Posted on 07/20/2005 1:00:28 AM PDT by Californiajones
BEIJING -- Legendary explorer Marco Polo's journey to China lasted 24 years.
This is the kind of commitment that foreign media executives leading the way into China today say they will have to show their hosts if they are to succeed at making a business out of entertaining 1.3 billion Chinese.
They continue their push into China with new partnerships and ventures taking shape on a regular basis, but the majors realize that it might be 20 or even 30 years before they can reap the full benefits of these exploratory ventures.
Executives who are leading the way into China for the U.S. entertainment sector caution that it takes time for non-China companies and Chinese authorities to fully learn and understand each others' cultures. The Chinese government's careful bureaucracy almost mandates that companies take a longer-term view when it comes to making a business out of entertaining the Chinese population.
"They are a country that has been around thousands of years," says Burbank-based Andy Bird, president Walt Disney International. "They kind of take a longer view, and sometimes we, too, have to just take a slightly longer view in terms of how we do business there."
Richard Fox, executive vp international at Warner Bros., also based in Burbank, adds: "Yes, it's a long timeline. The fact is that China started a lot later than Germany, Japan, Italy or France, but there's no question that it's going to become one of the most important markets in the world. We just have to work with them in the context of China's regulations and customs and practices. Now that we are working on the ground with them in so many of our core businesses, this alone, over time, will create a better environment for change."
Simply put, big Western media companies are willing to be patient with speed bumps like regulatory flip-flops and seem unfazed by the challenge of doing business in China, drawn by the 25.2% increase in Chinese spending on entertainment and media projected over the next four years by a recent PricewaterhouseCoopers report, "Global Entertainment and Media Outlook: 2005-2009 Global Overview."
Last week, right on the heels of U.S.-China trade talks about market access and piracy, the Chinese government delivered a setback to foreign media, banning provincial TV stations from working with foreign companies.
Still, in Hollywood, the long view prevails where China is concerned.
"We just see an enormous amount of potential there," says Bird, pointing out that incoming Disney CEO Robert Iger has made international expansion one of his key priorities, with China, Russia and India being the company's biggest focus markets. "I look at China with nothing less than optimism."
Culver City-based Todd Miller, Sony Pictures Television International senior vp and managing director Asia, adds: "The reason we are so enthusiastic about China is that it is a market that has over 9 million broadcast hours a year and 400 million potential viewers for the kind of shows we produce, which are aimed at viewers in the 15-35 age group. So when you couple the demographic with the large broadcast infrastructure there, it all makes China a very interesting market."
Jeffrey Dunn, chief operating officer of Viacom's Nickelodeon networks group and president of Nickelodeon film and enterprises, speaking during a June PwC conference panel in New York about current business trends, said, "We have spent years developing the business (in China), and it will take years to reap the benefits."
THE NUMBERS
The Chinese media and entertainment market nearly tripled in size over the past five years to a preliminarily estimated $46.4 billion in 2004 from $18.7 billion in 2000, according to PwC data. The firm predicts the market will more than triple over the next five years to reach $143 billion in 2009. This year, entertainment-sector spending will amount to $60.6 billion in China, growing to $79.7 billion in 2006, $100.6 billion in 2007 and $122.4 billion in 2008.
On the broadcast side, PwC predicts that terrestrial ad spending is expected to grow to $7 billion in 2009 from $1.3 billion in 2000.
Among the key drivers in the burgeoning market will be multichannel TV households, which will grow to 190 million in 2009 from 117 million this year, and Internet users, whose numbers will increase to 280 million by 2009 from 120 million this year, according to PwC.
In fact, Internet spending in China is expected to grow to $90.7 billion in 2009 from $29.7 billion this year.
The expanding market also will bring with it shifts in share in the country in terms of revenue sources for film.
For instance, PwC predicts that revenue for film from TV broadcast will increase to 45.1% of total income for movies by 2007 from 31.6% in 2004.
China boxoffice has been on an upward trend the past few years, finishing in 2004 at 1.5 billion yuan ($183 million), according to statistics from China Film Bureau, one of the government bodies under China's top media regulator, the State Administration of Radio Film and Television (SARFT). Boxoffice this year is projected to continue its climb.
