Hollywood & China – “To fight monsters we created monsters”

“The film market in China is like an experimental supermarket – with more and more racks but only one product… The viewers don’t care what they see as long as it’s a film. They’ll watch whatever is put in front of them.”

– Zhang Xiaobei, CCTV

LA is “a favourite place for Chinese businessmen to do business”, according to the objective opinion of China’s general counsel to Los Angeles. And that was back in 2011, before China extended its annual quota of foreign films allowed to be exhibited on the mainland. We’ve written before about the relationship between Hollywood and China, which in the two years since we wrote that piece has only deepened. It’s little wonder; EY has predicted China will be the largest film market in the world by 2020. Revenue is being squeezed in the film industry as millennials hang out on their smartphones and games consoles. When they do pay for movies, it’s more likely to be streamed rather than owned. Worse, that stream may be hosted by someone like Netflix, whose burgeoning clout makes negotiations for license fees increasingly difficult. So China provides a timely cash cow; an antidote to Western media fragmentation and fatigue. But at what cost?

China’s economic rise to superpower status has logically meant a rise in its viability as a place to invest in. From infrastructure, where cinemas screens have been springing up at the unbelievable rate of seven a day (as of May this year), to co-productions between Hollywood and homegrown Chinese outfits. These collaborations have resulted in overt references to China in storylines, such as that seen in The Mummy: Tomb of the Dragon Emperor, The Karate Kid and the Kung Fu Panda franchise, or the additional scenes filmed for Iron Man 3. This also includes the more recent Transformers: Age of Extinction, which saw not only a large part of the film take place in Hong Kong, but also included local talent and featured a mind-boggling amount of inappropriate product placement from Sino brands. The few production companies in China are also expanding, looking beyond more traditional propaganda fare, as well as to foreign markets, as is the case with China Film Group.

But the film industry in China is not quite as rosy as it appears. Interestingly, there have been few efforts at US talent getting involved in Chinese productions. This may be partly due to the mess that was The Flowers of War, starring Christian Bale, which was reportedly little more than a propaganda piece. And from a content point of view, caution has been the watchword for studios; The producers of World War Z removed a discussion over whether the zombie apocalypse started in China; Chinese villains were edited out of Pirates of the Caribbean: At World’s End and Men in Black 3. Is that really necessary? And while scripts are edited to appear more appealing to China, so are balance sheets. For while Transformers 4 is now China’s highest-grossing movie of all time, according to The Hollywood Reporter, what THR don’t mention was the way the gross is measured. For, says Julie Makinen, a China correspondent for the Los Angeles Times, box office revenue is arbitrarily inflated. She elaborates,

“I think everyone agrees there’s some fudging that goes on… It’s fairly common to go into a theater, say, ‘Hi, I’d like to buy a ticket for Transformers,’ and they say, ‘Great,’ and they print out your ticket for a local romantic comedy. So I’m pretty sure the 20 bucks I just handed over is being counted in someone else’s basket. Things like that happen; a lot of statistics in China are suspect.”

Moviegoers aren’t being particularly discriminating yet because the act of going to the cinema as an event or experience is still a relatively new phenomenon for many. Product placement, which we referred to earlier, while an opportunity for some synergy between film and brands, risks being too commercial and overt if done without context. A recent article in the Financial Times said such promotions in Transformers 4 quickly “start flying faster than bullets from an Autobot’s wrist-mounted Gatling gun”. Apart from bringing viewers out of the fictional narrative into reality, creating a disappointing experience, inappropriate product placement can also cause ire between businesses. (We’ve written several times over the years about product placement, here.) Such an occurrence took place at the end of July when a tourism group in China sued Paramount Pictures for failing to show a logo of the park that the company had paid to be prominently displayed in the movie. The implementation of co-productions between the two countries evidently needs work too. Scenes added exclusively for a Chinese version of Iron Man 3 added little except some questionable product placement as well as the dubious plotline of Tony Stark heading to China, of all places, for medical convalescence. Lastly, the current quota of films to be exhibited in China means that many good-quality US films fail to be seen in the country. Much like bans on US games consoles and the Android app store, Google Play, the result of this has been an explosion of home-grown imitators. In this case, films in China are made that precisely mimic the formula and set-up of popular American franchises like The Hangover, which was never seen by Chinese audiences, thus the extent of emulation isn’t evident. Assuming that eventually the quota will be entirely relaxed, this type of tactic can only ever be a short-term measure.

One of the greatest opportunities the film industry in China has is in part due to one of its greatest weaknesses. Because of historically protracted release windows, and a narrow selection of films making it to cinemas, piracy has been rampant. Indeed, infringement has been widespread enough that the industry has had seemingly no choice but to innovate. We reported back in April how China has relaxed its embargo on foreign games consoles, and, more to the point, how Tencent, in partnership with Warner Bros., were making the latest 300 film available to rent, while the film was still in cinemas in the US. Such forward-thinking is welcome. As well as offsetting any losses from piracy, it also hopefully points the way to a more open business environment in China, at least for TMT companies. Such innovative thinking will need to be extended, however, to the structure of China’s film industry itself, which is reportedly a vertically integrated engine driven almost entirely at the whim of the state.

