Gone China

30 Jun 2017

GONE CHINA

Back to basics

Edited from 2016 ITA Media and Entertainment Top Markets Report





China’s M&E industry is on track to reach $242.2 billion by 2019. China has the second largest economy in the world, powered by state‐owned enterprises (67 are listed on the Fortune Global 500). 

The population of 1.3 billion (1.388 bn, Worldometers) has more than 600 million Internet users and 500 million mobile Internet users. Wi-Fi is widespread and free, but free speech is curtailed and Internet sites are monitored and blocked for offensive content. 

China’s growing affluent middle class is seeking quality and diversity of entertainment products and services. The government has put its weight behind promoting culture and is building movie theatres at a furious pace, now standing at 23,600 screens (compared to 40,000 in the United States) and more than 3,700 theatres and growing and with an estimated 60 million movie goers, there are excellent M&E growth opportunities in the world’s most populous country.


China offers a powerful, large market place and the government is making sure the entertainment industry is rising to the challenge to match global markets and offerings for its vast consumer base. However, trade barriers such as content restrictions and rules for Chinese ownership limit how exporters can access and trade in this market.

Foreign film producers and distributors can enter co-development/production agreements or other entrusted production agreements to bring their content to film and TV viewers, both in theatres and online. 

The games sector is also booming, and both digital console and online games are facing robust growth in the next five years, presenting excellent opportunities for foreign exporters who would like to enter the marketplace with a Chinese partner. With 13 percent of the world’s global mobile revenues, a new trend has emerged with games spreading due to the popularity of mobile chat apps. Piracy plagues China, and the government is working to improve copyright and IP protections. 

Overview of M&E Market 



China’s M&E market is growing faster than the overall economy as the government has strategically invested in M&E and the growing middle class consumer base can afford to spend on entertainment. 

The Chinese government has emphasized training in the Chinese M&E industry and has increasingly made capital available to the cultural and entertainment sectors, while cautiously allowing foreigners to invest, such as creating an M&E investment fund in collaboration with Singapore and a media project with US media conglomerate Time Warner. In addition, both the US and China view this industry focus as a “soft power” tool in a five-year plan to grow the domestic industry and increase China’s global influence as well as their image abroad. 

There is high demand and consumption of mobile games and filmed entertainment, and some experts advise new exporters to start investing in second or third‐tier cities that have established international business ties and active ports before venturing to the capital, Beijing, and so‐called first‐ tier cities, like Shanghai, that are more competitive. 

Opportunities in Filmed Entertainment


China’s filmed entertainment sector is expected to grow 14.5 percent by 2019 to reach just under $10 billion, nearly doubling from $5.8 billion in 2015. 

This growth is due to China’s policies to stimulate the sector, build its domestic movie production and digital theatres, and expand the role of co‐productions, as well as addressing their quota system and increasing revenue sharing imports. According to the Los Angeles Times and Artisan Gateway (a leading film and cinema consulting firm in Asia), box office receipts increased 48.3 percent to $6.8 billion by year end of 2015.

This enormous growth is the largest jump in the past five years, and 61 percent of it was generated by Chinese films, as American share of the market has continued to decline.

Chinese screens increased by more than 9,000 in 2015, bringing the total amount of movie theatres to 32,000.

NEW!

More recently, the head of the Chinese official film delegation, the State Press and Publication of SARFT Deputy Director Zhang Hongsen first announced that, as of now, the number of Chinese film screen more than 45,000, has surpassed North America (USA + Canada) to become the world's largest film screen s country. 

Compared with 2012, the average daily increase of more than 19 screens.

According to data released by the American Film Association (MPAA) earlier this year, the number of screens in the Asia-Pacific region rose 18% to the highest in the world, while China's 16-year national number of screens increased by 9,290, or 29.37%, the highest in the world. As of December 20, the number of national screen is 40,917, into the 2017 Chinese screen number to maintain a high growth trend, the cumulative increase in the number of screens in 4,000 or so. While the end of last year, North America, the total number of 43,531 blocks.

The increase in the number of screens has made China the hardware market for the world's largest film market, but by the end of the year, the cumulative box office in North America in 2017 reached 36.2 billion yuan (RMB), while China's 17-year cumulative box office was 25.7 billion yuan, an increase of 4.9% over the same period last year %. 


Since 2017, the domestic box office statistics will be network ticket service fee into the box office calculation, so the actual growth rate of less than 4.9%. Large amount of votes to make the loss, the quality of the film is uneven, the audience more rational and other issues are restricting the further development of China's film market.

Source: China Film Insider


China boasts the second largest theatrical market worldwide after the United States, and box office revenues are on a meteoric rise and are expected to reach $8.8 billion (15.5 percent) by 2019. Filmed entertainment is a main driver for the entertainment sector in China, and the government has invested a tremendous amount in new mega theatre’s and entertainment complexes, collaboration with US media and entertainment conglomerates, and co-productions with foreign entities and domestic film production. 

