China's Film Industry- a New Era - Deloitte
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China's Film Industry – a New Era
Contents Introduction 1 Trend One: From Bigger to Biggest 2 Trend Two: From "Made in China" to "Made for the World" 3 Trend Three: From "non-intelligent" to "Intelligent" 5 Trend Four: From "Highly Concentrated" to "Diversified" 7 Trend Five: From "Long Tail" to "Thick Tail" 10 Trend Six: From "single IP" to "IP franchises" 12 Trend Seven: From "non-Conforming" to "Standardization" 13
China's Film Industry – a New Era | Introduction
Introduction
China's culture and entertainment These "new giants", backed by vast
industry has entered into an user base and channel advantages,
unprecedented "golden age". With are eroding the influence of
box office revenue of RMB44 billion "traditional giants". Faced with
in 2015, China is the fastest growing a rapidly evolving situation both
film market in the world. By 2020, inside and outside of the industry,
China's box office is expected to reach "traditional giants" have sensed the
RMB200 billion and will exceed North urgency for change. To "traditional
America as the world's largest market giants" in the culture industry,
in box office revenue and audience Internet Plus-based transformation
numbers. and comprehensive industry chain
restructure have become common
Driven by policy, Internet, and trends. For example, with Disney as its
capital, "new giants" are emerging. model, Huayi Brothers has launched a
In particular, Internet companies, led "de-cinematic" strategy that integrates
by BAT, and real estate developers the traditional film business, Internet
such as Wanda, have used resource entertainment, and location-based
advantages to gradually penetrate entertainment, and expands into
the entertainment industry and upstream and downstream industry
build an ecosystem. For instance, chains to alleviate dependence on the
Wanda Group, a Chinese property film industry.
developer, has merged its culture and
property resources, taking advantage In the next five years, China's culture
of its commercial property to build and entertainment industry is on track
movie theatres, and expanded into for speedy development. Mainstream
the upstream film industry with forms of entertainment such as film,
its channel advantage. Since its online videos, and TV will experience
acquisition of AMC Entertainment prosperous development; competition
Holdings Inc. (AMC), Wanda Group between "new giants" and "old giants"
has become the largest cinema will become fiercer; cross-industry
chain operator in the world. In early cooperation and competition will
2015, Wanda Cinema was listed on continuously come into play, the
the SME Board of the Shenzhen industry chain will be shuffled and
Stock Exchange, and became the transformed, and opportunities
first cinema chain stock to list on the and challenges will co-exist. The
domestic stock market. culture and entertainment industry
is ushering in a new era, and the film
industry should witness the following
seven key trends.
1China's Film Industry – a New Era | Irend One: From Bigger to Biggest
Trend One: From Bigger to Biggest
1.1 China's box office revenue TV, and Internet) has grown rapidly, film export, due to cultural differences
and number of movie-goers are providing important support for the between China and foreign countries,
expected to surpass North America continuous expansion of China's film legal considerations, and other factors,
by 2020 consumption. Regarding film and only mild growth is expected, with little
The size of China's film industry theater investment, investment in impact on the industry as a whole.
is made up of three parts: film new theaters is expected to stabilize, According to Deloitte's forecast, by
consumption, film and theater and the extensive operation model 2020, China's film industry will see
investment, and film export. On the will be replaced with an intensive one. further expansion, with revenue
film consumption front, China's film Moreover, against the backdrop of reaching RMB200 billion. By then,
industry maintained rapid growth, with theaters overflow and high costs in China will overtake North America
combined revenue of RMB66 billion1 first-tier cities, steady expansion into in box office revenue and number
in 2014. In recent years, revenue second, third, and fourth-tier cities will of movie-goers, and will become the
generated from non-box office, film be rewarded with better returns. For largest film market in the world.
copyright, and advertising (theaters,
Figure: China's film industry market size forecast (2014-2020)2
RMB200 plus billion
by 2020
RMB66 billion in 2014
27%
Film IP
(3%, 0.3) Film consumption
Advertising
(9%, 1)
36% 139%
Renovation/
expansion
(6%, 0.68)
New theater investment Theater and Non-theater
(17%, 1.92) movie investment Film investment
investment (2%, 0.19)
(8.6%, 0.95)
Film export (2.7%, 0.3) Film export
1 ENT Group
2 ENT Group, Deloitte Projection
2China's Film Industry – a New Era | Trend Two: From "Made in China" to "Made for the World"
Trend Two: From "Made in China" to "Made for
the World"
2.1 Co-productions should enjoy access to China. At present, half of revenue. In the first quarter of 2015,
favorable status, resulting "win- countries listed as top 10 international co-productions contributed ~60
win" for China and its foreign box office markets have signed co- percent of total box office revenue.
