Hollywood Sets Eyes on Chinese Market

Article  by  Dovilé DAVELUY  •  Published 27.07.2011  •  Updated 29.07.2011
[NEWS] Warner Bros. Entertainment is the first Hollywood studio to distribute films through pay-per-view and VOD services in China, starting this summer. This latest business endeavor is one of many recent attempts by Hollywood to get its foot in the door of the Chinese market.
On 15 June 2011, Warner Bros. announced the agreement of its joint venture in China, CAV Warner Home Entertainment, with Chinese technology provider You On Demand, which has a joint venture partnership with state-owned China Home Cinema. Chinese viewers will have access to the Warner Bros. catalog of films and new releases, which will be available via pay-per-view at about the same time they are released on DVD. Determined to conquer the Chinese market, on 28 June, the studio struck another deal with Chinese video site leader Youku. The two companies signed a three-year agreement to make around 400 Warner Bros. films available through Youku Premium library – the newly launched online paid content platform. The new service has been tested since last October and has already processed 200,000 paid transactions.

Youku's platform.
In its press release announcing the deal with You On Demand, Warner Bros. emphasized that this represents a “historic milestone” for all parties involved. Shane McMahon, You On Demand’s Chairman and CEO, said that he is “excited for the millions of Chinese consumers that will be able to experience and enjoy the very best content that Hollywood has to offer”. Warner Bros. estimates that about three million Chinese households will be able to access their films this summer, expecting to reach as many as 200 million homes down the line.
Film industry players hope that video-on-demand services will represent a reasonable alternative to pirated DVDs, which are currently abundant in China. The Los Angeles Times reports of a 26 year-old film fan named Zhou Xin, interviewed in a pirate DVD shop in Beijing, who said that she had never bought a legal foreign DVD. The woman summarized the situation in the following way: “Even if I wanted to [buy a legal foreign DVD], there is nowhere to go. Legal DVDs are like democracy — they do not exist in China”. Commenting on the Warner Bros. deal with Youku, the latter’s chief financial officer, Dele Liu, affirmed that Chinese consumers are ready for pay-per-view services and “are increasingly willing to pay for high quality content”.

The Hollywood hit "Avatar" (Source Los Angeles Time).
This is exactly the news that delights Warner Bros. and Hollywood at large. China ranked number six in global box office revenues in 2010, with its gross box office sales rising by 61%, compared to last year, to $1.47 billion. A major portion of the profits came from Hollywood hits such as “Avatar” (which grossed $204 million), “Alice in Wonderland” and “Harry Potter and the Deathly Hallows”. In June 2011, “Kung Fu Panda 2” broke the Chinese box-office records, in almost $20 million on its opening weekend. With ticket sales declining in the Western world, Hollywood’s “increasingly unsubtle efforts to woo Chinese audiences”, as Ellen Jones puts it in a Guardian article, are not at all surprising.
The Los Angeles Times notes that Warner Bros. has been one of the most aggressive Hollywood players in China, “pioneering multiplex cinema development, selling DVDs at prices competitive with pirated versions’ and partnering with streaming video sites to show recently released movies”. Jim Wuthrich, president of international home video for the Warner Bros. home entertainment unit, suggested that “the opportunity in China is just too irresistible”.
Warner Bros. is nevertheless far from being the only player trying to get a share of the growing Chinese pie. In March 2011, the Canadian-based large screen company Imax Corp. signed a joint venture with Wanda Cinemas, China’s largest theater operator, to open 75 theaters over the next few years, hoping to reach 300 theaters by 2016. In April 2011, Disney announced its $4.4 billion plan to build a theme park and resort outside of Shanghai by 2015. And in June, Legendary Pictures announced a joint venture with a Chinese entertainment conglomerate to make English-language blockbusters in China for export around the world. Such is the economic appeal of the Chinese market that MGM went to the lengths of digitally altering its film “Red Dawn” – changes that cost $1 million – in order to substitute North Koreans for the Chinese villains. Commenting on the studio’s move, the Los Angeles Times concluded: “It is all about maintaining access to the Asian superpower’s lucrative box office”.
Although Hollywood studios may be slowly gaining ground in China, as the Chinese rejoice in watching Western films, the Chinese government’s censorship and quota system imposed on foreign films remain the major obstacles to further expansion. Currently, China allows about 20 foreign films into the country per year under a revenue-sharing agreement by which studios collect less than 20% of box office revenues (compared to more than twice that amount in the U.S. and other international markets). Moreover, foreign film distribution is controlled exclusively by the state-owned Chinese Film Group, and the majority ownership of cinemas by foreign operators was forbidden in 2006.
Chris Dodd, chief executive of the Motion Picture Association of America,
at the 14th Shangai International Film Festival (Source The Hollywood Reporter).

In 2007, the U.S. filed a complaint with the World Trade Organization over China’s protectionist media distribution practices. The WTO ruled in the U.S.'s favor, ordering China to stop its 20-foreign-films-a-year quota and open its cinemas to outside production by 19 March 2011. Yet, as the Guardian reports “the deadline for the lifting of the quota has now passed, but China’s State Film Bureau has yet to announce what changes it will make”. Hollywood players themselves have also been mounting pressure on the Chinese government to relax its quota system. Chris Dodd, chief executive of the Motion Picture Association of America, urged China to open its market at a speech given at the 14th Shangai International Film Festival, held from 11-16 June 2011. Rupert Murdoch, chairman of News Corp., and Jim Gianopulos, chairman of Fox Film Entertainment, made similar appeals at the festival. In his interview with the Hollywood Reporter, Chris Dodd claimed that the question of what some are calling the “failed WTO ruling” was high on his agenda during the trip in China, and assured that “things seem to be moving [forward]”. In May 2011, the U.S. Trade Representative included China on its “Priority Watch List” for not doing enough to combat the theft of intellectual property – the rampant piracy of films being consistently pointed out as a major outcome of the restrictive regime.
Warner Bros.’ video-on-demand project is an efficient way around the quota system, as the latter only applies to titles released in cinemas. Warner Bros. films will nevertheless still be subject to the government’s censorship. In the past, the Chinese government has banned numerous films deemed as containing inappropriate content, including “Rush Hour 3”, “Seven Years in Tibet” and more.

Chinese movie Confucius (Source Intercontinental Film Distributors).
The quota system aside, Hollywood must also be ready to compete with the growing local market. Wang Taihua, director of the State Administration of Radio, Film and Television, assured that despite the recent success of certain Hollywood films, local movies are equally popular and profitable. In 2010, Chinese director Feng Xiaogang’s film “Aftershock” became the highest-grossing film in Chinese cinematic history, bringing in over $100 million, and was submitted as China’s entry for the 2010 foreign-language Oscar. China Daily reports that the country made 500 films in 2010, securing the third spot after Bollywood and Hollywood in terms of annual output. And the Chinese cinema industry is certainly expected to grow further. The government is investing generously in the local film industry, which Ellen Jones explains simply as being due to the country’s economic prosperity, which “affords it the opportunity to present its own image to the world”.
The success of the Warner Bros.’video-on-demand and pay-per-view endeavor will also depend on technological advances. Currently, there are about 4,000 cable operators for 187 million households. Only 50 million of these presently belong to a two-way digital network that allows them to order programs on-demand, but technological advances are coming about rapidly. Warner Bros. will also have to compete with prices of pirated DVDs, which can be as low as $1. Despite these challenges, Warner Bros. seems firmly set on going after millions of potential Chinese viewers.

Photo credits : Youku / Los Angeles Times / The DreamWorks company / The Hollywood reporter / Intercontinental Film Distributors.
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