Magazine article Variety

Chasing China

Magazine article Variety

Chasing China

Article excerpt

A huge opportunity awaits U.S. media and entertainment companies in a region capable of delivering more than $10 billion in incremental value over the next five years to their film and theme park businesses

FOR YEARS, CHINA HAS HELD substantial economic promise, with the outsized growth many have long envisioned only recently beginning to come to fruition. During this time, U.S. media and entertainment (M&E) companies have been quietly chipping away at the opportunity, navigating the market's onerous regulations with high-quality brands and content, evolving government relationships and an increasing appreciation for local culture, f At present, the most immediate opportunity for U.S. M&E value creation in China resides at the local box office, where restrictions on foreign studios have eased (however, ample room for improvement remains). BofA Merrill Lynch Global Research estimates the Chinese box office could yield $5 billion in value potential for Hollywood studios by 2017 vs. approximately $2.2 billion today, including imported and local productions (with this figure potentially doubling under further relaxed regulatory conditions).

Following years of obscurity, China's domestic theatrical market has transformed into a rapidly growing priority for U.S. film studios - a concept nearly unheard of just five years ago. From 2007-12, China's box office has improved at a compound annual growth rate of 47%, to $2.7 billion (becoming second largest in the world), fueled by a 30% CAGR in screens, as well as loosened foreign import quotas and a fast-developing local production market.

Indeed, similar to Hollywood's importance as a leading U.S. exporter, many see parallels to China's theatrical "coming out" - as the government appears intent on fostering the development of China's own world-class film products, rooted in local culture and values. At present, BofAML estimates nearly 560 films get made each year in China, with 150-160 releasing theatrically and 70-80 becoming notable box office contributors.

The top 10 Hollywood films in China generated a steady 30% share of the 2012 box office, whereas the top 10 local productions generated 26% of the 2012 box office (vs. 24% in 2011). The uptick in local hit movies reflects the expanding production industry (both in terms of quantity and quality) and preferential regulatory treatment. Regardless of product origin, though, the expanding exhibition footprint and rising consumer purchasing power are pushing all blockbusters into new territory, as the most successful films are now consistently generating more than $100 million in revenue at the Chinese box office.

Assuming the government continues to manage toward a 50/50 foreign/local box office mix, BofAML estimates U.S. studios could generate approximately $3.4 billion in Chinese box office in 2017 from imported films, plus an incremental $1 billion from local co-production efforts (including international proceeds). Admittedly, and only time will tell, there are several variables that could cause this figure to change significantly, including box office shares and the international appeal of local co-productions that release outside of China (these estimates are made assuming modest performance).

Naturally, should the market become large enough where China believes less regulation is needed to achieve local growth objectives, potentially loosened import quotas and/or content-owner splits could drive U. …

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