Just as China’s tastes have held increasing sway over the production of art and wine in recent years, so with film. The middling global box office performance of Pacific Rim found salvation in Asia, and that was all the justification needed for a franchise to be developed. There is certainly much to be gained from investment and co-productions in China’s films industry, especially while it is still relatively nascent, not least of which are the financial returns. How such relationships impact the content itself is another matter. Hopefully some of the approaches China is taking with regard to multi-platform releases might even trickle over to Western markets. Studios should also be wary about putting all their eggs in one basket; CNBC reports that growth in ticket sales for Hollywood films in mainland China hit a five-year low in 2013. Only three US movies made the top ten highest-grossing films in China last year, down from seven in 2012. One reason for the slowdown is a lack of variety. And yet don’t expect the blockbuster formula to change anytime soon; as much as it was born in the USA, it is also what audiences in the worldwide market love to gobble up. (Michael Bay’s films – expertly dissected in the above video – prove that point no end, and it has been particularly driven home recently as Bay himself as well as sometime employee Megan Fox have expressed nonchalance about any negative press from critics, knowing their products make millions despite nasty reviews. Specifically, actress Fox told naysayers to “F*ck off”.) There is a certain amount of momentum behind the two industries’ relationship with one another, but recent productions have shown that future projects should perhaps be treated with a little more caution, particularly as Chinese audiences tastes mature. Last month the film historian Neal Gabler was quoted in the Financial Times, in a point that usefully sums up this piece,

“The overseas market has changed the DNA of American movies… The bigger-faster-louder aesthetic is very deeply embedded in the American psyche. No one else can do it. It’s one of the reason they export so well. It’s so much a part of who we are. But we have been victims of our own success. It’s a Catch-22. The things that make our movies so popular overseas are now larger than the American market can support by itself.”

UPDATE (30/8/14): The production side of the industry continues to evolve, as China’s largest video website Youku Tudou demonstrated on Friday when it promised to produce 8 films for cinema release and 9 to premiere on the internet. Chairman and Chief Exec Victor Koo pointed out to the Financial Times that there was a gap in the market left by Hollywood, “The US film industry is highly developed. It tends to be either blockbusters or franchise films. But in China you’re talking about small to mid to large budgets…”. The logistics of creating a film for online release – more than likely to be consumed on a smartphone – must consider important limiting factors such as, according to Heyi Film chief exec Allen Zhu, smartphones in China running films get “very hot after 20 mins”. Youku Tudou’s plans may seem ambitious – particularly given it reported a $26m loss for the second quarter – but when 18 screens are erected in China every day (last year more cinema screens were added in China than the total in France), it seems a risk some are willing to take.

On Piracy

The terribly dry yet fascinating Harper’s Magazine recently featured in its ‘Readings’ section an excerpted essay taken from a book, out this month, entitled Stealth of Nations: The Global Rise of the Informal Economy. The following is a summary and rebuttal of some of the key points made.

The excerpt begins in China, where intellectual property theft is, as most of us know, already rampant, and has been for several years. There are contributing factors for this. One is a market that allows around only 20 Hollywood films to be released every year. Another is the premium placed on legitimate DVDs sold in emerging economies like China. As The Economist reported in August, DVDs of The Dark Knight sell for $663 a copy in India. In China, the LA Times reports, counterfeit DVDs may have more special features than the genuine article. This last point taps into what most advocates of piracy usually tubthump; piracy gives people what they want. Not necessarily just regarding price – Zeitgeist would be hard pushed to fork out $663 for The Dark Knight – but also with regard to access and to functionality of the product. At The Future Laboratory‘s Spring/Summer trends briefing earlier this year, the emphasis was on loosening control over proprietary technology, collaborating with others in order to enhance innovation and ultimately help make the product better.

The product in question in this bazaar, however, is not DVDs; “There’s essentially just one product sold here: mobile phones.” The handsets are all knock-off, counterfeit items, playing on and abusing the brand equity of established companies with names like “Sansung”, “Motorloa” and “Sany Erickson”. It brings to mind the episode of the The Simpsons when Homer is duped by brands like “Panaphonics” and “Sorny”.

The competitive advantage for these products over their authentic brethren is the price. With no need for an R&D budget, the price of a “pirated Nokia N73 [is] $85, a fifth the cost of a real N73”. The author predicts sellers get an “extraordinary” 100% return on the initial investment. This, then, is big business. Big in the terms of holistic number of customers, returning multiple times, and big in the sense of the amount of profit it turns, and the number of people employed in such activities.

