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Why Hollywood Movies Are Losing Market Share in China

January 22, 2018Media Mention
The Information

By Matt Pressberg

Wu Jing, the director and star of Chinese smash hit “Wolf Warrior II,” has been pressing the flesh around Los Angeles in recent months to build buzz for the film ahead of this year’s Oscars, whose nominees will be unveiled Tuesday. While “Wolf Warrior II” is unlikely to score a nomination, it’s arguably the most important film of 2017. And its record-setting haul could be a bad omen for Hollywood in an increasingly important market.

Hollywood blockbusters were once unstoppable forces in China, driving growth in total theater box office revenue from $455 million to $8.6 billion over the last decade. But U.S.-made films have lost some of their luster with Chinese moviegoers: Hollywood's share of Chinese box office receipts has fallen to 40% from more than 50% in recent years. That is dimming what has been one of the few bright spots for the U.S. film industry in the past few years, as domestic film attendance and revenue from DVDs have both been in decline.

THE TAKEAWAY
Chinese movie audiences are losing interest in U.S. movies, eroding Hollywood’s position in the second biggest film market globally at a time when traditional revenue sources are in decline.

Because the Chinese market is expanding, U.S. studios’ revenue is still growing despite the market share drop. But if its share continues to decline, Hollywood will lose bargaining power with Chinese authorities. The studios will likely find it harder to negotiate the best release dates for their movies in China, or to be allowed to release more of their films. That in turn could drive the studios’ box office share even lower and crimp the flow of money they’ve made in China for the last few years.

What’s eroding Hollywood’s power in China is the growing popularity of locally made movies. Last year, “Wolf Warrior II” hauled in $854 million, easily becoming the country’s highest-grossing movie of all time. In 2016, Chinese film “The Mermaid” made $527 million in its home market (and less than $24 million everywhere else), setting a record at the time and more than doubling the performance of any other film in that country.

And this year looks to deliver more of the same. Local films “Monster Hunt 2” and “Detective Chinatown Vol. 2” are expected to do huge numbers over the Chinese New Year in mid-February.

In contrast, the latest “Star Wars” film, “The Last Jedi,” couldn’t even win a weekend in China, significantly underperforming the two most recent films in the franchise, “The Force Awakens” and “Rogue One.” And none of those movies did much to establish a beachhead for “Star Wars” in China despite Disney throwing its full marketing weight around, including putting Stormtroopers on the Great Wall in a highly publicized promotional event.

China used to rely on big Hollywood films to fill the hundreds of new multiplexes built across the country in recent years. But “the Chinese film industry doesn’t need these [blockbusters] nearly as much as they once did,” Schuyler Moore, a partner at Greenberg Glusker who has worked on several major U.S.-China transactions, told The Information.

Hollywood Ending

China is far and away the biggest movie market outside of the U.S.—and the gap is narrowing. Last year’s $8.6 billion from China is compared with $11 billion in theater box office revenue in the U.S. The second biggest foreign market is Japan, which in 2016 (the most recent year available) generated only $2.1 billion. China’s box office has been growing by double digit percentages for most of the past decade, up 14% in local currency terms last year. (The year before was flat, largely due to a reduction in online ticketing subsidies, but that was an aberration.)

As big a market as China is, it presents plenty of challenges for Hollywood. Release dates are controlled by China’s censorship body. It bans foreign movies from theaters regularly in periods during the summer and around Chinese New Year. Sometimes Hollywood films get release dates in China weeks or months after the films premiere in other major markets, which can reduce buzz due to the lag time. It also creates more time for pirated content to circulate, reducing demand when the films do appear in theaters.

Even the number of foreign releases is limited. China’s regulatory body has allowed 34 imported films a year on a revenue-sharing basis in which the foreign studio takes home 25% of the gate. (There are also co-productions involving U.S. and Chinese partners, which qualify as domestic, including DreamWorks’ “Kung Fu Panda 3” and Legendary’s “The Great Wall.”) Given the size of its market, competition for those slots is fierce. And American studios aren’t the only ones trying to get in. India’s industry, Bollywood, is also a rival.

