it’s just a question of what channels will be delivering it, in what manner.

“I don’t know what we would have done without movies,” says Wang Zhuowei, a legal analyst at a Wanda-backed sports firm who was recently laid off due to the pandemic and spent much of the lockdown in his native Wuhan watching quarantine-themed content with his parents, including the South Korean series “Flu” and Steven Soderbergh’s “Contagion.” “They’ve been our lifeline.”