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China’s film industry – changing market dynamics driven by technology

Bar chart showing China's online video market by revenue for 2009 - 2019, and forecast until 2022.

Chinese moviegoers bought a total of 548 million movie tickets in China in 2020, and the country’s total box office reached CNY 20.4 billion (about USD 3 billion) in 2020, overtaking the North America to become the world’s largest movie market for the first time (until 2019, China had been the world’s second largest movie market).

China’s ascent to pole position in 2020 is despite China’s box office takings plunging 68.2% year-on-year (YoY) from a record high of USD 9.2 billion in 2019, and a 66.5% decline from 2018 – due to cinema shutdowns as a result of the Covid pandemic and significant losses as a result of delayed or scrapped film releases. As many as seven Chinese films that were scheduled to be released during the Lunar New Year Holiday 2020 were pulled which is estimated to have cost USD 210 million in those two days alone. The roughly one week long Lunar Holiday is a key release period for Chinese films. Chinese authorities shut Chinese cinemas nationwide for 178 days from January 23, to July 20 when cinemas were allowed to re-open at 30%. The restriction was lifted to 50% on August 14, and 75% on September 25.

The shutdowns hit industry players hard. Maoyan Entertainment (HKG:1896) for instance, China’s largest online movie ticketing app for instance said revenues plunged to 89.7% YoY to CNY 200 million during the six months to June 2020, from 1.94 billion the same period a year earlier. Tencent-backed (HKG:0700) ticketing platform Maoyan Entertainment, dominates China’s online movie ticket sales with an estimated market share of 60% in China where more than 80% of all movie tickets are sold online (mostly over mobile devices). Together with arch rival Alibaba-backed (HKG:9988) Taopiaopiao which has a market share of 30%, the duo command a combined market share of as much as 90% of China’s online movie ticket sales.

Wanda Film Holding万达院线 (SHE:002739), which acquired AMC Entertainment Holdings (NYSE:AMC) in 2012 to become the largest cinema chain operator in the world said revenues declined 73.93% YoY during the first six months of 2020 to CNY 1.97 billion, pushing the company into the red, with a net loss of CNY 1.57 billion a staggering 398.8% decline from a year earlier when it reported a profit of CNY 524 million. Box office revenues which sank 88.5% YoY to CNY 580 million in 1H 2020, accounted for just 27% of total revenue during the period.

Meanwhile, North American box office revenues sank more than 80% YoY to USD 2.28 billion in 2020, from USD 11.4 billion in 2019 according to American media analytics firm Comscore (NASDAQ:SCOR) as a result of the Covid pandemic which shut cinemas throughout the country causing blockbuster Hollywood productions like Black Widow and Wonder Woman 1984 to postpone their 2020 releases. According to Comscore by late 2020, just 34% of all North American theatres were open.

Last October, Wanda Film’s AMC Entertainment warned the US Securities and Exchange Commission (SEC) that it could run out of cash within half a year, as poor attendance weighs on its cash flow despite 494 of its 598 theatres being open as of October. The cash-strapped movie theatre operator has managed to raise USD 200 million but is still short of USD 750 million more which it needs to ensure its survival.

Chinese moviegoers– a declining market

Movie viewership is on a downward trend with Chinese watching an average of 1.73 theatrical films in 2020, down from 2.88 in 2019, and 3.06 the year before. This could be due to the fact that with an average age of 28.8 years in 2020, Chinese movie-goers are on average younger than their American counterparts. Just 11% of Chinese movie-goers are above 40 years of age (compared with more than 50% in the United States according to data from Statista).

This young, tech-savvy generation appear to be more inclined towards watching films online from the comfort of their homes, and at the convenience of their time and pace, rather than in cinema as evidenced by a 2019 report from Tencent and Moayan which reveals that in 2019 just 66 million movie tickets were sold for the year’s top 10 highest-grossing films in China, while those same films were viewed 503 million times online. Their preference for options to suit their online lifestyle is also amply evidenced by China’s online movie ticket sales which has steadily increased over the years climbing from 76.1% in 2016, 81.6% in 2017, and 84.3% in 2018.

Meanwhile, the rise of “internet films” which are movies commissioned by internet streaming platforms such as Baidu-backed ((NASDAQ:BIDU) iQIYI (NASDAQ:IQ), Tencent Video and Alibaba’s Youku Tudou, (China’s three biggest online video streaming companies) further illustrate the shifting dynamics of China’s conventional film industry. China’s online video market has grown tremendously and having emerged as major online film distributors, these online video behemoths are now increasingly moving to increase their involvement in the film industry with a particular focus on online-only “internet films”.

Bar chart showing China's online video market by revenue for 2009 - 2019, and forecast until 2022.

The trend is similar to that in the West where studios are increasingly finding themselves with the difficult decision on whether a movie will be streamed online through a streaming platform such as Netflix (NASDAQ:NFLX) or whether they should stick to traditional theatres.

Meanwhile streaming giants such as Netflix and tech behemoths such as Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) are also flexing their muscles in the film industry with a number of them churning out their own original video content, leveraging on their positions as major consumer entertainment or e-commerce platforms to market and distribute their content, and thereby disrupting Hollywood’s decades-old stronghold on the world of entertainment.

Local content gaining greater share of film consumption

Imported films accounted for about a sixth of China’s total box office takings in 2020, a 55% year-on-year decline according to figures from Maoyan Entertainment. The decline was largely attributed to the Covid pandemic which affected Hollywood release schedules, as well as rising interest in domestic content. Foreign films had been seeing consistent declines in their share of China’s box office takings over the past few years, accounting for 38% in 2018, 35.9% in 2019, and just 16.3% in 2020.

China’s growing importance in the global film industry has made Hollywood studios eager to capture a share of the pie, however with the Chinese government limiting the number of distribution slots for foreign films and domestic productions increasingly gaining greater appeal among Chinese movie goers as a result of greater content, and improving quality and competitiveness, foreign films are fighting an uphill battle in China.

Chinese film The Eight Hundred, which was released in August earned USD 461 million in the global box office, making it the highest grossing film in 2020 according to data from box office tracking website Box Office Mojo.

Produced Huayi Brothers (SHE:300027), Tencent Pictures (HKG:0700), Alibaba Pictures and Beijing Enlight Media (SHE:30251), The Eight Hundred is the first Chinese film to reach the top spot in the global box office, and is the first non-English film to win the annual global box office crown since 1915.

Competition looks set to intensify as a growing number of local players enter the market as well. Alibaba Pictures, which has so far positioned itself as a joint rather than a primary role in local film production is now reportedly working on expanding its original content production capabilities, with the launch of a new in-house film studio called “Surprise Works”.