In 2014, 67 foreign films were released in China; of those were released on a flat‐fee basis and 34 on revenue‐sharing basis, meeting the full quota of films. The US–China film deal of 2012 allows for 14 additional movie imports of new format films in 3D or animation on a revenue sharing basis. China’s overall import quota on a revenue sharing basis now stands at 34 films annually for all countries. Co‐production is gaining in popularity, and several major Hollywood studios as well as indie film makers engage in these deals with China. In 2015, foreign films held 45.5 percent market share, in large part due to the success of the US blockbuster Transformers: Age of Extinction.

Whether importing or co‐producing, foreign firms interested in working with China will have to understand how to address State Administration of Press, Publication, Radio, Film and Television of the People's Republic of China (SAPPRFT), regulations for the industry, including cultural and content restrictions, a quota system for foreign films, and garnering data and earnings from unclear box office reporting.

There are two major modes of co‐production in China: joint production (collaboration) and assisted production (entrusted production). Joint production, or “co‐pro,” is considered a domestic film and not subject to the quota and will also be at least 51 percent Chinese‐owned. 

In an entrusted production agreement, the foreign party puts up 100 percent of the capital; the Chinese side produces the film, but it counts as a foreign film under the import quota. Foreign exporters and licensors also face a marketplace with widespread piracy of creative content and are advised to conduct a cost‐benefit assessment prior to entering the market. 

In addition, the China Film Group (CFG) controls distribution of imported movies, and investors will have to either use a joint partnership or hire US or local experts to help manoeuvre the bureaucracy. Either way, a Chinese entity must be approved for “film distribution” in order to distribute foreign movies. While CFG has such an approval, other Chinese entities may also be approved. 

It is a must to speak Chinese or have a local representative who is fluent in Chinese (Mandarin on the mainland) when doing business in China. Foreign producers and exporters will compete for the online generation in China with the “BATs,” namely the three Internet giants in China: Baidu, Alibaba and Tencent, which have all moved into film production. 

Dalian Wanda Group, China’s largest cinema owner and commercial real estate developer, which acquired the US company AMC in 2012, is building a movie studio to rival Hollywood studios in Qingdao, a major port city in eastern China, with a $160 million fund to attract producers. 

Qingdao Oriental Movie Metropolis, an enormous film studio development owned by the Dalian Wanda Group, is set to open sometime in 2017. The complex will include a theme park and entertainment centre, a 4,000-room resort-hotel complex, a shopping mall, a 300-berth yacht club, a celebrity wax museum, and a hospital. Wanda Studios Qingdao is going to be one of the largest and most technologically advanced feature film-production facilities in the world, encompassing 30 sound stages; an enormous, temperature controlled underwater stage; a green-screen equipped outdoor stage that is still larger at 56,000 square feet; a permanent facsimile of a New York City street; and much more.

China has the largest cable TV market in the world with 216 million subscribers. Via the media giants Tencent, Baidu, LeTV and Youku Tudou, Through‐TV‐ subscription revenues are projected to reach $462 million in revenues by 2019, up from $314 million in 2015 (13.4 percent).

Electronic home video is expected to reach $480 million (16.6 percent), driven by smartphone and mobile expansion. OTT and streaming will grow at a fast clip of 16.6 percent from $166 million to $291 million during 2015 to 2019, a significant revision downward from the 2013 to 2018 predictions.

Nevertheless, China is the largest IPTV market in the world, yet this sector is also under siege from piracy. Effective April 1, 2016, SAPPRFT requires foreign films and TV series to register for a “publication license” in order to show content and stream online. 

Imported TV series also have to be reviewed by China’s censorship authority in their entirety before streaming on the Internet. This has a huge impact on weekly shows. Programs that were not registered by March 31 will be removed from VOD platforms. 

Finally, a recent 30 percent limit on foreign TV shows and films has been implemented, creating challenges for many and raising questions in the context of the 2012 film agreement, which promised to make the process of importing films easier and more transparent.

Challenges M&E Exporters



China remains on the US Special 301 Priority Watch List for IPR due to heavy piracy, especially online, on mobile devices, and from the proliferation of media or set‐top box piracy. 

Rogue manufacturers can access, pre‐load and store unauthorized content, including pay TV, movies, music, books and games, and sell them cheaply to users who seek access to premium content without paying subscription or market prices.

Consumers can also download content from a multitude of illegal sites, onto set‐top boxes or other devices. The set‐top boxes are sold all over Asia, including markets where much of the content is not even legally licensed, creating deep losses to rights owners and M&E firms. Pay TV and signal theft is also on the rise, and illegal cam-cording of movies in theatres is widespread.


Guidance

The following information is intended to provide guidance for those looking to sell their services in China:

• Typical buyers, licensors and distributors of M&E in China might include state and federal government and select private companies depending on the sector. 

• Preferred business strategies to enter/expand in the market might include identifying local partners and co-production companies for distribution and to assist with content and other requirements. 

• Common trade barriers to enter/expand in the market might include that most multinational vendors have either a regional or local presence in country. Companies should expect some significant challenges with content restriction and State government overview of M&E sectors. 


Check out two of China’s most significant pavilions – Zhejiang and SMG – at ATF 2017, where their ultimate content distributors will reside. Don’t miss them on Level 5!

Source: 2016 ITA Media and Entertainment Top Markets Report

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