counterparts production agreements with China, Co-productions can achieve "win-win"
In the past, the scale of China's and the number of co-productions outcomes because co-produced films
investment in the foreign film market has increased to some extent. Though is considered as "Made in China" and
and China's film exports were co-productions only accounted for a enjoy the same treatment as domestic
unsatisfactory. However, in recent small proportion of the total number ones. Compared to imported films, co-
years, as China has become the world's of productions in the Chinese film productions enjoy better distribution,
second largest box office market, an market, they contributed a significant revenue sharing percentage, and
influx of foreign investors and film percentage of total box office revenue. policies. Nonetheless, co-productions
producers have shown willingness to In 2014, co-productions accounted are still faced with many challenges
cooperate with China. Co-productions for 6 percent of total productions such as copyright ownership, cultural
are a way for China's films enter screened in China, but contributed differences, and different work styles.
global and for foreign films to gain around 50 percent of total box office
Figure: Box office contributions by nations/regions (2015 Q1, Top five)3
HK 42.6%
U.S. 37.8%
France 10.8%
South Korea 5.7% 54% contribution
U.K. 3.0%
0% 10% 20% 30% 40% 50%
3China's Film Industry – a New Era | Trend Two: From "Made in China" to "Made for the World"
2.2 Co-productions for the global almost all of its actors were Chinese.
market Western resources were mainly used
Currently, most co-productions are for content creation, such as direction,
targeted at the Chinese market. Wolf and Chinese-foreign diversified capital
Totem, released in early 2015, was support. This film had great success in
a China-France co-production. The the Chinese market, earning RMB700
movie used many Chinese elements, its million at the box office in 35 days.
main scenes were shot in China, and
Figure: Co-productions for global market4
Co-productions for
global market
Chinese productions for
Chinese market
However, achieving success in the market is the ultimate goal for Chinese
Chinese market is not the ultimate goal. films. With co-productions becoming
For instance, Fast and Furious 7 , screened more mature and cooperation growing
in 2015, was not only targeted at the deepener, there will be an expanded
Chinese market but also the global co-production market, thus fueling
market. It leveraged the best resources the co-production trend and achieving
in the world, received investment from success for Chinese film in the global
global investment platforms and made market.
RMB2 billion in its first 15 days. Like this
movie, achieving success in the global
3 ENT Group
4 Deloitte Analysis
4China's Film Industry – a New Era | Trend Three: From "non-intelligent" to "Intelligent"
Trend Three: From "non-intelligent" to "Intelligent"
3.1 Big data will be used to drive Tencent Pictures, iQiYi Films, and Baidu
decision optimization and profit Pictures, are all entering the movie
growth business. Traditional film companies
At present, the utilization of Internet are also actively responding to this
and big data has impacted the whole situation. For example, Shanghai
film industry chain including IP, New Culture Media (listed on the
production, marketing and promotion, A-share market) along with others all
distribution, and ticket sales. Among announced private placement and
these, Internet giants invested investment plans on Internet and big
continuously in the film industry, data technologies, with a total amount
and Internet film companies such as of over several billion yuan.
Figure: Impact of Internet and big data technologies on the value chain of the film industry5
• Crowd funding: consumers invest and
influence production.
Production • Internet IP: emergence of Internet IP.
• Innovation: Using online ticket sales,
Turns to Distribution analyze customer distribution and
• Social network: fans actively participate film popularity to improve distribution
customer-focused Data-driven efficiency and resource use efficiency.
in decision-making process.
• Big data: precise estimation of box
office revenue.
Marketing New
media-driven
"New media"
• Video: play trailer, launch
B
promotion
du • Online: precise marketing,
improve sense of
participation
"Internet Plus"
Theater
Online
Data-driven
• Big data
• Social networks
• More power: • Online seat reservation: online ticket
• Crowd funding consumers enjoy sales surpass offline ones; make
• Internet IP greater voice. User shooting decisions based on ticket
sales data; increase attendance.
• Video • Derivative products: Higher status
diversified online + • New channels: theater is no longer the
• Online activities only channel, paid video mode is on
offline activities.
• BAT investment the rise.