Despite the fact that the admission price to a movie is beyond the means of many Chinese, the continued rise in earnings among some professional sectors makes a night at the movies a desirable if pricey "white collar date," which accounts for the continued upward trend in boxoffice receipts.
China's national average price for a movie ticket is about 20 yuan ($2.40). In big cities, tickets can run as high as 80 yuan ($9.60).
Even in relatively wealthy Beijing, a movie ticket is a luxury beyond the reach of most of the capital's 15 million residents, who earned on average 15,700 yuan ($1,900) last year.
Beijing's wealthiest 20% earn four times that of the capital's poorest 20% -- 29,600 yuan ($3,600) vs. 7,400 yuan ($890) -- municipal government statistics show.
What's more, China's poorest rural residents, who earned an average income of 865 yuan ($104) last year, number 90 million and account for 10% of the country's total rural population.
Moviegoing has for a long time been held back because state-owned cinemas were in poor shape with poor sound and bad seats.
But in 2002, theater operation was opened by SARFT to private, and then foreign, investment.
As of 2004, there were 37 cinema circuits comprising 1,118 individual theaters and 2,396 screens, according to research by China eCapital, a private Beijing-based media sector investment advisory. In addition, there are about 3,900 independent theaters, which typically are rundown.
In an effort to draw a wider audience, many cinema owners began last month to sell half-price tickets on Tuesdays in a push driven by the China Film Distribution and Projection Assn., which represents 32 of the cinema circuits and about 900 cinemas nationwide.
Another factor that could swell China's movie attendance is the wave of digital film building in the country.
The digital revolution could make movies more accessible because the cost of producing, distributing and exhibiting a digital film is just a fraction of that for a traditional film.
As of January, China had 166 digital cinemas and is projected to have 500 within three to five years, according to China eCapital.
A network of 317 TV stations (that create and transmit content) and 1,305 additional broadcasting stations (that only transmit) distribute more than 2,000 programs nationwide, according to Daniel Brody, former managing director of the U.S. Technology Office in Beijing, speaking in the China Economic Quarterly.
DOING BUSINESS
Some analysts believe that "outsiders' " desires to reach the vast Chinese consumer base might in the short term be kept in check -- or even rebuffed -- by the government's wish to promote domestic players and control what people see on the screen.
As a new top regulator gets settled in Beijing, a much-anticipated new film law to govern market entry awaits full approval.
The law, now in draft and awaiting the feedback of Wang Taihua, the new chief at SARFT, could guide censorship, investment and the first film ratings system.
Marcel Fenez, leader of PwC's Hong Kong-based Asia-Pacific entertainment and media practice, is doubtful the law will be unveiled before the end of this year. "While most industries have only one overseer, Chinese media regulation is a maze. There are lots of people who can interfere, but not so many who can make decisions," he says.
Wang Ran, principal at China eCapital, agrees: "It's a highly regulated market. The regulations and rules limit what the Hollywood studios can do."
Wang says the ambiguity in the interpretation of these rules dictates that companies spend a lot of time and effort on local government relationships and cultivating their access to officials in the information departments and, even higher up, with senior leaders.
"Going forward, the importance of maintaining good relations with the government is going to be equally important, but I think increasingly the government has realized that the media needs to be opened," Wang adds.
There are of course issues to be dealt with over the long term, not least of which is the rampant DVD piracy problem that the Motion Picture Assn. estimates is at 95% for films.
In the latest high-level U.S.-China trade talks, which took place last week, U.S. Trade Representative Rob Portman said "measured progress" was made when China's government said it would increase the number of intellectual property rights violation cases tried in criminal court and delay issuing draft regulations on software procurement that threatened to close off a market with a potential value of $8 billion to U.S. firms (HR 7/12).
China's trade team, headed by Vice Premier Wu Yi, also agreed to post an IPR ombudsman to its embassy in Washington, to enhance its crackdown on movie piracy and to establish a group under the Ministry of Public Security responsible for all IPR criminal enforcement.
