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China As Holy Grail & Headache: How It’s Influencing Hollywood Strategy – Deadline Disruptors

Deadline logo Deadline 5/22/2017 Nancy Tartaglione
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China’s breakneck box-office growth may have ground to a sputter in 2016, but one need only look at the recent success of The Fate Of The Furious for proof there is still gas in the market. Last month, F8 crossed 2.43 billion RMB to become the No. 1 import ever in the market. As of Sunday, it has climbed to 2.662 billion RMB ($386.7 million).

That performance reflects what has become a source of excitement and consternation for Hollywood. In the five years since it paved the way for more studio films — and Wanda acquired AMC — China has come to represent the holy grail of box office bucks and a key financing source. Yet it remains an enigmatic labyrinth whose twists and government agenda appear to shift continuously. So what’s Hollywood’s upside in having China, with its flashy pronouncements and strict censors, disrupt it so?

It’s important to look at how China differs from previous deep-pocketed comers to Hollywood. What were the Japanese, Germans, French, Arabs, Indians—and Wall Street—lacking? A giant pot of gold at the end of an ocean-spanning rainbow that leads to what will soon be the world’s biggest theatrical market, that’s what. Hollywood simply can’t ignore a country of 1.3-plus billion people.

“Every studio and financier in town and filmmakers and creatives have all changed their strategy to adjust to the fact that there is a new market that will be the biggest in the world,” says one film exec. “The way they think about moviemaking and the creative process and the financing of it and the P&L have all been disrupted by that.”

A dealmaker who works with both countries adds, “China came around at exactly the right time to help make up the fall-off of physical home entertainment and a weakness at the box office.” But they caution, “Now, the same way everyone got dependent on home entertainment dollars, the studios are dependent on China dollars.”

Further, says a distribution executive, “The irony is that most of the studios have started to include China grosses into ultimate numbers for films when first mapping out in the budgeting process, which can be dangerous. To hit budget numbers, you used to completely exclude China—which was a smart way to go about it and allowed China to become your upside opportunity.” Now, this person says, “Including China makes it even harder to hit your number and disastrous if the film does not get a release slot for any number of reasons”.

With the yin comes the yang, and folks disagree on China’s positive role as a disruptor. Chris Fenton, a trustee of the Washington DC-based U.S.-Asia Institute and also president of DMG Entertainment, is pro. “There is no better way to bring two countries with a tense relationship together than through the high-profile artistic collaboration necessary to make globally relevant movies,” he says. “The bridge it builds is both practical and emotional.”

But another exec doesn’t believe the market itself is all that hot. “China is a major market, but the quota and revenue share make them less relevant, as they can’t change bottom line like they could if those were gone.” This person believes the revenue share issue is “essentially cutting off their own nose because they have a chance to become the biggest revenue earner for Hollywood, and therefore an ability to control the field. It’s not enough to be the biggest overall market… If China was 40 percent revenue share like every other market in the world, then it really matters.”

Co-productions, which entitle studios to a 43 percent return, are still in the growing-pains stages. “Speaking to two cultures at the same time and trying to bridge that is really, really challenging,” says one exec. But, “there’s no trend of them stopping and no one is pulling the plug on things. The two markets are too big and too important to not try to approach this.”

The U.S. Trade Representative (USTR) will soon begin negotiating a new contract with China on behalf of the film industry. When the last one, in 2012, raised the quota floor and upped the revenue share from 12.5 percent to 25 percent, a boom time began. But studios quickly learned that with no control over release dates, films could be sandwiched into unsavory slots or cannibalized by the competition. Release date say-so isn’t likely to change, and many consider that raising the quota floor again is counter-productive because P&A costs are growing in China. On the other hand, if the revenue share is increased, it could actually send more Chinese money into Hollywood.

The renegotiated contract “is going to be a catalyst to open up China as a market for U.S. movie companies and China for allowing different types of investment into the U.S.,” suggests a Hollywood dealmaker. “If the revenue share goes up, it will be tremendously powerful for U.S. companies and Chinese companies that are multinational.”

China does its level best to maintain at least a 51 percent market share for local movies, but if that potential box office is maxed out, big players like Wanda, Alibaba and others will want to get a larger percentage of the U.S. cut. Yet a number of recent deals have evaporated. There are stricter government controls in place, slowing money flow out of China—and also attempting to curb “irrational” investments by companies whose core business is not media. But many also see that as a convenient excuse.

In the case of the $1 billion Paramount/Huahua slate financing, which hiccuped before recently getting back on track, and other deals that have been announced with fanfare, only to never materialize, an exec cautions, “There is no deal unless the money is in your account and you have sole discretion over it. Nothing. It doesn’t exist.”

Examples of investment deals that have moved forward include Perfect World Pictures’ 50-film financing pact with Universal; Hony Capital, Tencent and others’ arrangement with STX; and Alibaba, which has put money into individual tentpoles.

The likes of Wanda, Tencent and Alibaba are doing their own deals out of their own bank account, and that’s encouraging. Says one film exec, “There wasn’t a lot getting done until [Wanda’s Chairman] Wang Jianlin bought AMC. That was a really important moment—people were saying that the transaction was real and funded, in the same way as if they had bought a steel company.” Jianlin has certainly done his part to disrupt the landscape; his company is now the world’s largest exhibitor, via its ownership of AMC, and also owns Legendary Entertainment.

Wanda has come under some scrutiny in D.C. as part of a broader hand-wringing over China’s investments in Hollywood. But after a recent meeting between U.S. President Donald Trump and his Chinese counterpart Xi Jinping, tensions seemed to ease on issues of trade. Some think China is going to continue to be restrictive on offshore investments, but others say that if the Chinese government stymies capital conversion by multinationals, the effect of them not being able to expand is more deleterious on the economy than sending money offshore.

Attorney Tom Ara says it’s “TBD” whether money will flow into Hollywood like it has recently. But he’s positive about the future. “Right now there is a bit of a stall. I think things will maybe not go back to the peak, but there will definitely be some more of the past five years.”

Turning back to actual moviemaking, China and Wang personally have said they want to learn from Hollywood. But isn’t that dangerous? Ara thinks not. “Hollywood has always been Hollywood and anybody who thinks that they are, even the Chinese, going to make films with international appeal, they’re not, not in my lifetime. Are they going to be able to dominate their own box office better than they are now? Absolutely. And that’s what they want to do.”

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