Hollywood’s China Revolution: Smaller Is Better

Still, DMG, Relativity and Legendary East will face structural challenges in trying to penetrate the exploding new market

Hollywood is positioning itself for the rewards of an explosive new market – the famously difficult China.

The past two weeks has seen a flurry of deals and funding activity:

>> The Chinese media conglomerate DMG put together a $300 million film fund to cofinance tentpoles for studios.

>> Relativity Media set up a Chinese production and distribution partnership.

>> Legendary Entertainment, through its Legendary East, announced plans for a $220.5 million investment in a filmmaking venture aimed at the Chinese market.

It all makes sense – particularly now. China is one of the fastest-growing economies in the world, and it has a giant appetite for popular culture, making it the last enormous untapped market for Hollywood.

But DMG, Relativity and Legendary East — notably small and nimble in every case — will face structural challenges in trying to penetrate the glittering new market that Hollywood has in its sights.

Each has essentially the same game plan: They want to make “co-productions” under Chinese rules. But for films to qualify as Chinese co-productions, they must include at least one Chinese actor and have at least one sequence filmed in China. They also have to satisfy Chinese censors.

Legendary East will work with Huayi Brothers, a Chinese film conglomerate, to make its co-productions. Paul Y Engineering Group is investing $220.5 million and taking a 50 percent stake in the company, which will fund two English-language films per year for global audiences. Warner Bros., which has a longstanding relationship with Legendary, will distribute the movies outside of China.

Relativity is working with two state-owned companies that have the authority to approve movies that are imported to China. It plans to bring U.S. film to that country and to make an increasing number of co-productions.

While Legendary and Relativity have found Asian partners, DMG is the Asian partner. It is approaching U.S. studios to co-finance films that will be co-productions.

But China is a tricky market. In order to work there, companies have to partner with the government — a government whose role is pervasive in every element of life. It imposes strict censorship on movies made there and on movies it allows to be imported. And it only allows 20 non-Chinese movies into the country each year.

And then there’s the issue of censorship. It's not exactly like working with the MPAA.

The Chinese government doesn’t allow movies that involve murder, violence, horror, evil spirits and devils. Or that reconstruct crimes or even reveal police investigatory techniques. Or that advocate nihilism, environmental damage, animal abuse or the capture or killing of rare animals.

While that prevents abominations like “Human Caterpillar,” it also makes movies like “The Godfather” out of bounds.

“Avatar” did well. But so did “Transformers,” “2012,” “Resident Evil: Afterlife” and “Twilight.”

Chris Fenton, the GM of North America for the Chinese conglomerate DMG, told TheWrap that movies have to be presented to censors in the right way.

“If you just make a movie and then submit it through the China Film Group website, you’re probably going to find it blocked for a variety of those reasons,” he said. “But if it’s presented in the right light with the right types of relationships and the right track record behind it … then obviously you get a lot more leeway.”

One reason for the upsurge in activity is that while China has plenty of cash to put into movies, it doesn’t yet have the expertise to make really good projects, said Rob Cain, an independent producer with Pacific Bridge Pictures – and who has been doing business in the country since 1987 and doing entertainment business there since 1995.

“There’s a growing need in China that really can’t be fulfilled yet by the domestic infrastructure and talent pool,” he said. “There are hardly any writers who know how to write a properly structured screenplay.”

Cain said he supposes the reason the market is exploding right now is that China has only recently been ready for it.

“China in general has started looking more and more toward investing overseas and to investing in join ventures, and that started with the founding of a couple of their big sovereign wealth funds,” he said. “It’s taken a couple of years for those organizations to professionalize and to get more sophisticated about how to do business with foreign partners.”

The obstacles, he said, are surmountable.

“Yes, there are a lot of pitfalls. It can take a lot of investment to make not very much money. But there is a lot of money to be made there and somebody’s going to make it – and it does take a very entrepreneurial attitude.”

That, he said, is why companies like Relativity, Legendary and DMG are at the forefront.

“A smaller, more nimble, more entrepreneurial company … will have the flexibility to meet the Chinese investors halfway,” he said.

In fact, he is planning something there, as well.

“I’m in the process of hiring a writer with development funding and a production fund to come from Chinese investors for an action project,” he said. “It’s really designed to be a global product.”

Fenton, of DMG, told TheWrap he was happy to see the Relativity and Legendary announcements.

“Everybody in town is looking for interesting opportunities to exploit … a product that we create here, or know how to create here,” he said. “We have produced in Hollywood a product that is Number One in the world, so where can we take it and where are the growth prospects and where can be new forms of revenue for a business that’s also a little flat lined?”

He said that he is “super-excited about China being a part of the growth quotient that the future of the health of Hollywood can look to.”

And he said he doesn’t see Relativity and Legendary as competition, but as potential partners.