In addition, the MPA revealed Monday that it had for the first time signed an anti-piracy memorandum with SARFT and the Ministry of Culture to target the counterfeit of new releases (HR 7/18).
Mike Ellis, MPA Asia-Pacific regional director, said, "The MPA is very pleased to have entered into this historic agreement ... and we are hopeful that positive results in the form of reduced piracy will be quickly felt. We are additionally hopeful that this memorandum will benefit all film producers and distributors and not just MPA member companies."
The Hollywood studios' lobby group estimates that its member companies lost $280 million in China because of piracy in 2004, making China by far the worst offender in Asia, where the MPA says losses totaled $896 million across 15 nations.
But this has not deterred the studios from accessing the Chinese market.
Market access is totally controlled by SARFT, which limits the number of foreign films, selects which titles are acceptable and dictates when they can be released.
The process begins with the producing studio submitting its film to China Film Group (the country's monopoly film importer) and to Huaxia (a secondary distributor). If the film is considered "commercially viable" by these distribution bodies, it is forwarded to the China Film Bureau for review. If the Film Bureau deems the film acceptable, it notifies China Film Group of proposed edits to meet in-country standards. China Film Group and Huaxia notify the producing studio of the film's acceptance and submit a list of proposed edits from the Film Bureau to qualify for distribution. This process can take as little as one week or as long as two months.
Film, TV and home entertainment titles each are overseen by different five- or seven-person censorship boards whose appointed members typically belong to the Communist Party.
Sometimes, films that fail to meet the theatrical standards are approved for home release and vice versa, but across the board the two biggest taboos are sexual content and material considered offensive to the Chinese people, says Li Chow, general manager of Columbia Tri-Star Film Distributors, a division of Sony Pictures Entertainment.
"This is one of the biggest challenges to film distribution in China," Chow says. "We have to be politically correct. Something negative about North Korea or Russia, for instance, is not allowed because they are friends of China."
This summer, Chinese moviegoers are able to see Sony's Ice Cube starrer "XXX: State of the Union," the sequel to a film China never saw on the big screen after SARFT banned the original "XXX" because of body art on star Vin Diesel's character. "One reason they gave us for banning the original is that tattoos are for gangsters," Chow says.
Currently, China's regulations limit to 20 the number of foreign films that may be screened theatrically each year on a revenue-sharing basis. The rest have to be imported for a flat fee, which is minimal. A March report on the film industry by China eCapital says that 675 million yuan ($81 million) was earned in 2004 by the 20 foreign revenue-sharing films allowed into China, accounting for roughly 45% of the total boxoffice. SARFT says the quota for revenue-sharing films will stay at 20 this year.
Of the boxoffice revenue shared, foreign film companies get only 14% -- well below the 25%-35% commanded by their Chinese counterparts -- which can hurt, considering that the cost of bringing a film into China can run up to $250,000, the China eCapital report says.
No quota exists for foreign films imported for TV, and about one-quarter of the films shown on Chinese TV are from overseas.
But TV also is very much a developing sector for foreign producers as the one-time license fee paid is typically less than $100,000. This situation could improve as various forms of pay TV and Internet TV gain in popularity and develop a wider user base than the current 1 million who were pay TV subscribers at the end of 2004, the China eCapital report says. It predicts that subscription TV spending in China will increase from more than $3 billion this year to more than $7 billion by 2009.
The numbers bear out what the experts say about going into China with a long-term view. Warners' Fox echoes others when he points out: "The Chinese need to see we are committed to their country, their industry and to their culture from the ground up. They see us investing in theaters, films and human resources."
Sony Pictures Television International, too, has long had its foot planted in China. But only now are the relationships beginning to bear fruit.
"We opened up a rep office a decade ago, and that office spent a lot of time just maintaining a daily dialogue with all the critical people both on the political side and the commercial side," Miller says. A number of important strategic partnerships have resulted for Sony. Miller hopes that a co-production agreement between SPTI and Hua Long Film Digital Production Co. will result in some 150 hours of new programming over the next two years.
