China’s Hollywood Takeover

Acquisitions to boost China's 'soft power,' movie-making know-how
By Fan Yu, Epoch Times
June 12, 2016 7:00 pm Last Updated: June 20, 2016 11:22 am

NEWS ANALYSIS

Money continues to flow out of China and into foreign assets unabated, despite Beijing’s tightening capital controls. But Beijing has no qualms about providing funding to one particular region—Hollywood.

Chinese companies are developing a keen interest in entertainment, as several Hollywood studios and production companies announced recent tie-ups with Chinese investors.

For China, the film industry’s lure is evident. China hopes to tap into Hollywood’s expertise as it builds up its own nascent entertainment industry. It also understands popular culture’s potential as a PR platform for the Chinese Communist Party on the global stage.

Tang Media Partners, an investment firm founded by businessman Donald Tang and backed by Chinese internet giant Tencent Holdings, last week acquired a controlling stake in IM Global, a film sales and distribution firm in Los Angeles.

In April, Chinese film producer Huayi Bros. Media Corp. formed a partnership with Burbank, Calif.-based STX Entertainment, to collaborate on a slate of new films.

The deal gives Huayi—one of the biggest in China—a foothold in Hollywood from which it can launch films with a bigger international audience.

Earlier this year, property developer Wanda Group purchased a controlling stake in Legendary Entertainment for $3.5 billion. The Burbank, Calif.-based Legendary is the production company behind many hit films including “Interstellar” and “Jurassic World.”

Tencent and Chinese online retailer Alibaba have been interested in film distribution for years. Alibaba Pictures Group invested directly in last year’s “Mission Impossible—Rogue Nation” and obtained distribution rights in China. The film generated more than $680 million in total global box office receipts.

Marketing Potential

Tom Cruise and Alibaba founder and executive chairman Jack Ma at the Shanghai premiere of Cruise's latest film "Mission: Impossible - Rogue Nation," on Sept.  6, 2015.   (STR/AFP/Getty Images)
Tom Cruise and Alibaba founder and executive chairman Jack Ma at the Shanghai premiere of Cruise’s latest film “Mission: Impossible – Rogue Nation,” on Sept. 6, 2015. (STR/AFP/Getty Images)

Middle-class consumers in China have a growing appetite for entertainment. Oriental DreamWorks CEO James Fong predicted at the Milken Global Conference last month in Los Angeles that Chinese movie box office receipts would soon exceed revenues in the United States.

The box office in China—the world’s second-largest market—grew 49 percent in 2015 to reach $6.8 billion in receipts. Since 2011, China’s annual box office receipts have grown at 35 percent CAGR. During the same time span, the number of cinemas in China also increased four-fold.

June 8’s release of video-game adaptation “Warcraft” in China offers an example. The movie brought in more than $91 million for Legendary and Universal Pictures in two days, the fastest film ever to cross the $90 million-mark in China.

But there’s a problem. Beijing caps the number of imported movies per year and tightly controls how foreign movies are released. The state-run China Film Group must approve and license each foreign import. Hollywood movies accounted for 38.4 percent of last year’s box office receipts, down from a market share of 45.5 percent in 2014, according to data from China’s state news agency Xinhua.

So for both foreign film studios and Chinese distributors of foreign firms, connections are crucial, and could determine if a film gets a wider release—such as “Warcraft”—or a limited release.

Hollywood movies accounted for 38.4 percent of last year’s box office receipts.

The Censorship Issue

China’s Legendary acquisition has been years in the making. Legendary East’s Beijing-based director Peter Loehr is a China veteran and helped broker a multiyear deal in 2013 with China Film Group to produce numerous Chinese movies intended for an international audience.

That deal gave birth to English-language historical drama “The Great Wall,” which Legendary co-produced. Starring Matt Damon and directed by Zhang Yimou, the movie is set for worldwide release in November.

But the Legendary-Wanda tie-up will be scrutinized both financially and social-politically.

Beijing, CHINA: A movie theater in Beijing advertising the James Bond film "Casino Royale", on Jan. 29, 2007. Chinese censorship made the filmmakers to remove a reference to the Cold War from the film. (FREDERIC J. BROWN/AFP/Getty Images)
A movie theater in Beijing advertising the James Bond film “Casino Royale”, on Jan. 29, 2007. Chinese censorship made the producers to remove a reference to the Cold War from the film. (FREDERIC J. BROWN/AFP/Getty Images)

China’s “Great Firewall” censors free speech and open discussion. Foreign movies are frequently barred from screening, and even approved films must edit out references and clips that Chinese censors deem politically sensitive. For example, Beijing instructed producers of the 2006 James Bond film “Casino Royale” to remove a reference to the Cold War. In 2014, Beijing authorities shut down the annual Beijing Independent Film Festival on its opening day for fear that the festival would be used as a forum for political dissent.

Producers of 2016’s “Kung Fu Panda 3” consulted with Beijing prior to working on the film, which resulted in preferential treatment for the movie’s release in China, including a bigger cut of box-office revenues.

Having a Chinese partner grants foreign studios the ability to bypass Beijing’s foreign film quota. But it also means that any film created by the venture would naturally kowtow to China’s censorship.

Wanda has an intimate relationship with the Chinese Communist Party. How much creative freedom Legendary retains will be closely watched.

China is keenly aware of the power of arts and culture.

In 2014, Chinese leader Xi Jinping said at the Beijing Forum on Literature and Art, “Contemporary arts must also take patriotism as a theme, leading the people to establish and maintain correct views of history, nationality, statehood, and culture while firmly building up the integrity and confidence of the Chinese people.”

China is keenly aware of the power of arts and culture—specifically motion pictures’ ability to influence contemporary ideas and values. The accumulation of such “soft power” can help mollify China’s image as it annexes islands in the South China Sea and threatens foreign journalists.

As more Hollywood properties receive funding from China, would their creations unwittingly become a channel for marketing Beijing’s worldview? It’s a worldview that includes blocking display of classical Chinese dance in Korea and ostracizing a Chinese human rights lawyer.

Historical Flops

Previous waves of international investments into Hollywood have mostly failed to produce a financial windfall.

In 1989, Japan’s Sony Corp. paid $4.8 billion to acquire Columbia Pictures and TriStar Pictures, creating Sony Pictures Entertainment. Several management missteps, box-office flops, and ongoing economic issues in the United States and Japan turned the historical acquisition into a costly mistake. By 1994, the studio was loss-making and Sony took a $2.7 billion write-down of its investment.

More recently, in 2008 Indian billionaire Anil Ambani’s Reliance Entertainment acquired a stake in Steven Spielberg’s DreamWorks. The partnership was supposed to put Bollywood on the international stage, but in the several years since the tie-up, Reliance and DreamWorks failed to consistently produce blockbuster hits.

But perhaps China’s goals are entirely different. China’s foreign film cap will eventually end in 2017 due to World Trade Organization’s rules, which should open up the entertainment market and increase competition from foreign films.

Similar to its strategy in the high-tech and automotive industries, China likely is looking to acquire Hollywood know-how to fast-track the growth of domestic film companies.

After all, if you can’t beat them, buy them.