Hollywood’s China Syndrome

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By ROBERT W. WELKOS
Hollywood’s pivot to Asia is hardly new but it seems nowadays that rarely a week goes by without some big multimillion-dollar deal being announced by U.S.-based entertainment companies with businesses based in the Far East.
Universal Studios has announced plans to build a $3.3 billion theme park in Beijing with Hollywood director Steven Spielberg helping in the design efforts and the park, with Harry Potter and other attractions, opening possibly in 2019. Disney is already building a $4.4 billion theme park in China and DreamWorks has a $3.1 billion entertainment complex set to open in 2016 n Shanghai.
At the same time, Warner Bros. Entertainment, Brett Ratner’s RatPac Entertainment and global advertising agency WPP are joining up with Shanghai Media Group and CMC Capital Partners in a deal that Variety reports involves “films and television properties as well as live stage and theatrical events, including musicals, that are Chinese-language or would appeal to Chinese audiences.” Ratner and his billionaire partner in RatPac, Australian casino mogul James Packer, financed the Oscar-nominated space thriller Gravity starring Sandra Bullock.
Former Warner Bros. production chief Jeff Robinov, meanwhile, is using a $200 million infusion of financing from Chinese conglomerate Foshun International and another $50 million kicked in by his former rival Sony Pictures Entertainment, to open a new production company called Studio 8 with plans to release two dozen films through Sony over five years. Robinov told the New York Times that he chose the number eight because it’s his wife’s lucky number.
Only two weeks ago, Japan’s telecommunications conglomerate SoftBank, which owns Sprint Corp. and also a 32 percent stake in China’s booming e-commerce enterprise Alibaba, disclosed that it was investing $250 million in Legendary Entertainment, the Hollywood production company best known for its Dark Knight and Hangover films. Days before that announcement, SoftBank had been the focus of intense media speculation that it was about to acquire the publically traded DreamWorks Animation studio headed by CEO Jeffrey Katzenberg and best known for its Shrek and Madagascar franchises. SoftBank’s interest cooled on the deal but speculation about DreamWorks being wooed in the next six to 12 months by other companies persists.
Then there is the new studio taking shape backed by billionaire Gigi Pritzker, producer Robert Simonds, private equity firm TPG Growth and China’s Hony Capital with plans to spend $1 billion over the next five years to produce and self-distribute eight to 10 star-driven films every year. “When folks around town heard that, they rolled their eyes,” commented Deadline.com. “After all, there is a history of largess announcements with Chinese investors only to find out later that it’s not real.“ But the entertainment industry website noted that JP Morgan’s David Shaheen, the head of the financial institution’s entertainment banking team, said, “The funding is in place. We’ve been working with them for the past year and in earnest the last several months.” Already, the emerging studio has brought on board some big-name executives like Viacom’s former COO Thomas McGrath and former Universal Pictures chairman Adam Fogelson.
And, billionaire Ryan Kavanaugh’s Relativity Media (Fast and Furious 6, Bridesmaids), announced this month that it had struck a deal with China’s 3C Media to jointly produce up to four local-language movies based on Relativity intellectual property annually as well as at least two local-language Chinese TV shows,” according to the Hollywood Reporter. Under the terms of the deal, THR stated, Relativity and 3C will each own 50 percent of the films and TV programming created through the partnership. And, the trade publications noted, this is on top of three other partnerships that Relativity has with the China Film Promotion International, Jiangsu Broadcasting Corp., and the Industrial Commercial Bank of China Limited and SeedShine Capital, a Chinese investment firm.
There is no question that Hollywood is salivating over the growth potential it sees in China.
In July, Britain’s Guardian newspaper reported that China is opening 10 new cinema screens every day and with 18,200 screens at the end of last year, compared with 40,000 in the U.S., noting, “If China had the same number of screens per capita as the U.S. it would have 133,000.”
The Motion Picture Association of America found that Chinese box office grew by 27 percent in U.S. dollars to $3.6 billion last year becoming the first international market to exceed $3 billion in box office revenue. By comparison, the U.S. and Canada totaled $10.9 billion, up only 1 percent from 2012.
MPAA Chairman and CEO Christopher Dodd told a conference in Chengdu, China, last month: “Here in China, which is now the world’s second largest film market, the film and TV industry contributed 272 billion Yuan—or $42.1 billion in U.S. dollars—to the country’s Gross Domestic Product in 2011 alone. That year, it also supported 3.5 million jobs overall and generated $8,8 billion in total tax revenue.”