5 Deloitte China Analysis
5China's Film Industry – a New Era | Trend Three: From "non-intelligent" to "Intelligent"
Production and distribution: ticketing has upended traditional
With the exception of some high ticketing channels. Online ticketing
quality scripts, film making and platforms have great influence and
production will be more driven by related marketing is essential to drive
market demand. The right to select film consumption and penetrate
content and main creative personnel the upstream film industry to help
will gradually transition from producers integrate the film industry and
and directors to movie-goers. More Internet. The online ticketing sector
film IP will be based on Internet has attracted many competitors such
creations. Films will be invested and as Meituan, Gewara, Wepiao, Taobao
produced based on data on movie- movie, and Dianping, among others.
goer's preferences regarding content, Online ticket sales accounted for 63
actors, etc. from Internet and social percent of total ticket sales in Q1
network, thereby achieving more 2015.6 In addition, online ticketing
precise market positioning and box platforms have streamlined the film-
office forecasts, and higher investment watching experience.
returns.
Cinema screenings:
Marketing: In the link of cinema screenings, there
Data on new media users makes it is big potential for data analysis, which
possible for precise marketing of films. will be used for decision and service
Traditional marketing methods such as optimization. Breakup Buddies, prior
posters and trailers are not sufficient to its official screening in 2014, used
for large scale film marketing and the online booking platform Meituan
promotion. New media technologies to lock up over RMB100 million in box
are being used for film marketing, office through online booking. On
which will match film content to the basis of the film's online sales, its
the target audience, and audience screening rate in domestic theaters
feedback on preferences will be used reached over 36 percent, substantially
for adjustment of marketing strategies, surpassing other films screened during
which should increase box office the same period. Based on online
earnings. ticket data and box office forecasts,
theaters are able to adjust screening
Online ticketing: schedules more efficiently, improve an
Another change to the film industry audience's movie-watching experience,
brought by Internet is that online and increase ticket sales.
6 ENT Group
6China's Film Industry – a New Era | Trend Four: From "Highly Concentrated" to "Diversified"
Trend Four: From "Highly Concentrated"
to "Diversified"
4.1 Investment in the film market percent. In the market, there are four
is steadily increasing, and non- types that are favored by investors:
industry acquisitions are rising "online ticketing platforms," "film +
Since 2014, investment in the film Internet platforms," "transnational
sector has totaled RMB1.28 billion, with co-productions," and "fan films."
yearly investment in 2015 up by 15
Figure: Investment and acquisition trends in the film industry (2009-2015Q1)7
Hundred million yuan Trading volume
300
250
200
150
100
50
0
2009 2010 2011 2012 2013 2014 2015 Q1
Investment amount Acquisition amount
Investment event Acquisition event
Industry giants like Huayi Brothers, their expansion into the film industry. to shore up its strong growth points,
Enlight Media, and Huace Film and One of the most notable acquisitions take advantage of the rapidly growing
Television will continue their pace of was Alibaba spending RMB6.24 billion film industry to slow down its recent
acquisitions, integrate many small to acquire a 60 percent stake in trend of decline, and realize strategic
scale film companies with a single ChinaVision and renaming it Alibaba transformation of its enterprise.
profitability model, and improve their Pictures. However, judging from the current
industry chains. Acquisition in the situation, many companies have yet
film industry has also spread to other Shanghai Zhongji Investment Holding, to achieve satisfactory results after
industries, and acquirers from non-film a traditional enterprise, spent RMB1.5 integrating film enterprises, because
industries accounted for 49 percent of billion to acquire Beijing Ruyi Xinxin significant differences in management
total acquirers. Among these acquirers, Film Investment—producer of Old and culture can make it difficult for
Internet enterprises have accelerated Boys and Youth Days—with a view these combinations to gel.
7 Zero2ipo
7China's Film Industry – a New Era | Trend Four: From "Highly Concentrated" to "Diversified"
4.2 Film enterprises might delist companies that will go public
from foreign stock market and individually and adopt a capital market
return to domestic A-share market operation model for expansion. For
The main reason for film enterprises example, Huayi Brothers plans to split
delisting from foreign stock markets new media and Internet entertainment
lies in long-term undervaluation of and form an independent Internet
their American stocks. Bona Films, for entertainment company that can
example, helped produce or invested go public on its own. These splits,
in 12 domestic films in 2014, which or spin-offs, are one way to build
generated 2.6 billion in box office an Internet-based entertainment
revenue for the whole year, accounting company. Different from a traditional
for 15 percent of total box office entertainment company, the spin-offs
revenue, and its total market value was have some degree of independency,
around RMB5 billion. Enlight Media, and incorporate "Internet Plus" while
however, released 12 films in 2014, retaining a traditional film company
contributing about RMB3.1 billion model. This might become one of the
in box office revenue, and its total development trends for film companies
market value was about RMB59 billion; following the introduction of Internet
Huayi Brothers released 10 films, Plus.