The ninth-highest-grossing film at the Chinese box office in 2017 was “Dangal,” an Indian movie that made $193 million in China. Films from Spain and Thailand also did well.

“I don't think Hollywood is going anywhere—modern Chinese moviegoers have grown up on a steady diet of our films since the mid-’90s and that won't suddenly disappear,” Jonathan Papish, a box office analyst at China Film Insider, told The Information. But the U.S. isn’t “the only country winning over Chinese audiences, and we're going to start seeing a lot more revenue-sharing import slots go to other countries,” he added.

In some cases, U.S. studios can’t get approval to release a film at all. That happened to Warner Bros.’ “Suicide Squad." To improve its chances, the studio chose “Task Force X” as its Chinese title. But its dark tone doomed it with China’s censors, one insider familiar with the process said.

The Chinese government is working to make life even harder for foreign movies. It has instituted an incentive plan that would reward theaters if 55% of their total box office receipts were from Chinese releases.

Meanwhile, China has pulled back from investing in Hollywood institutions—adding to the challenges facing U.S.-made movies in China. Wanda Group’s $3.5 billion purchase of Legendary Entertainment in early 2016, for instance, gave Legendary more leverage in getting its films into China and putting them on more screens in better theaters. Legendary took advantage of that with China-friendly films like “Warcraft,” which made $47 million domestically—and almost $214 million across the Pacific.

But plans for more such Chinese investments were derailed by the Chinese government, blocking the transfer of money out of China. Among the deals that fell apart was a $1 billion slate financing deal with Paramount Pictures involving two Chinese film companies. China’s State Council formalized the country’s crackdown on cross-border entertainment deals in an August statement.

Those developments have significantly reduced Chinese companies’ ability to finance U.S. movies. That reduces Hollywood’s leverage in getting films into the country or positioning them for success.

Reasons for Hope

Still, Hollywood executives have some reason to be hopeful. For one thing, the China market is likely to continue growing for some time. The average Chinese moviegoer sees about one movie a year, while in the U.S., it’s around four. Millions of people are living in cities that are just now getting their first modern cinemas.

Theater attendance in smaller cities is, on average, “woeful,” according to Mr. Papish, and weakening, aside from Chinese New Year. That may be part of the learning curve that comes with getting people used to going to the movies, or it could be a sign that audiences want more choices. Chinese films have stepped up their game massively in both quality and quantity, but they hardly represent a broad cross-section of genres even now.

“The film industry still needs a combination of imported and domestic films to become healthy,” Mr. Papish said. “Relying on one or two ‘Wolf Warrior II’s’ per year—basically the difference between an up year and a flat year in 2017—is unsustainable.”

Chinese movie makers also seem to be learning quickly how to make blockbusters—and what to stay away from.

Legendary’s “The Great Wall,” a mega-budget period piece starring Matt Damon and Hong Kong icon Andy Lau, failed to fully connect on either side of the Pacific. In contrast, “Wolf Warrior II,” in which the Chinese military rescues trapped hostages while the U.S. armed forces flee in disgrace, succeeded by focusing on what Chinese audiences wanted. The movie combined a Chinese story with Hollywood-inspired action sequences, with director and star Wu bringing in veteran superhero film directors the Russo Brothers to serve as consultants. And that combination brought in close to $1 billion in China.

In an October conversation, “Detective Chinatown Vol. 2” director Chen Sicheng said Chinese audiences, now used to American films, have higher expectations for local movies, and the country’s directors have taken note. He had no choice but to increase his budget and production value for his upcoming film, spending the money to shoot its New York City action scenes in the real Big Apple.

Hollywood helped teach China the value of blockbusters. Maybe too quickly for its own good.