China's – a New Era Contents

Introduction 1

Trend One: From Bigger to Biggest 2

Trend Two: From "Made in " 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 – a New Era | Introduction

Introduction

China's and 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 , in box office revenue and 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, 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 to build and entertainment industry is on movie , and expanded into for speedy development. the upstream film industry with forms of entertainment such as film, its channel advantage. Since its online , 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.

1 China'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. , and (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

2 China'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 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 , 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 , cultural are a way for China's films enter screened in China, but contributed differences, and different styles. global and for foreign films to gain around 50 percent of total box office

Figure: Box office contributions by /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%

3 China'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 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- 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 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

4 China'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 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, film industry chain including IP, New Culture (listed on the production, and promotion, A-share market) along with others all distribution, and ticket . Among announced private placement and these, Internet giants invested investment plans on Internet and big continuously in the film industry, data , 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. • : Using online ticket sales, Production • Internet IP: emergence of Internet IP. Turns to Distribution analyze customer distribution and • Social network: fans actively participate Data-driven film popularity to improve distribution customer-focused in decision-making process. efficiency and resource use efficiency. • Big data: precise estimation of box office revenue. Marketing New media-driven "New media"

• : play , launch promotion du • Online: precise marketing, B 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 • New channels: theater is no longer the • Online activities diversified online + offline activities. only channel, paid video mode is on • BAT investment the rise.

5 Deloitte China Analysis

5 China'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 Traditional marketing methods such as optimization. Breakup Buddies, prior 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

6 China'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 " 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 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 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

7 China'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 -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 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

8 China'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

Supplementary Copyright Middle Middle • Supplementary channels are steady and flat channels pre-sales

Main channels dominant but Self-owned Institution • show signs of weakening Main channels 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 ; net assets) to make the public serve as the second model will adopt a low film investors. threshold and reasonable returns,

9 China'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, , 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, 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

10 China'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 • : 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 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

11 China'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 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 , copyright and authorization, etc. of source IP resources. For example, generated US$8.7 billion. With this in Baidu set up Baidu ; 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

12 China'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 , compensate the investor with a and medium-size film companies, including comprehensive review and guaranteed amount. establishes a sound financial commenting on various aspects such system, and connects the film and as , capital, creative control, The impacts of this system on China's finance industries together.

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