contributing about RMB1.1 billion in
box office revenue, and its total market 4.4 Crowd funding should provide
value was RMB70.9 billion. Bona Films supplementary financing for the
also invested in building theaters, and film industry
has 22 theaters in operation. In fact, In 2015, there were over 100 crowd
Bona Films was equivalent to about funding platforms in China, whose
one third of SMI Holdings Group in impacts on the film industry were
market value, while total market value mainly reflected through three
of SMI Holdings was 12 billion HK aspects: a new financing channel,
dollars. By comparison, Bona Films was open transition, and marketing means.
seriously undervalued on the American Generally speaking, capital raised
stock market. through crowd funding only amounts
to around ten million RMB, which
4.3 "Internet Plus" could drive film is a fraction of the amount (billions)
companies to split into separately required for film production. For
listed companies and go public small film companies, crowd funding
individually offers a viable way to raise capital. For
In the wake of "Internet Plus", many large film companies, however, crowd
giants in the film industry intend to fully funding is mainly used for promotion
develop the Internet entertainment and testing the market response.
sector, split into separately listed
8China's Film Industry – a New Era | Trend Four: From "Highly Concentrated" to "Diversified"
Figure: Impacts of crowd funding on China's film financing channels
Channel Blockbuster
percentage
• Diversified financing
New channels Crowd funding Advertisement Low Middle
(public) placement • Open industry
• Diversified marketing
Copyright • Supplementary channels are
Supplementary Middle Middle
pre-sales steady and flat
channels
• Main channels dominant but
Self-owned Institution
Main channels show signs of weakening
capital Financial loan (venture High High
(producer) investment)
In the future, the crowd funding may allowing the public to profit; the third
be characterized by three models. model will be represented by equity-
The first model will be represented by based crowd funding and debt-based
rewarding crowd funding, using games crowd funding, using a high threshold
to encourage public participation, and (investors need to have certain level of
also as a means for film promotion; net assets) to make the public serve as
the second model will adopt a low film investors.
threshold and reasonable returns,
9China's Film Industry – a New Era | Trend Five: From "Long Tail" to "Thick Tail"
Trend Five: From "Long Tail" to "Thick Tail"
5.1 The current singular film industry to follow. At present,
profitability model will require a Disney's production and entertainment
diversified strategy business only contributes 15 percent
Though the domestic film market of its total revenue, the rest comes
is thriving, there are only a few from diversified business including
film companies making profit, and theme parks, toys, books, video games,
covering film production costs and media networks. Core IP, derivative
relies heavily on box office revenue. products, licensing, and entertainment
However, the Disney model offers a projects provide Disney with stable
successful blueprint for the Chinese sources of income.
Figure: Diversifying revenue sources
Future
Full entertainment
Past
Internet entertainment
Location-based entertainment
Film entertainment
Derivative products
"Expansion"
Brand licensing
Film
Film entertainment
Film
In China, Huayi Brothers took the upstream and downstream industry
lead in launching a "de-cinematic" chains. Enlight Media also launched
strategy, and its expansion resulted projects that entered into several
in continued adjustments to revenue industries including gaming, animation
structure. By implementing this "de- production, and location-based
cinematic" strategy, Huayi Brothers entertainment development, and
gradually decreased its dependence followed Disney's model in trying out a
on the traditional film industry and full industry chain layout.
maximized overall value by expanding
10China's Film Industry – a New Era | Trend Five: From "Long Tail" to "Thick Tail"
5.2 Revenue structure will be re-
balanced, shifting from "Long Tail"
to "Thick Tail"
Figure: From "Long tail" to "Thick tail"
Revenue
Present: long tailF uture: thick tail
Time
Besides extended development, adopt revenue-sharing methods
there are three ways to re-balance with film producers to generate
the revenue structures of China's film new sources of revenue for the film
enterprises: market.