This summer, Paramount’s Transformers: Age of Extinction grossed $301 million in China with an opening weekend of $92 million, according to box office tracker Box Office Mojo.
Still, no one has a crystal ball. Some long-time observers of Hollywood, in fact, are counseling caution for U.S. companies eager to form alliances with Chinese firms.
Harold L. Vogel, the veteran entertainment industry stock analyst and author of Entertainment Industry Economics: A Guide for Financial Analysis, which in December will be out in its ninth edition, said that when it comes to film financing, he has seen this story played out time and again over the decades, albeit with different players.
Vogel said that Hollywood’s current dalliance with China reminds him of earlier embraces the film industry gave others around the globe, only to see those deals forgotten in the end.
“Ten years ago, it was popular to do German financing,” Vogel told HollywoodNews.com. “And before that it was popular with the hedge funds. And then there was the Arabs and you can go back further to the Japanese. It’s all in the history books. But they either don’t read history or they don’t know.”
With China, he said, Hollywood gets “fooled by the old argument that China has a billion-and-a-half people and that it’s an underdeveloped market. Excuse me, but the Chinese government limits the number of American films to 34 (per year).” Vogel also points out that the U.S. film industry is only permitted to take 25 percent of the profits from the Chinese box office.
“And then they come in with a big pair of scissors,” Vogel said, commenting on China’s strict censorship rules. “They look at the script and they say, ‘This film has something about people in rebellion and is against authority. That’s no good. We’ll take it out of the script.’ So, you really don’t know what the government wants to do. You see that in Hong Kong today.”
As proof that American studios must toe the line when releasing their films in China, the British newspaper The Independent reported in July that Paramount Pictures “altered its zombie epic World War Z, removing a potentially disparaging reference to China to please the country’s sensitive censors. Chinese villains were edited out of (Disney’s) Pirates of the Caribbean: At World’s End and (Columbia’s) Men in Black 3, while (James) Cameron cut shots of Kate Winslet’s breasts from the 3D version of (20th Century Fox’s) Titanic for its Chinese release,” the newspaper reported. It went on to note, “Last year, a dispute over a new Chinese tax on Hollywood releases left studios in the U.S. waiting months to see even a cent of their agreed 25 percent of the Chinese box-office earnings for some of 2013’s biggest movies.”
Doing business with China is currently the “politically correct thing to do and sounds logical on the surface,” Vogel said, with Hollywood gushing, ‘“Oh, gosh, they have all this money to exploit and they have this untapped market.’ But…you end up not owning the whole thing.” He said U.S. companies should be wary when dealing with China. “You go and travel halfway around the world a couple times a year. You take the risk with these brilliant things and you get shot down because it’s not exportable. They really don’t want anything but your money and your knowledge so they can set it up for themselves. It’s possible some will succeed. … but it’s a long shot. It’s not good odds. I don’t think they’ve weighed the risks sufficiently.”
Vogel’s pessimism is mirrored by what he sees happening today in the gambling industry, where Morgan Stanley took a $2 billion writedown on Revel Entertainment Corp., an Atlantic City resort, as a result of declining revenues.
“What I keep telling people who want to go into films is, excuse me, but there is a shortage of peace in the world and we could use a cure for Ebola and cancer,” Vogel remarked. “Is there a shortage of film in the world? No way. If you’ve got a billion dollars, why are you messing with this?”

About Robert W. Welkos

Executive Editor: Robert W. Welkos is an award-winning journalist who covered the entertainment industry for 15 years as a staff writer for the Los Angeles Times. During this span, he wrote extensively about the movie industry from turmoil in the executive suites, the Academy Awards and Golden Globes, and box office hits and bombs to visits to movie sets as well as profiles of top stars and A-list directors, cutting edge features on the newest indie films and visits to famous film festivals like Sundance and Cannes. Prior to entertainment, Welkos worked as a reporter and assistant city editor in The Times’ Metro section where he undertook major investigations for the paper as well as covering breaking news and writing in-depth features. Before joining The Times, he worked for the Associated Press in Reno, Nevada, and City News Service in Los Angeles.

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