China – Tech sector and Film industry moves

“China is at an end”. This lament was heard to echo through the auditorium of London’s Royal Opera House earlier this month, part of the libretto of Puccini’s Turandot. In it, a ruthless, hereditary ruler presides over the nation with a culture of fear, and everyone in the country appears to have a role affiliated with or subject to the state. A far cry from today then.

In this article, we will look at movements in China’s tech sector and film industry.

Tech: Much news is pouring out of China currently as it looks to accelerate its digital maturity and capabilities, prompting varying degrees of concern, particularly as state actors look to influence the strategy and restrict the processes of individual corporate entities. Apple’s concession of building data centres in China is disappointing. No less ominous is China’s continued investment in artificial intelligence. The opportunity is a potential wellspring of innovation, but one likely to be geared toward autocratic ends (e.g. the identification, if not ‘prediction’, of those not towing the party line). Having relaxed the market only in recent years to allow videogames consoles, China’s regulators are now terrified of the impact of such things on children. Tencent saw >$15bn in market value lost in one day earlier this month when they restricted playing hours on their number one game to two hours a day for 12-18 year olds. This move was anticipatory, after much government and media speculation over the game’s addictive nature. As the Financial Times reports,

“Two weeks ago a 17-year-old boy in Guangzhou suffered a stroke after playing nonstop for 40 hours. Last week state media reported a 13-year-old boy in Hangzhou had broken his legs jumping from a third-floor window after his parents stopped him from playing.”

Surely if Tencent is under pressure, no one is safe? So it seems; Weibo became the victim of over-eager government chin-wagging recently, with shares dropping 6% on the revelation that it was banned from showing user videos without the appropriate licence. As with many other social platforms, video is a key revenue medium. According to the FT, 20% of Weibo’s $170m advertising revenue in the first quarter was from video; Chinese social users dedicate 25% of their time on mobile devices to watching video.

Film: 2017 seems to be a year of reckoning for the motion picture industry in China. The market has spent over a decade providing increasingly huge amounts of revenue to Hollywood studios, gradually relaxing its annual quota of releases further as allegations over nefarious dealings had been largely ignored. At one time, China’s box office was predicted to become the biggest in the world at some point this year. That talk has now ceased. PwC recently made a more sober prediction of 2021. The last twelve months have seen:

• A dramatic slowdown in overall box office in China
• Domestic product reaching new lows of box office takings
• Increased visibility of what appears to be widespread fraud at the box office, allocating ticket sales from one film to another
• A higher share of revenue for Hollywood fare

These four things are, unsurprisingly, connected! There have long been anecdotal stories about how local exhibitors will give cinema-goers the “wrong” ticket for a movie – especially when it is a foreign film – giving the audience receipts for a local domestic film instead, in order to inflate its box office performance. Also known as fraud. There are non-illegal reasons for relatively poor performance too. Local product still tends to be technically and narratively inferior to Hollywood films, as well as often being extremely derivative. Of the top 10 selling films in the second quarter, only two were made at home; in previous years the balance between revenues from domestic and foreign films has been closer to 50-50. The addition of 9,000 screens has not budged the needle. As a result, Variety points out, “Many Chinese movies have opened strongly, but then faded fast”. The Financial Times writes that “China may still see its first drop in ticket sales in more than 20 years in 2017”. Regulators have added salt to the wound (aka opened up the market), scrapping the annual ‘domestic film industry protection month’, where only Chinese films are allowed to be shown in theatres. Hollywood studios should not celebrate their relative success too much; its tactic of vast amounts of Chinese product placement was commercially successful in the fourth iteration of Transformers; less so with the fifth (and hopefully last) iteration.

M&A in the industry has been affected by a wider clampdown on capital outflow, which has put the kibosh on large deals by companies like Wanda, which recently sought to purchase Dick Clark productions. Political tension means associations with Wanda and AMC Entertainment are under scrutiny, in an effort to de-risk opaque dealings, and explains the absence of any South Korean films at the Shanghai International Film Festival earlier this summer. Signs continue of US/China co-productions (such as Marvel’s planned creation of a Chinese superhero). But further international cooperation could be hit by the factors mentioned above, especially when mixed with economic realities. You may have noticed Alibaba Pictures gracing the opening credits of the last Mission: Impossible film. The company’s $141m loss last year may give pause before further such outings.