“The International AntiCounterfeiting Coalition… predicts that, with hundreds of thousands of industrial workers still facing unemployment and dislocation from the global recession, China will allow more piracy in order to prop up employment and avoid potential civil unrest.”

The author contends that this kind of behaviour is entrenched in society, and owes its debt to Bernard Mandeville, who argued for liberalising the market to the extent that things like tax-dodging, piracy and overcharging were “good for society”. The pamphlet in which he extolled his virtues became extremely well-known because pirates quickly got a hold of his six penny publication and distributed it in half penny sheets. This obviously made Mandeville no profit, but it raised his profile no end and, according to the author, “gave him the opportunity to publish a new edition”. Keeping as many people employed as possible, no matter the scrupulousness of their work, he argued, would lead to a better society than one dominated with excessive rules and regulations. And it seems, prima facie, that selling pirated goods allows access to consumers who can’t afford to pay full price. The difficulty, however, lies in whether the consumer can’t afford to or whether they just don’t want to. Whether someone whom a company would initially attempt to covet and convert to a prominent customer at a later age is instead lost to a world of pirated goods, which, not being subject to the same standards as the genuine article, ultimately disappoints the buyer and pushes them away from the brand entirely.

In a tale similar to that of Mandeville, the author Neuwirth suggests similarly that were it not for piracy, Shakespeare himself would also be confined to the realms of anonymity. During production of his plays, piracy allowed for other productions to run different versions – “King Lear was remade with a happy ending”, for example. In 1709, publisher Jacob Tonson bought the rights to the complete works, publishing them at a premium every fourteen years,  “enough to secure his perpetual copyright”. When one upstart pamphleteer threatened to sell the plays in sets for a fraction of the price, the argument that ensued resulted finally in Tonson flooding the market with plays sold at a penny.

“Shakespeare’s plays were suddenly available all over London at rock-bottom prices – something that had never been true even in the playwright’s lifetime. A century after his death, piracy helped make William Shakespeare a household name across social classes.”

Without deep research it is hard to dispute this intriguing interpretation, except to say that some of the adaptations of the plays may well have fallen under today’s terms of ‘fair use’, and that perhaps what this example really demonstrates is the need for a regulatory environment, one that stipulates that culture be accessible to all, rather than leaving it to excessive price gouging. Similar stories occur in the present-day as Neuwirth moves on to illustrate the situation in Peru, where “more books are sold in pirated editions than official versions”. The price for a legitimate copy of a book is too steep for most people to afford; thus the piraters are the ones that undertake market research, attend book fairs, etc. This is a dramatic fault with the publishing industry in Peru, which clearly has missed business opportunities here by not aliging prices sufficiently with customer demand. This again, then, is an example where regulators should be stepping in to correct market deficiencies. It is not necessarily an excuse for piracy to be celebrated. An absence of morality is not an imprimatur for immorality.

The Business Software Alliance affirms that in 2008, piracy cost software companies $53bn. The author rightly challenges this, writing that the BSA “assumes that every pirated program represents a lost sale at full retail price”. With relatively high prices for products like Adobe InDesign and Photoshop, this thinking by the BSA is indeed questionable. In some cases, initial access to a pirated copy, much in the same way a legitimate trial version works, might well help incentivise the consumer to purchase the full, legal product. Interestingly, the author quotes a note, hidden away in the BSA’s results,

“‘Business, schools and government entities tend to use more pirated software on new computers than ordinary consumers do’. The government – the same entity that the industry calls upon to police piracy – is actually one of piracy’s largest patrons.”

This revelation is startling as it turns the notion that it is consumers who are the wrongdoers, consumers who need the educating, on its head.

The notion of piracy contributing positively to business turnover is a tough one though. The author contends that in the world of fashion, going from a world of ‘planned obsolescence’ (a term used for things like when BMW will decide to release their new version of the 7 series), to “induced obsolscence”, where piracy “spurs demand for new styles”. This may be so in some sort of roundabout way, but the presence of piracy can surely be said to do little for the customer trying to differentiate between the legal and the illegal product, and little for the brand. Louis Vuitton et al. have surely suffered considerable losses over recent years, and invested significant amounts of time and money on combatting piracy. Though an anonymous executive of a “major sneaker manufacturer” might concede piracy doesn’t really impact the bottom line, it is debatable as to whether this is the case for those in the high-fashion world.

Ultimately, while the rise of pirated goods allows consumers more options, it also requires them to be increasingly savvy about the products they are purchasing. An over-regulated environment may stifle innovation; collaboration among multiple entities has been proven to sometimes enhance the development of a product. Quality of craftsmanship is necessarily going to be harder to discern when purchasing a pirated good, though. The trick is to create a legal framework that allows businesses to thrive, to provide their customers with a product at the right price, and to employ people who are protected under laws that they would otherwise not be granted under illegal outfits.