Chinese film industry rings in 2017 after experiencing an unsatisfactory box-office growth, surpassing the U.S. in cinema screens and popularity reduction in fan movies. The irrational growth finally slows down with the bubble burst and the year 2017 will see the market back to the rationality when the tide goes out.
1: The box office enters a structural growth stage, driven by the fourth and fifth-tier cities
Different from the general growth of the box office from the first-tier to fifth-tier cities in the past, the box office will enter a structural growth stage in the future. According to 2016 data, it’s expected that the growth in the first and second tier cities should keep stable with a slight growth, while the fourth and fifth-tier cities will see a double-digit growth (the box office in the fifth-tier cities increased by 16% in 2016).
2: Cinema screenings increasingly differentiate
In 2016, more than 500 films were screened and over nine films were aired each week on average. Now, the diversified screening model has not been established in China, without screenings in different rounds, different zones or art cinema associations (a loosely-organized art cinema association is established this year). As digital copy reduces the distribution costs, nearly each movie is screened across the country at the same time. Such intensive screening causes adverse consequences. For example, many movies become a one-day show or one-week show. The box office is squeezed by newly-screened movies before releasing its full potential. Such “one-size-fits-all” approach also leads to the homogeneous genres of films screened. The first-tier cities complain about only a few screenings of art films, while the fourth and fifth tier cities think that more teen films shall be screened.
There are 48 cinema lines in China, of which the position, location and target audiences are varied. However, same films are screened in them, which fundamentally violates the market rules. As China has no distribution zoning and art cinema lines, the cinemas just adjust their schedule as per their actual needs and based on the same film list. Nominally, films are centrally distributed across the country. However, the screening schedule is greatly different between fifth-tier cities and first-tier cities, indicating that distribution zoning has been actually implemented in China.
3: Non-box-office revenues increase in cinemas
The box office is not the only channel for cinemas to generate revenues, and the proportion of box-office revenues would be further reduced in the future. According to the official data released by the American Screening Association, food sales accounted for 40% of annual gross income of the cinema, while the product sales only maintain around 10%-15% of total revenues in Chinese cinemas.
Apart from food, pre-film advertisements and field advertising, as well as new revenue sources based on the field would become new income sources for cinemas. Taking Wanda as an example, Wanda Cinemas achieved non-box-office revenues of RMB 1.722 billion, accounting for 32% of its total revenues in 2016 H1 while this figure was RMB 636 million in the same period of 2015, occupying 18% of total revenues, with the year-on-year growth of 14%.
4: The cinema lines are further concentrated
Chinese cinema lines are less concentrated due to historical issues of distribution by province before reform in the cinema line system. Now, Chinese has 48 cinema lines, creating the market consisting of leading Wanda Cinemas and other competitive cinemas. In 2017, CR3 market is less than 30% of the Chinese cinema line market, down 0.5% compared to 2015. CR4 is 37% in China while this figure is 60% in the North America. CR3 accounts for 96% in the R.O.K. All indicate that the cinema lines need to be further concentrated in China.
Actually, the merger and restructuring of domestic cinema lines has started since 2015 when Alibaba Pictures invested Dadi Cinema, Bona Film Group Limited and Hangzhou Xingji; The Perfect World acquired Antaeus Group and its associated 217 cinemas; China Film Co., Ltd. became a controlling shareholder of Huachen Film Group in Dalian with RMB 553 million and Macrolink Group invested RMB 150 million in Bona Film Group Limited. It’s expected that with increasing market competition and upgrading cinema technology, the cinema lines will be further concentrated in 2017.
5: Copyright price of the new media keeps growing
Two years ago, the copyright price of the new media saw several rounds of ups and downs with the competition between the film market and video websites. However, the copyright price of movies, in particular blockbusters, still rose in 2016. According to the forecast by Huashi TV–a copyright purchaser and operator with the largest market share, the copyright price of blockbusters will increase by 30%-40%, even 50% in 2017. The film companies obtain the bargain power in the copyright sales and increase income from the new media through integrating resources of various parties, rather than just solely competing for price.
6: Hot money inflow decreases while both stock equity and project investment cool down
Compared to capitals rushing into the entertainment market in 2014 and 2015, the capital market cooled down in 2016. Both M&A transactions and capitalization slid compared to 2015. Along with the restructuring failures of many film and TV cases, the capital enthusiasm is further declined. With the official promulgation of the Administrative Measures for the Material Asset Reorganization of Listed Companies in September 2016, the review on conceptual subjects such as R, gaming, TV & film programs and Internet finance, has been increasingly stringent. Since 2016, several companies, such as Zhejiang Talent Television & Film Co., Ltd, LeTV, Wanda Cinemas and Huayi Brothers, announced the failure of their M&A and restructuring programs. It is no longer feasible to raise the market capitalization and cash out through acquiring TV and film companies or even packaging the film & TV concepts.
Apart from equity investment, project investments also cool down. The trend of the box office market in 2016 significantly dampens the investment enthusiasm of hot money. In the short term, the flow of hot money would be reduced while film projects will be difficult to find investment. However, one thing that won’t be changed is excellent scarce contents never lack funds.
7: The securitization operation around film revenues will be constricted
The box-office scam was a hot topic in the movie industry in 2016 and also became the largest scandal in the year. The purpose of box-office scam is to securitize the expected film income. Leveraged by P2P finance, investors played a “greater fool” game and finally burst the bubble. This was also one of the important reasons for decrease in box-office revenues of 2016.
The film market could have financial innovation such as minimum distribution. However, it would endanger the healthy development of the industry if generating profits by using audience’s expectations by fair means or foul, rather than improving movie quality through financial means.
The government has promulgated laws and regulations against box office scam. It is expected that the securitization of box office such as box-office scam will be reduced in 2017.
8: Internet TV, video websites and large screens compete for audience time
As for the new media, the revenue increase responds to the boost of copyright price. On the one hand, Internet TV and IPTV are quickly entering the living rooms of mass audiences. On the other hand, the subscribers of video websites rise suddenly and sharply. For example, subscribers of Tencent Video exceeded 20 million, Youku reached 30 million, iQIYI announced that its subscribers exceeded 20 million in the middle of 2016 and LeTV announced that its ecological subscribers reached 50 million and so on.
With the copyright protection strengthened and paid subscribers increased, the film industry embraces a new phase for the new media channel, facing both opportunities and challenges. In Chinese film market, both new movie audiences and subscribers of video websites increase simultaneously, which is one of large differences between the Chinese and American market. Namely, the rise of the film industry encounters a strong competitor– online videos.
With increasing subscribers of online paid videos, the consumption of other channels shrinks accordingly, which will be a long-term situation faced by the film industry. What the film industry needs to do is increasing revenues from the upstream and downstream of industrial chains based on the film industry and from various channels rather than narrowly focusing on the box office from the “big screen”. In the future, the box office revenues will not necessarily keep a high growth, but the non-box-office revenues will do.
(Source: Entgroup.cn By/Zhuge Naonao)