THE MAJORS' PRESENCE
When it comes to China's media environment, hopes for overnight change and instant wealth are ill-advised. But late in 2004, regulator SARFT did lay out a welcome mat to foreign participation in China's media industry, one of the last biggies to open its doors. Its new rules allowed joint ventures in filmed entertainment, and Hollywood's desire to scale the Great Wall was renewed.
Here is a rundown of key moves and investment plans by Hollywood majors operating in China:
n Time Warner follows a strategy that includes everything from co-productions to theaters to DVDs. This past November, its Warner Bros. studio helped create Warner China Film. Warner Bros.' partners in what is the first Sino-foreign film production joint venture in China under the new SARFT rules are China Film Group (40%) and Hengdian Group (30%), a privately held entertainment company.
Later this year, WCF is expected to announce its first Chinese-language co-productions in film, TV and animated movies, the outgrowth of an initial investment of 415 million yuan ($50 million).
In May, Warner Bros. chairman and CEO Barry Meyer told Britain's Financial Times that, while looking for new theater locations in China in 2004, he stumbled upon a company relic in Shanghai -- a site that had housed a Warner theater in the 1940s just before the communists swept to power.
By December, Warner Bros. International Cinemas had opened state-of-the-art multiplex cinemas in seven Chinese cities, including Paradise Warner Cinema City in Shanghai, the top-grossing cinema complex in China for the past three years.
Under SARFT regulations, WBIC became the first Western cinema investor with majority ownership in a Chinese cinema, with 51% of a joint venture with Shanghai United Circuit, according to Warner Bros.
WBIC now awaits government approval for a 51% stake in a joint-ownership venture with the government in China's southern boomtown Shenzhen, where it hopes to build five theaters in shopping malls anchored to Wal-Mart stores.
In September, Beijing is expecting to open a seven-screen, 1,100-seat Warners theater through a joint venture with Guangzhou Jin Yi Film & Television Investment Co., according to Warner Bros. Also this year, the studio says that four more Warners' majority-owned multiplexes could appear through a joint venture with the government of the southern city of Guangzhou.
To try to beat the DVD pirates to market, Warners in February joined the Ministry of Culture's video titles licensing body, China Audio Video, to form CAV Warner Home Entertainment (with CAV having a 51% stake; WHV, 49%).
The company aims to distribute and market Warner Bros.' extensive library of films, from "Casablanca" and "Looney Tunes" to "The Last Samurai," to the growing number of Chinese able to afford 28 yuan ($3.38) for a legitimate product versus the average 8 yuan (97 cents) for pirated DVDs. The CAV Warner DVDs will be manufactured in China and distributed in part through Wal-Mart, Sam's Club, Xinhua Book Store and Carrefour.
Last month, CAV Warner released "The Sisterhood of the Traveling Pants" on DVD in China in 1,500 retail outlets on the same day it was released theatrically in the U.S.
A spokesman says that the simultaneous release was a test of part of an evolving Warner Bros. strategy and that the film never was intended for theatrical release in China, adding, "Legitimate video retailer support was significantly stronger than we would have expected with a delayed release, and we are presently evaluating the title's sell-off but are pleased with the initial results."
In TV, Warner Bros. also sells movie licenses to state-run broadcaster China Central Television's main movie channel, CCTV6, among others, and HBO struck a deal in late 2004 for CCTV to carry hours of HBO programs daily on its digital pay TV film channel.
In the online space, Warner Bros. in June named TOM Online to distribute its classic animated characters, movies and games to China's increasingly mobile- and Internet-based consumers.
n The Walt Disney Co. first entered China in the 1930s with films like "Snow White and the Seven Dwarfs," which was shown in major cities. "China has become very fashionable lately in the entertainment world, but for us it's kind of like, 'Well, we have been there and doing it' for the last 75 years," Disney's Bird says.
In 1995, "The Lion King" became the first Disney movie to enter the Asian country since the creation of the People's Republic of China. Since then, more than a dozen films have been cleared for screenings, including "Toy Story," "Tarzan," "Pirates of the Caribbean" and "Pearl Harbor."
This year, "National Treasure" has been the company's big box-office hit in China, earning 35.9 million yuan ($4.34 million) during its mid-March to July run, a Disney representative in Beijing says.
