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MillimeterChina Rising
Jul 1, 2008 12:01 PM, By S. D. Katz
A reality check on the Eastern horizon.
Illustration by Shengchuang. Art Direction by S. D. Katz
The revenue potential of 1.3 billion prospective moviegoers gets any studio exec's pulse going — and Western entertainment companies have been trying to get into China's market ever since the country entered the World Trade Organization in December 2001. China's economy has an average annual growth of 10 percent, with close to 30-percent growth in the movie box office for the past few years, but the local film industry accepts only intermittent competition from Hollywood. U.S. media companies would like to repeat in China their success conquering local cinemas in many other countries around the world, but it's precisely that success that has made their entry into the Chinese market difficult.
While China has clearly embraced many aspects of capitalism, including private ownership and foreign investment, there are many state-run businesses and industries operating in a regulatory and judicial environment that tends to favor state-run enterprises or businesses with government connections. There's also the Chinese notion of guanxi, or relationships. Guanxi plays a large role in how business deals are struck — sometimes edging into cronyism and nepotism. Because most state businesses operate without transparency, personal connections are able to take precedence over normal decision review processes and due diligence. Handshakes and drinks over dinner can be as important as market-research reports and contracts.
Nowhere is the lack of transparency and the presence of market interference clearer than in China's movie business. Few things touch the government's sense of self-preservation more than the control of the media, so loss of box office is often less important than the goal of social harmony or having domestic films perform better in comparison to foreign movies. Ultimately, industry policies are directed from above and carried out by the distributors and exhibitors who are often unfairly blamed for market manipulation that they must implement. The biggest problem is that current policy is inconsistent and unpredictable. That's because it's not working. Movies that the government approved of have not done well; Hollywood movies have. Based on how China has operated in the past in other industries, the next likely strategy would be learning how to make Hollywood movies while simultaneously coaxing the system to favor local Chollywood product.
Complaining about China's manipulation of the market is fair game, but it's also disingenuous. Western distribution is far from an open market — and the major studios operate much like a government-sponsored cartel — so China's protectionist policies, while heavy-handed, are not entirely without provocation.
In 2003, Warner Bros. International Cinemas (WBIC) came to China with the understanding that it would be able to own up to 75 percent of its venture to build theaters in up to seven major cities. The company's Paradise Warner Cinema City in Shanghai became the most profitable movie venue in China, but toward the end of 2005, the State Administration of Radio, Film and Television (SARFT) released a new regulation requiring mainland Chinese investors to own at least 51 percent or play a leading role with foreign investors. After attempts to find a compromise failed, Warner decided to pull out of the Chinese theater business in 2006.
Unsettling as the government's policy reversal was, Warner is aggressively pursuing China ventures in an unlikely area: DVD marketing and distribution. This includes a common-sense initiative to sell DVDs at prices that, while not as low as those of pirated copies, are still low enough to potentially convert some customers to the real deal. At least that's the theory put into practice in a joint venture with Paramount (Fox is also adopting the low-price strategy). The verdict is out on this initiative, but this shows the tenacity of the major players who enter the Chinese market.
While owning theater chains is not in the cards for the moment, U.S. media companies are finding other ways to reach Chinese consumers. Steamboat Ventures — Disney's Burbank, Calif.-based venture-capital firm and a consortium of investors — invested $23.5 million in Chinese interactive-video firm UUSee in 2007, allowing the company a low-profile entry into content delivery in China. UUSee provides video-on-demand mobile downloads and services for Internet cafés. It also delivers close to 60 channels of live TV and 350 channels of commercial video content serving 36 million users. Steamboat has also invested in a video-sharing website, 56.com, and CTS Media, a Chinese firm that inserts ads into streaming video content online.
Another infrastructure player is ReachMedia, a U.S./Chinese company that is building out or acquiring second-tier infrastructures such as HD plasma screens featuring advertising and entertainment in 15,000 retail outlets, IPTV, mobile-phone TV, and out-of-home networks such as LCD screens in buses and cinema-size display screens in airports. It's clear that content-delivery systems are rapidly permeating China's cities, wall-papering everyone's peripheral vision with fast-moving eye candy. All this content has to come from somewhere, and China has been encouraging investment in production facilities for several years.
Continue the discussion on “Crosstalk” the Millimeter Forum.
