[JD Says] How to Warm Up the Movie Market in China?
On February 27, 2017, Dolby Theatre in Los Angeles, USA witnessed the winner of Best Picture Award of the 89th Oscar – Moonlight – after an unexpected mix-up. Among the nine movies nominated for the award, apart from La La Land which has caught much attention, Hacksaw Ridge was on in Mainland China in the end of 2016 and Arrival in the beginning of 2017. These three movies have earned box offices of nearly 200 million yuan, 426 million yuan, and 109 million yuan respectively.
An Oscar statuette costs only 400 dollars to produce, while a nomination can bring a box office of over a million for a movie. Compared with the prosperity in North America, the movie market in China has been too cold in recent years. After the withdrawal of capital for quick money, reasons gradually came back.
Sharp growth of Chinese movie market stopped by shrinking box offices
Seen as the GDP of Chinese movie market, box office is paramount. The general trend in the past few years presented a sharp development of box offices at an astonishing annual growth rate of over 25%. However, in 2016, stagnation appeared. Despite the prediction by optimistic analysts that the box office of 2016 would be over 60 billion yuan, the actual amount reached 45.5 billion yuan, only increasing by 1,400 million from the figure in 2015 and registering a growth rate of 3%. With a rapid increase of the number of movies, the growth rate 3% means decreasing attendances and demands for market restructuring.
What caused the stagnation of box offices? In recent years, the improvement of cinema facilities and growing of audience number have stimulated the general development of the movie market. Also, subsidies generated from the capital and the Internet have also propelled substantive increase of box offices. With the sharp growth of the market, investors and producers kept launching guaranteed distributions, which led to a higher expectation for box office bets. Although most of famous movies in 2016 enjoyed guaranteed agreements, there were more failures than success. The tense situation hadn’t been eased until the ticket price war came to an end and the market was completely divided up in later months of the year.
Guaranteed distribution: a valuation adjustment mechanism (VAM) agreed by the producer and the issuer before the movie release. According to the VAM, after both parties agree on an amount of the box office, the producer can receive high returns in advance regardless of actual outcomes, and the issuer enjoys a priority in gaining extra returns from the box offices exceeding the agreed amount.
However, the Chinese audience has learned more during the industrial surge brought about by box office subsidies and guaranteed distributions. As the number of audiences grows, expectations for the quality of movies are becoming higher and higher. Nevertheless, capital from various sectors created a lot of “hot money” movies failing to meet industrial regulations, causing a contrast between the low quality and powerful marketing. Viewers with a broader horizon refused these movies, which led to bad box offices.
The rise of video websites also promoted the revolution of movie communication channels. With a part of viewers turning to the Internet, cinemas have gradually become the place for offline social contacts and entertainment. JD Capital predicts that hot movies offering stronger visual experience will be more suitable for offline cinemas in the future, which will be an important factor influencing the box offices.
At present, as the ways for entertainment diversifies, imported movies may bring greater impact on domestic ones. Therefore, instead of sticking to a blind growth, Chinese movies are expected to focus on a higher quality and a refined operation.
Cooperating with industrial mainstays may help end investment impasse
Under the current backdrop of China’s movie industry, investing in one single movie is of great risk. Deducting the special fund, dividends for circuits and cinemas, and profits gained by distributors, the investors and producers can only get no more than 40% of the box office, not to mention the cost spent in the early-stage investment.
Generally speaking, the development of China’s movie industry is still backward. However, due to the scarcity of market resources and high industrial thresholds, it is rather difficult for institutions on pure financial investment to enter this industry. Therefore, mighty industrial resources are still of high values.
Moreover, compared with other industries, the value of the movie market is more difficult to be assessed, so the market is not suitable for pure financial investment. Therefore, we believe that the future movie investment shall, through capital’s profound penetration along the upstream and downstream of industrial chains, combine the industry and capital in depth. The pure resource competition or “gambling” of investment institutions has no superiority at all.
Nowadays, the concentration of China’s movie industry, the downstream of industrial chains such as chain theaters and movie distributors in particular, is increasing. Among the current mainstream circuit brands, for example, one single theater is too small in proportion to absolutely monopolize the market. However, all the large-scale chain theaters are proactively striving for their screening schedules by acquisition and constructing their own cinemas, while the small-scale local theaters are struggling to benchmark the larger ones. Consequently, the emergence of mainstream theaters is bound to give rise to new magnates.
The profits of China’s movie industry are mainly generated from the upstream of industrial chains dominated by content production. However, the market share of one single content production is low, though the market boasts many players with considerable scales. In the future, there may be magnates born out of content producers. Different producers shall be responsible for their audiences with certain requirements and attributes. Meanwhile, the downstream enterprises can, with their own advantages, enter the upstream of industrial chains after expansion.
To enter the movie industry under the new market trend, investment institutions are likely to cooperate with the leading powerful industrial mainstays that are advantageous in such key links as distribution, contents and theaters, or able to guarantee the income or apt at price negotiation.
New values for movie investment: high standards and refined operation
We hold that China’s movie industry still has great potential for growth, but in a more modest way compared with the situation in the past. The investment will focus on more accurate operating subjects as well as talents with new technologies and high standards that can meet different viewers’ requirements.
Currently, various new technologies have brought enormous changes to movie production, distribution and screening. In the future, more investment opportunities based on technical innovation are supposed to be created. For instance, with the rise of visual spectacles, more and more technical companies on visual effects like CG movies, panoramic videos and extra-high frame rates are developing rapidly, under which circumstances the intervention and integration of quality capital can contribute to forming an advantageous linkage.
The supporting facilities and operation mechanisms of cinemas are also upgrading, which is surely to bring in wider application of new technologies. Also, most of the chain theaters still arrange their screening schedules in the light of empiricism. In the future, however, scientific screening schedule approaches based on technologies like big data will gradually overturn original experience. All these technical applications deserve to be noticed.
In addition, on the analogy of such systems as age rating and theater-based distribution in America’s movie market, the stratification and classification of Chinese audiences may bring about new investment chances. For example, townsfolk and hipsters are interested in different kinds of movies; inevitably, there will be certain content producers catering to different groups’ screening requirements. Therefore, competitive institutions meeting audiences’ requirements in a targeted way are likely to stand out and attract more capital.