27 January 2016

Chinese money on Sunset Boulevard


Wang Jianlin is China’s richest man. With a personal fortune of over $30 billion, he owns businesses that range from department stores to commercial property, from e-commerce to media to tourism. But that is not enough for Wang Jianlin: in the past he has made no secret of the fact he also wants to be a Hollywood film mogul. And this year his dream has been fulfilled.

It was no great surprise to the industry when in January Wang paid $3.5 billion for a controlling stake in Legendary Entertainment, producer of films like Godzilla, Jurassic World, the Steve Jobs biopic and the Batman series. There had already been talk of a deal with film producers DreamWorks Animation, or with Metro-Goldwyn-Mayer, or with Lionsgate, none of which came to anything. But the purchase of Legendary is a turning point deal. It is the first time a Chinese owner has entered the mainstream international film market on a large scale (although Wang Jianlin’s holding company Dalian Wanda does already own the US AMC cinema chain), and it is the first time a large US producer has come under Chinese control. The Chinese have long had their sights set on prime Hollywood properties, and now they have  arrived in some style.

Although there have been plenty of US-Chinese co-productions in the recent past, Wang Jianlin is the first big spender. He is unlikely to be the last. For example Jack Ma, the founder of Alibaba  – the largest e-commerce company in China – was also in Los Angeles late last year when he had conversations with Sony, Paramount, Lionsgate and Warner Brothers (and as it happens there there are rumours that Time Warner may be looking for a new owner). More recently Jack Ma has brushed off suggestions that he may be the next Jack Warner, but China is not short of ambitious billionaires and it is only a matter of time before another of their number saddles up and follows on the Jianlin trail. But what does it all mean?

It may look as if China with its cash and its refreshingly unapologetic desire to get to the top of everything is muscling in on Hollywood and its markets. But in fact the plot unfolds the other way around. It is Hollywood that is trying to get into China, and for one very good reason: China is already the second biggest film entertainment market in the world, and it will soon be the biggest.

According to the Cinema Insight report from IHS, a global information company, China will in 2018 overtake the United States as the biggest film market by box office revenues. While cinemas are closing in developed economies, box office takings in China have increased by a factor of almost fifty in the last 12 years. Streaming video for home entertainment is also taking off (there are offerings from Alibaba, and e-commerce competitors Tencent and Baidu, and most recently a new joint venture between a Chinese studio and the UK’s streaming specialist Mubi) but that is the market of the future; for now the Chinese action is in traditional filmgoing.

Naturally Hollywood wants to be part of that. The difficulty is that just as in so many other parts of the Chinese economy it is extremely tough to flourish in a market that is highly-regulated. For foreign producers the barriers are censorship, and distribution quotas, and home-grown Chinese competition. And for some Hollywood studios the obvious strategy for beating the barriers is to become more Chinese.

Chinese competition is certainly fierce. China is the world’s third biggest producer of films (by number of productions) after the US and India, and half of the films in the list of top grossing productions in China are home-grown. The biggest Chinese hits of the last twelve months include Lost In Hong Kong, the latest in a hugely profitable series from Hong Kong’s Huanxi Media, and Mojin: The Lost Legend from Wang’s own Wanda Media studios. Last year’s biggest grossing film in China was Monster Hunt, an effects-heavy 3D action fantasy made by a consortium of ten Chinese studios.

Chinese films make a lot of money in China and other Asian territories: Monster Hunt outsold all the Hollywood competition, taking $370 million over the year in China alone. Hollywood also sells well – the seventh Fast And Furious movie was the second-biggest seller in China last year – but what Hollywood really wants is to hit on a formula that would create movies that press all the right buttons in China and the rest of the world. Producers are still struggling to come up with a film that is critically and commercially credible, that sells well in all territories, and that is as Chinese as it is Hollywood.

And that is exactly what Wang Jianlin is attempting through his purchase of Legendary Entertainment. It is no accident that Legendary is already close to completing the most ambitious Hollywood-in-China project yet, an adventure called Great Wall starring Matt Damon which at over $130 million will be the most expensive film ever to be shot entirely in China. But irrespective of the film’s budget, or its bankable star actor, the key to its success is that thanks to China’s richest man the film now has a Chinese production identity. Whether it is good or bad, Great Wall will not face the distribution barriers that other Hollywood films contend with, and nor will subsequent films from Legendary.

China is not an open market, in films or anything else. Although most film financing and production in China has long moved out of the realm of state control (although somewhat bizarrely the state continues to subsidize some production through a film studio that is part of the People’s Liberation Army), distribution has not similarly escaped. And when it comes to cracking the Chinese market, distribution is what counts.

The government’s distribution quota permits only 34 big-budget foreign films to be marketed in China each year (with a further quota for smaller niche market films). Even where a film is granted distribution there are also censorship hurdles, with content judged ‘extreme’ liable to be removed. Controlled distribution and censorship overlap: for example next month’s violent superhero blockbuster Deadpool from 20th Century Fox (to be reviewed on CapX shortly) has already been denied distribution on the grounds that it will be upsetting for sensitive Chinese film-goers (thereby guaranteeing plenty more business for the thriving Chinese market in bootlegged films).

Censorship can be just as much a problem for domestic Chinese film-makers as for Hollywood, and can also take unexpected forms. To take one example: when the original star of last year’s hit Monster Hunt was arrested in China on drugs charges just as the film was close to completion, the producers instantly realised that their chances of getting distributed had become negligible and chose to re-shoot nearly all the film with a new lead actor, almost doubling production costs. Luckily for the producers the finished product repaid its inflated budget more than seven times over.

Commercial film-making is a high risk business, whether in China or elsewhere. Like other businesses, film studios making big-budget movies seek constantly to limit their risk. The possibility of exclusion from the Chinese market is rapidly becoming one of the biggest risks that figure on the studios’ spreadsheets. The only sure way to mitigate that risk (as the accountants would say) is to integrate film production with Chinese companies who understand how to navigate the backchannels to government that win distribution approvals and keep clear of the censor.

That is why Wang Jianlin will not be the last Chinese billionaire to hang out on Sunset Boulevard. And the effect on big budget film-making itself? That is another question. Limiting risk is not at all the same thing as making great films. Let’s see if Great Wall has what it takes.

Richard Walker is a journalist and advisor to financial companies.