Hollywood Needs to Focus on China

Burgeoning market offers enormous potential for growth at box office, online and at retail

At the time of dramatic systemic changes in the media business, Hollywood should pay heed to Marco Polo’s history and turn their attention to China as a key opportunity to redefine their business model.

When Marco Polo came back home to Venice after 20 years, he told his contemporaries the tale of a country that was far more powerful and civilized than any other in the world. In 1299, the proud Venetians could not conceive the idea of a more prosperous place than the mighty city-state of Venice, the master of the sea and the mighty superpower of late medieval Europe. So far-fetched was considered Marco’s account that his book, originally titled "The Book of Wonders,” became known as “The Million,” as in “the Million Lies.” Of course we all know how that story ended: Just a couple of centuries later, Venice became a beautiful, yet hollowed, city-museum and China is the biggest world superpower.

A decade of piracy, censorship and failed business ventures have fostered the conventional wisdom of China being a market where the risk-reward balance is skewed the wrong way. The truth may be different and the real risk for Hollywood may turn out to be missing out on what is rapidly growing into the largest content market in the world.

The news on the entertainment business coming from China is nothing short of Marco Polo’s "Book of Wonders." Box office takings have been growing for the last few years at an annual rate of 20 percent to 30 percent, with 2009 growing a whopping 44 percent. Theatrical grosses are, for the first half of 2010, already 60 percent ahead of last year.

While the absolute number is still small compared with the U.S., the growth is likely to continue as an average of almost two theaters open each day and the burgeoning Chinese middle class joins the rest of the world in their moviegoing habits.

The room to grow is staggering in a nation of 1.3 billion people but fewer than 6,000 screens; for comparison, the U.S. has 40,000 screens serving a population of 300 million. To put it another way, in 2009, in the U.S. people spent on average $34 per person on movie tickets, while in China that expenditure was 70 cents per person.

Assuming China will develop moviegoing habits similar to those of other Asian countries, such as South Korea or Singapore, China’s box office potentially could turn into a $45 billion-plus business — more than four times larger than the U.S. theatrical market.

As the Chinese government focuses on domestic consumption as the key driver for economic growth, the development of retail environment and shopping malls has been frenetic across the country. Cinemas are a key factor in driving traffic to retail, hence the torrid pace of growth. The need of these theaters for more movies will in turn drive the gradual opening of the market to foreign films. The World Trade Organization’s recent rule against China’s protectionist measures against foreign films will significantly boost growth as more diverse movies will make it into China’s theaters.

The growth of the theatrical business will in turn feed the TV and Internet distribution channels that are also growing at a torrid pace, with TV advertising sales growing 18.5 percent in 2009 and the number of people on pay TV platforms reaching 163 million. There are now about 350 million internet users (a 24 percent increase from the previous year) that include 70 million habitual online gamers.

The opportunity for Hollywood is even more compelling if additional macro-trends are factored in:

–China’s currency is likely to undergo a revaluation against the U.S. dollar over the next few years. Such an event will translate into additional growth in dollar terms virtually overnight.
–It is estimated that by 2015 there will be more English-speaking people in China than in the U.S., hence exponentially expanding the market for English-language content.
–While China’s economy may in the next few years experience some growing pains, expenditure for movies and entertainment is likely to be recession-proof as historically experienced in U.S. and other markets around the world.

In the recent months a number of Hollywood pictures broke all-time records in the local box office in rapid succession; "Transformers 2" in June, "2012" in October and, just in the last few months, "Avatar." While the latter is a monster hit and has already reached the $200 million mark in China, “2012” is perhaps an even more explicative case as the film grossed in China more than 42 percent of its U.S. gross, making the country the second largest market for the film.

A sign of things to come as, even applying conservative assumptions, it appears likely that in a few more years, China will become as big as the U.S., at least for major film releases. Eventually, maybe within the decade, it is possible that a major feature grossing, say, $300 million in the U.S. will gross $600 million-$700 million in China; the fundamentals of that market strongly support such a scenario.

Make no mistakes; the road to media riches in the Middle Kingdom is fraught with peril and challenges. Government censorship and protectionism are likely to continue to be issues for many years to come as China’s government sees the control of "cultural industries" as a key political issue more than an economic one.

Furthermore, while sensing the opportunity, western companies still find daunting the navigation of the complex and opaque media industry.

Nevertheless, the data from China make more compelling than ever the case for Hollywood to step up its engagement in that region. And not just on the distribution side but rather across the full spectrum of strategic options; from co-productions to collaboration with local talent, from business and financial partnerships to local production.

At a time where the traditional business models seem to come under pressure, Hollywood should avoid going the way of 13th-century Venice but rather learn about and engage with China. The market for content in that country is on its way to becoming the largest in the world and it is just a matter of time before Hollywood executives assessing a new project will be asking a crucial question: "Will it play in Beijing?"