Outside the country, Disney's Miramax unit has handled such local films as 2004's "Hero," which grossed $53.6 million in North America, and 1991's "Raise the Red Lantern."
Since entering the Chinese home video market in 1998, Disney has released more than 120 titles in DVD form.
In the TV world, its ESPN started program syndication in China in 1992, followed two years later by "Dragon Club," a popular programming block showcasing Disney animation and locally produced elements in cooperation with municipal and provincial broadcasters.
A long-standing partnership with CCTV in 2001 led to Disney animation being featured on CCTV1's flagship kids show "The Big Windmill." "The New Adventures of Winnie the Pooh" currently reaches a potential audience of almost 300 million every month, according to the company.
In the consumer-product business, more than 1,600 Disney-branded corners in retail stores feature the Disney logo and merchandise, a successful setup that has the company hoping to continue to grow the number of such locations.
Disney content also is available in China in magazine, book, Internet and wireless forms as well as in live-event shows like "Disney on Ice."
All but Disney's theme park division has a presence in China. This will change Sept. 12, when the much-anticipated Hong Kong Disneyland park is set to open.
Disney, whose animated films are widely known in China, narrowly escaped blemishing its family-friendly image in June by removing sharks' fin soup, a Chinese delicacy, from the menu at the new theme park. The soup was removed after environmentalists complained that the company was promoting the desecration of endangered species -- a lesson keenly noted by big foreign media companies working hard to honor China's customs without offending shareholders at home.
n Sony Corp.'s film business in China is carried out through Sony Pictures Entertainment and Columbia TriStar Motion Picture Group. Sony has been involved in China through active co-productions out of its Hong Kong office, including such domestic successes done in conjunction with local producers Huayi Bros., as "Cell Phone" and "Kung Fu Hustle." It was also the overseas distributor for "House of Flying Daggers."
In TV, SPTI and Hua Long Film Digital Production Co. Ltd., of China Film Group, formed joint venture Huaso Film/Television Digital Production Co. Ltd., with offices in Beijing. Huaso has a number of Chinese-language projects in development, including light entertainment, sitcoms, dramas and telefilms, for distribution within and outside the People's Republic of China. This joint venture is part of SPTI's larger commitment to increase production capabilities in Asia, SPTI's Miller says.
Miller reports that the response from China's creative community to the venture has been encouraging. Creatively, he adds, the venture will enjoy a vast pallet of Chinese storytelling skills and other creative input.
SPE has worked with CFG on digital postproduction for Chinese feature films, including "Warriors of Heaven & Earth" and "Ultraviolet."
This month, SPTI and CCTV announced that CCTV's programming licensing division, China International Television Corp., signed its first licensing deal with a major U.S. studio. SPTI acquired multiyear rights to distribute CCTV's epic drama series "The Stories of Han Dynasty" in Asia.
As part of the deal, SPTI will offer "The Stories of Han Dynasty" to Asian markets, with the exception of the PRC and Japan.
News Corp.'s presence here is widely felt on TV in both English and Chinese via its Hong Kong-based regional satellite TV provider STAR.
Viewers in Mainland China can receive such network offerings as STAR's flagship Mandarin-language entertainment channel Xing Kong, Mandarin channel Phoenix Chinese Channel, STAR Movies, STAR Sports and others.
Xing Kong, launched in 2002 in the Guangdong province, was the first all-new channel granted cable TV carriage rights in Mainland China, the company said. It features more than 700 hours of original programming each year. Among other things, it has aired the Miss Universe pageant.
Xing Kong also struck a creative marketing deal with carmaker Toyota in late 2003, which included the redesign of the network's primetime lineup under the name Zai Meng Xian Feng, meaning "pioneer in transporting aspirations into reality." Among the shows launched as part of the arrangement were "Check Points," a motor race-cum-reality show with six teams racing along different routes with different challenges; "Progressing Generation," a look at Chinese cities and what they have to offer, including the hottest clubs, fashion and gadget trends; and "Joyful Youth," a comedy about three single girls who share an apartment.
Last year, STAR also won approval to create the first fully foreign-owned advertising company in China, which handles advertising for its Chinese channels. Approval for the venture was granted by China as part of its Closer Economic Partnership Arrangement with Hong Kong, where STAR is based.
