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.”

 

Media & Tech firms on corporate governance and shareholder responsibility

In this post we’ll be looking at a variety of firms in the media and tech sector as we examine how their vision impacts on the broader economy.

• Short-termism and misdirection (Amazon and legacy players)

In March, Zeitgeist was privileged enough to attend an intimate dinner (well, fifty guests or so-type intimate), hosted by the CEO of a major media company. Much of his speech during our meal was focused on his relatively pessimistic outlook for global growth. One of the key causes of this, he noted, was firms and their fanatical focus on what is known as “short-termism”.

Much editorial ink has been spilled on this concept, one which is hardly new. The argument being that, because of a public company’s fiduciary responsibility to shareholders – who are becoming increasingly activist in nature – the C-suite in turn must increasingly focus on quarterly activities that deliver fat returns for said shareholders. This, at the expense of a longer-term vision or strategy that creates, for example, more sustained competitive differentiation, better margins or improved products. Indeed, in Zeitgeist’s view, many organisations, particularly those in legacy industries, are caught in a difficult Catch 22 situation; they need to maintain investor confidence in order to keep share prices stable while simultaneously investing heavily for the medium term in order to reinvent their business and avoid disintermediation from start-ups. Sony is a great example of this We won’t mention any names here of particular examples, of course…

However, what was interesting was that in February, The Economist published an editorial in its Schumpeter section, detailing how “short-termism” was not only a vague term but also misdiagnosed the root cause of the problem. One symptom of short-termism is share buybacks; the article argues that this is more to do with the fact that larger companies are growing more successful (a worrying trend we have touched on before, which puts paid to the idea that digital disruptors are in themselves value-laden orgs). As a consequence of their increasing success, they have more cash than they know what to do with (look at Apple), and so don’t spend it in a constructive way (look at Apple’s acquisition of Beats). These profits, as the article puts it, are “put to no use”. This won’t change unless competition policy improves; that is unbelievably unlikely to happen in a Trump administration.

Of course there are outliers to every argument. Thankfully there is one to be found here in the shape of Amazon. We mentioned The Economist earlier; the company appeared on the cover of last week’s issue, depicted as a fleet of enormous drones from some future time and place. Amazon’s investors seem to be made of an unusual crowd of people with an exclusively long-term outlook. As the article points out: “Never before has a company been worth so much for so long while making so little money: 92% of its value is due to profits expected after 2020“. While nothing seems to be getting in the way of Amazon’s approach for now, regulation will inevitably come into play (though, as mentioned above, perhaps less so in the US), as it becomes an ever more dominant, global force.

• Accountability and Purpose (BuzzFeed, Snap)

While incumbents are hammering out an approach, newer firms are trying to wind their way to going public. News of an IPO for BuzzFeed recently has raised many eyebrows. As the Financial Times pointed out last year, the company has “missed revenue targets in 2015 and halved its projections for 2016 from $500m to $250m”. Not a shining endorsement. Even without its prior performance taken into consideration, its business model is not guaranteed to woo investors, who are not usually won over by ad-supported models, or by firms that make viral videos, which rely on the fickle interests of the masses to make them profitable.

At the other end of the spectrum was the frothiness and exuberance that greeted Snap’s recent, enormous, IPO (albeit, as above, with some skeptical heads). This despite its existential challenges as platforms like Instagram et al seek to emulate what currently sets it apart from its rivals. In addition to this, there has been concern over the opacity of the company’s structure and shareholding rights, indicative of what the FT called a “21st century governance vacuum”. Snap’s IPO was the first ever in the US to issue shares with no voting rights at all. The newspaper elaborated,

By any standard Snap’s governance arrangements are flawed and its directors minimally accountable. Anne Simpson, a leading governance expert at the California pension fund Calpers, dubs this “a banana republic approach” to corporate governance.

Though the worst sinner, it is also indicative of a larger, worrying trend that is particularly common at tech companies (see Google, Facebook and Alibaba). The reason for going public has changed. As the FT points out, the principle reason for doing so now is so that “fresh equity fills the yawning gap between revenue and expenditure”. A lack of investor oversight means that accountability is less prevalent than ever.

On the bright side, some companies are looking beyond simply maximising shareholder returns to see how they can benefit society. Last year, Boston Consulting Group wrote an unusually whimsical thought piece on the impact businesses could have if they imbued themselves with purpose, acknowledging that with globalisation and technology trends, there are sometimes losers. Deloitte worked with the UK government to publish a report (also last year), detailing how businesses with a purpose beyond traditional financial returns – aka “Mission-led” – were more successful than those without.

• Next steps

Such thinking and work needs scaling, and needs to be evangelised beyond the traditional boundaries of Davos seminars. Without it, increasing deregulation and opaque public offerings are likely to hasten the end of an already long-ish period of global economic growth. Media and technology firms of today tend to provide products that are mostly services, i.e. intangible to the end-user but imbued with value. It would be prudent for them to think about where transparency and accountability adds purpose to their vision, structure, strategy and communication.

 

Closer than you think

While this video from Google might seem a bit fantastical – and it has drawn parodies – it’s actually all now feasible. It’s just a question of integration, mixed with a bit of time.

Check us out

As we celebrate our first anniversary and approach our 150th post, please join us in celebrating our 30,000th hit.

Over the past year, we’ve written on a variety of subjects. Some articles have commented on whole industries or cultural movements, some on incidents of spectacular successes or dismal failures.

We’ve written on the changing face of masculinity, and how men shop in the second decade of the 21st century. We examined why England lost it’s World Cup bid, and what the World Cup meant for the world as a whole, and the businesses that aim to profit from it.

We talked about the future of content; what it means to own something that only exists as a file on a computer, but you still have to pay for, as bookshops and videostores fade to dust and intellectual property rights evolve along an uncertain path.

How social media is used for good, for ill, for Gatorade and for Conan O’Brien.

We’ve ruminated on leadership, on how luxury justifies itself post-recession, and how antique brands like Louis Vuitton attempt to keep themselves fresh, as well as ultra-premium.

We’ve talked about how movie studios win by marketing their product, and how auction houses lost out to the pitfalls of behavioural economics.

We’ve debriefed you on our visit to the UK’s Google HQ, while waxing lyrical on Nintendo as it moves from taking on Sega to taking on Apple.  We’ve asked what it means for the future of TV when everyone has Sky+ and a broadband connection. And we’ve looked at several examples of superb brand activation.

Lastly, we’ve tried in vain to present the glory of Roger Federer.

Stick around and have a browse, we’re not going anywhere.

Head and Shoulders above other virals

A 21st birthday always calls for a celebration. But how do you celebtrate if you are a product that combines Shampoo and Conditioner?

Well, one thing you could do is hire Hull City midfielder and renowned footballing joker Jimmy Bullard to recreate one of your iconic adverts and stick it on YouTube.

Bullard, who has been plagued by serious injuries in recent seasons has carved a niche for himself as a cheeky chap who doesn’t take himself seriously as evidenced by his performance during the shooting of promo clips for Sky.

While the new clip is unlikely to make it onto mainstream television, it has been spreading like wildfire on football websites ensuring that it gets seen by its target market.

For the nostalgic amongst you, here is the original Wash and Go advert the spoof is based on.

To the uninitiated it may seem a brave decision to go with Bullard, who is not a celebrated international star and has yet to be invited to model underpants or sell fragrances, but if you want to attract football fans, send up your category and have some fun then he is the perfect fit.