All this is happening while Xi Jinping is in the midst of important domestic machinations to reorder his Politburo, on the macro level, while also, at the industry-level, seeking to re-negotiate the existing film important agreement. The MPAA has brought in PwC (the dudes that screwed up the Oscars’ Best Picture result) to audit Chinese box office takings for the first time, in order to presumably provide increased leverage in negotiations. Currently, according to Variety, studios get 25% of gross ticket receipts, “half of what theaters usually cough up in other major territories”. Stanley Rosen, a political science professor at USC who specializes in China, is downbeat regarding the potential scope of the audit, “It would be interesting to see what is allowed and what is off limits. My guess is the most egregious forms of box office manipulation will not be investigated.”

 

Horses for main courses

The last couple of weeks have been far from slow for news.

The Pope’s resigned, Oscar Pistorius has been charged with murder after shooting his girlfriend on Valentine’s Day and then a meteor crashed into rural Russia. However, one story threatens to keep them all off the front page – ‘The Great Horsemeat Scandal of 2013’.

The Guardian provides a chronology of events so far, but in short, horsemeat has been found in a number of dishes that claimed to contain only beef.

Reaction has been suitably mixed, from horror to apathy. Some see the deceit as part of a larger criminal activity that conned consumers, failed to adhere to religious doctrines and risked public health and so must be punished, while others take the view that the meals tasted nice, and therefore think, ‘So what?’.

Either way, our trust in those who put their names to the compromised products has been eroded. So far, all the major retailers have withdrawn products, and Findus are the biggest brand name to be affected after their lasagne was found to contain 100% horsemeat.

Our historical relationship with meat is quite complex. In the past, how you saw it depended on your social status. If you were a peasant, you saw the animals when they were alive. So you called them, cows, sheep, pigs and deer. If you were from a higher social status, you saw the animals on a plate. So you knew them as beef, mutton, pork and venison. Note that the latter come from the French, a land of unrepentant horse eaters. But in English, the meat of the horse is simply ‘horsemeat’. We don’t have a fancy name for it, because it’s never really been on the menu.

But for all the gnashing of teeth, is this scandal a major surprise?

Everyday Value

Even before the recession hit, retailers were doing their utmost to be seen to be providing value to shoppers. Often that was achieved by bringing prices down. This is generally accomplished at the expense of the suppliers, who in turn look to make savings from the companies that provide them with goods and services.  Marketing agencies know only too well that negotiations with procurement departments are rarely painless. The same is almost certainly also true for meat suppliers.

When cost cutting becomes endemic and pressure gets pushed down the line, people look for new ways to deliver. It can be the spark for innovation – necessity being the mother of invention and all that – but it can also lead to corners being cut and standards being lowered. In this instance, the consequences are apparent.  Real damage has been done to the brands caught up in the scandal and they will have to invest to build back their credibility.

For shoppers, it has provided a wake-up call and brought the whole meat processing business into the spotlight. Far from being happy and healthy beasts, we now know that meat is sent from country to country before it finally ends up on our shelves.

Effect on Shoppers

For some, these revelations will change behaviour.  A survey by Consumer Intelligence found that around one in five shoppers will cut back on the amount of meat they’ll buy, while around three in five are more likely to buy meat from independent shops. Inevitably though, the indignation will wear off and in the medium term, the convenience of supermarkets will win back many of those who ever managed to find a local butcher.

The irony for those who do stop buying processed meat is that, just as someone who is burgled tends to react by improving their security arrangements, new regulations will soon be implemented to improve standards in the meat supply chain. These ought to mean that the standard of meat we buy will soon be higher than ever.

Beyond processed meat, there may be benefits to consumers as food brands in other categories take a closer look at their own processes to ensure they don’t end up making the wrong type of headlines in future.

Indeed, for all the unpleasantness, perhaps we should be grateful that while we have been tricked and there has been serious criminal activity, it was ‘only’ horsemeat that entered the food chain. Had it been something more emotive like dog meat or far less pleasant like rat meat, the damage to the brands and retailers would have been much harder to overcome. In the meantime, the whole episode provides a clear lesson to brands, retailers and shoppers alike.

Cheap often comes at a high price.