On the film side, 20th Century Fox is having a strong summer, with three films in the top 10 through the week ending July 10. At No. 1 was "Mr. & Mrs. Smith," with 16.92 million yuan ($2.04 million) since its July 8 opening, China Film Bureau statistics show. Fox's "Star Wars: Episode III -- Revenge of the Sith," was at No. 7 with weekly boxoffice of 220,000 yuan ($26,602) and total boxoffice since its late-May opening of 75.23 million yuan ($9.09 million). In 10th was "Flight of the Phoenix," with weekly boxoffice of 100,000 yuan ($12,091). (Fox's "Taxi" scored 9.18 million yuan [$1.11 million] and was in the top 10 through the week ended July 3.)
Fox China business director Luke Xiang says "Sith" is within striking distance of Fox's No. 2 all-time earner in China, "The Day After Tomorrow," which earned 83 million yuan ($10 million) during its 2004 summer run.
"We plan to keep 'Sith' on the screens through the summer," Xiang says. "Four films is not bad for Fox, but it's not enough. We want to bring in more, but it's not something we can control. For now, it's my job to maximize the boxoffice for the films we can bring in."
"Titanic" remains Fox's biggest success in China, earning 360 million yuan ($43.5 million) in 1998 for Fox and Viacom's Paramount Pictures, which co-produced the film.
Viacom, primarily engaged in China through its MTV and Nickelodeon units, this year has expanded its MTV broadcasts in southern China, offering MTV-branded ringtones to the 200 million mobile subscribers of China's No. 2 provider, China Mobile, and launching children's programming in Shanghai with the co-produced, co-branded block Ha-Ha Nick, the fruit of a joint venture between Nickelodeon and Shanghai Media Group, one of China's largest media conglomerates.
Nickelodeon representatives in Shanghai and at their Asian headquarters in Singapore declined comment on how the new programming was being received, saying it was too early to give hard data.
The joint venture, announced last year, was among the first deals involving a media giant taking an equity stake in a Chinese content firm, according to Viacom.
The deal was a further step in the long-standing partnership between Viacom and SMG, which previously had included syndication of MTV and Nickelodeon programming on SMG channels and the co-production of the MTV Style Awards Show. That annual event is part of Shanghai's festivities leading up to its hosting of the 2010 World Expo.
Another successful annual event in China with some history is the CCTV-MTV Music Honors, produced together with CCTV.
Those are not all the partnerships Viacom has reached in China. Last year, it struck a strategic alliance with Tsinghua Tongfang, one of China's leading PC companies, to pursue opportunities for content and other partnerships in the digital, broadcast and other media arenas.
"Collaboration and cultural exchange with China remain central to our Chinese strategies," Viacom chairman and CEO Sumner Redstone, who visits China regularly, said at the time of that deal's announcement.
Viacom's MTV unit also has been syndicating locally produced programming to cable channels across China.
NBC Universal is seeing various divisions become actively involved in the Chinese marketplace. NBC Universal Television Distribution licenses film and TV content to Chinese broadcasters and is also a partner in HBO Asia, which now is being carried by CCTV. The international channels division is looking to enter the Chinese marketplace in collaboration with local partners on either the production or broadcasting side, a spokesman says. Additionally, he adds, Universal Pictures is aggressively evaluating current and future business opportunities in China in regard to content distribution and production.
Universal's Focus Features, and its principals James Schamus and David Linde, have been expanding relationships with acclaimed director Ang Lee and Hong Kong-based producer Bill Kong of EDKO Films. Schamus has produced all of Lee's films, including "Crouching Tiger, Hidden Dragon," with Kong. Linde, Schamus and Focus have handled international rights on other Kong-produced titles, including "Hero Winds Truck" and "House of Flying Daggers."
Georg Szalai in New York and Steve Brennan in Los Angeles contributed to this report.
Agree with you completely. Our Rulers are not only petty and mean but stupid.
The MBAs are the worst. Harvard MBAs are the worst of the worst.
Ah, the pleasure of a good rant!!!
ping
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