• Derivative products: As China
• Video on demand: In 2015,
pays more attention to copyright
the number of Internet video
protection and intensifies its
subscribers in China exceeded
crackdown on pirated movies,
500 million, and competition for
various enterprises are trying to
exclusive film content led copyright
develop derivative product markets
royalties to rise accordingly,
and reap more film-related revenue.
providing a reliable source of income
for film producers with in-demand These three methods will help
content. improve the post-film market and fully
develop potential markets. Together
• TV networks: In 2015, over
with the extended development of
30 provincial and municipal
enterprises, China's film revenue
broadcasting and TV network
structure is expected to re-balance
companies co-established the
through a shift from "long tail" to
"China TV cinema alliance", enabling
"thick tail."
them to purchase film content or
11China's Film Industry – a New Era | Trend Six: From "single IP" to "IP franchises"
Trend Six: From "single IP" to "IP franchises"
6.1 IP sequels are vital for future centering on IP authorization. Figure: IP development "trilogy"
success
The value of IPs are reflected in three Second, IP conversion: how to find
aspects: First, high quality IPs can earn the right people to adapt and build an
1 IP resources
higher box office revenue; second, IP- IP series, thus improving commercial
based fan bases form an established value. The process of converting quality
market, which is conducive to more IP runs through the whole cultural
efficient marketing; third, based on industry chain. After rising in one field,
the above two points, IP owners have an IP needs to extend to other fields in
more bargain power in the market, order to enhance its commercial value, 2 IP conversion
can influence the direction of capital form an IP system, and evolve from
flow and compete with big enterprises. "single brand" to "cluster brands", thus
Fast and Furious, a record-breaking achieving maximum benefits.
box office film in 2015, has lasted ten
years as a series, and has become the Third, IP operation: operation of an 3 IP operation
hottest car racing "super IP" in film IP ecosystem can prolong IP's life
history. In China, there are three key span. Integrating content making and
elements required for IPs to become distribution, platforms, and hardware
"Super IPs": terminals enables the same IP content
to be converted in multiple forms
Firs, IP resources, or, the competition (films, cartoons, mobile games, novels,
for quality IPs. By early 2015, the rights toys). In the future, IP operation mode
to 114 novels had been bought by should shift from a "single model"
either Internet or traditional giants. to an "integrated model". Disney's
Currently, 90 works are planned to have Toy Story 3 earned US$1.1 billion in
television adaptions, with 24 expected global box office, but its IP full line
to be made into movies. Internet development such as games, books,
companies hoarded a large amount DVDs, copyright and authorization, etc.
of source IP resources. For example, generated US$8.7 billion. With this in
Baidu set up Baidu Literature; Tencent mind, domestic film companies should
Game, Literature, and Animation have seriously consider the development
also accumulated many IP sources to and operation models of IP series.
conduct cross-platform expansion by
12China's Film Industry – a New Era | TTrend Seven: From "non-Conforming" to "Standardization"
Trend Seven: From "non-Conforming" to
"Standardization"
7.1 Completion guarantee will being "overdue and over-budget" is potential hazards for investors. It
promote industrial standardization quite common. About 70 percent is imperative to standardize and
With the rapid development of of the 600 or more films produced normalize the film production process.
China's film industry, problems in annually in China are never screened; Completing a guarantee system may
film production are beginning to this is a colossal waste of resources drive industry transformation.
surface. Due to the lack of standards for producers and the film industry
on domestic film production, films as a whole, and furthermore, poses
Figure: Moving to a standardization model
Traditional model
Seek capital
Producer Investor
Grant capital
Completion guarantee model
Completion guarantee
Provide materials company Risk evaluation
Submit application Grant guarantee
Undertake guarantee
responsibility
Participate in production
Producer Investor
Project passed
Grant capital
Completion guarantee is a relatively production, and distribution, among film industry are two-fold: first, the
mature film financing and production others, and for ensuring that film system helps solve issues of non-
supervision model in the United production and distribution are on standardization in film production, and
States. As a third party (neither budget and on schedule. If the film helps ensure the quality of produced
investor nor producer), the completion cannot be delivered on schedule, films and steady development of
guarantee company is responsible for the completion guarantee company the whole industry. Second, it helps
supervising the whole process from will take over film production and fix financing problems for small
film production to film distribution, compensate the investor with a and medium-size film companies,
including comprehensive review and guaranteed amount. establishes a sound financial security
commenting on various aspects such system, and connects the film and
as script, capital, creative control, The impacts of this system on China's finance industries together.
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