User experience is shaping the way content is being created, distributed and consumed. The future of storytelling is drastically changing, and being led by countries with the largest media consuming populations, from being featured on the big screen to now being played in the palm of our hands. As technology and the scope of accessibility to the internet continue to expand, so do platforms that stream content and the number of people who actively watch and engage on these channels. In correlation to this shift, box office sales, cable television subscribers, and blockbuster releases have declined.
Data shows that theaters continue to take hits from consumers who choose to watch movies and shows at home. Instead of going to the movies, consumers opted to spend $11.9 billion on subscription streaming services like Netflix, Google Play, and Amazon Prime Video last year. This year, that number is estimated to reach $13.6 billion, surpassing box office numbers by more than $2 billion.
Consumers and their demand for content are stronger than ever, but how are companies and studios keeping up to effectively find funding, reach audiences and monetize on this trend?
“The China Hollywood relationship is relatively young,” says Lindsay Connor, partner and co-chair of Manatt, Phelps & Phillips, LLP, “hopefully we have a long and prosperous road ahead, but it’s not surprising that things are moving in a couple of different directions.” What he’s addressing includes China’s decision to restrict and dial back outbound investments and remittance almost a year ago.
Much of the reason behind the restrictions set by the government involve irresponsible investments that lacked strategic direction. As Connor puts it, “today, Chinese companies can’t just throw money onto Hollywood and hope that the valuations match.” Irrational exuberance will no longer be considered between U.S.-China collaborations, he adds. “The Voltage Studio deal was the poster child for people to stop and say wait a minute, why is a Chinese copper-processing company investing in a film studio for $350 million? The bottom line is that sophisticated Chinese entertainment companies are still getting deals done and being active in commerce,” says Connor.
In terms of what this means for American companies that want to co-produce with China, Bennett Pozil, executive vice president at East West Bank has a positive outlook. “Right now, if you’re investing money offshore in China, you’ll most likely have a better chance in having that deal approved,” says Bennett. “Americans investing in Chinese production need to change their mindset to really promote win-win deals for both sides rather than trying to simply bring their own profit margins up. The more this happens, the less capital control we’ll see from the Chinese government.”
One of these entertainment companies is Perfect World, which began in 2014 as a China-based video game company. Today, however, it has teamed with some of the major players in Hollywood to invest and help produce movies. “We define our strategy by talking to people in the industry and getting a feel of whether you can really establish a long-term relationship with these businesses,” says Rong Chen, senior vice president and CEO of Perfect World Pictures. “Our real business objective has always been to diversify outside of China, because no matter how big China is or how fast it’s growing, it’s important for a publicly traded company to be financially responsible and impactful overseas.”
Working within the parameters set by China can be difficult to navigate for foreign companies and studios looking to shoot a co-production. Now, more than ever, it’s imperative to find Chinese partners when looking to enter their market.
Pozil shares some insight on how to find the right partner: “Work with prominent distribution companies in China and create a co-production,” he says. This ensures that your content will be distributed and shared across the most platforms with the widest reach. “Next, have a fixed business model with the newest trends of television and internet series,” he says. Pozil believes that about 80 percent of entertainment business currently centers around television and internet series. By capitalizing on this trend and pushing your product down this avenue, the chances of consumers viewing and engaging with your content becomes higher. “You also have the buy-out model where you can have a fixed price to sell to a company in China, or get a quota slot where your film enters one of the 24 foreign film slots in China,” he continues. By getting into the quota slot, studios and companies receive 25 percent of all box office sales in China. With co-productions, however, foreign content isn’t subject to the competitive film quota, and instead of 25 percent, studios and companies receive 43 percent of the box office sales that also are not taxed by the government.
Co-productions and partnerships can be difficult when working on the creative side. "The Great Wall," which came out in 2016, featured popular actor Matt Damon and was directed by Zhang Yimou. Despite the hype and production budget of $150 million, the film only earned $34.8 million in the U.S. and $171 million in China. The film, released with the collaboration of Legendary Entertainment, Universal Pictures, China Film Group, and Le Vision Pictures, was a blow and an example of the struggle in finding stories that appeal to both Eastern and Western audiences. “A lot of the problem with native movies going overseas is that they do exceedingly well in their own home box offices, but miss the mark overseas,” says Tom Jegeus, president of Fox International Productions.
On the other end of the spectrum, "The Foreigner," a $35 million action drama which came out a year later featuring Jackie Chan and directed by Martin Campbell, was an international hit. “Growing up in Hong Kong, Jackie Chan was a staple name in entertainment,” says Christina Chou, agent at the Creative Arts Agency, “but whether it was "Rush Hour" or "Shanghai Noon," many of his characters were applicable across movies and "The Foreigner" is really the first time where you see the narrative change of an Asian male in Hollywood.” Deemed a low-budget success story for American-Chinese co-production, "The Foreigner" proves that strategic cross-border collaboration can create good content and generate revenue. “The biggest challenge in co-production is that more often than not, a lot of the storytelling becomes diluted and causes audiences to become less connected to the film,” says Chou, “I think that the Chinese audience want to see meaningful representations and connections with the characters they see on screen.”
A few years ago, much of the money being made in China came from box office sales. The rise of diversified streaming platforms and channels have since grown large enough to dictate how consumers find, watch and engage with content. “The online video market in China has really exploded,” says Connor. “Not long ago, the figures were equaling box office numbers. I’m sure that the streaming numbers are way ahead today.” Just as the American consumer now opt to watch movies and shows from streaming platforms like Netflix, Google Play, and Amazon Prime, Chinese consumers are increasingly using Youku Tudou, iQiyi, Tencent Video and Sohu Video as their preferred viewing options.
According to market research company, iResearch, almost half of China’s 730 million internet users actively use live video streaming sites and apps to consume content. “What’s driving the growth for these online shows are subscription to the content using different platforms," says Chen. “Look at online gaming—mostly on PC and mobile—there’s more convergence and collaboration between games and television series these days.” An example of a win-win for streaming content has been for online games and shows to partner to increase consumer engagement, reach and revenue. “We’re seeing that gamification is really popular with TV shows and works well in China,” says Chen. “It doesn’t work for movies though, since the game shelf life will be much shorter with that model.”
So, how do you get your content out on the most popular streaming platforms? Pozil predicts that this aspect might become easier for foreign companies in the future. “I think starting in 2018, we’ll see a lot of consolidation of studios and companies,” he says. “Wanda and Tencent are great examples of this movement. A lot of the film companies retain their names, but the companies that have the biggest financial stake control the licensing decisions.” These gate keepers are undergoing changes that will result in a few mergers and acquisitions.
The bottom line for reaching and engaging consumers on a global scale, though, comes down to the fundamentals of content creation. Jegeus believes that, “rather than asking the question of where to get consumers or where the next revenue pipeline exists, we need to ask ourselves how to create the most intriguing content and figure out how to best tell a creative and unique story.”