That’s all Folks: Warner Bros in China
Is the Curtain Falling on Hollywood’s Chinese Dream?
Through its onscreen portrayal of the American dream, Hollywood has itself come to represent the fulfillment of that same dream. What’s more, the influence of Hollywood extends far beyond the shores of the US and the borders of the entertainment industry. Hollywood has propagated western culture as the benchmark of aspiration and in the process cultivated a global movie industry worth $38Bn in 2016, of which 70% of revenues come internationally. In turn, Hollywood douses American made brands with an aura of aspiration, stimulating significant export demand. Perhaps it is ironic then that the President’s recent escalation of anti-trade rhetoric with China could disrupt Hollywood’s supply chain – making it impossible for studios to access Chinese consumers. While the movie industry’s financial flows are small compared with other business sectors, movies are highly visible, symbolic, and politicized. 
Warner Bros (WB), founded in 1923, is the largest movie studio in Hollywood, with a 26% share of the Global Movie Industry.  WB owns distribution rights to movies, either by producing them internally, or by purchasing rights from other studios. WB then monetises these rights through distributors who sell the movie to end consumers (of which WB receives a share of revenue). Revenue is generated through three major sources: cinema ticket sales (c.40%), home entertainment (DVD, Pay per View) (c.30%) and TV licensing (c.30%). It is important to note that cinema sales set the tone upon which the two other segments capitalise. 
China is the biggest and fastest growing export market for WB movies. Chinese box office revenues were $6.4Bn in 2015 and have grown 144% since 2012 (a stark contrast to the 6% growth in the US over the same period).  China’s box office is disproportionately skewed toward blockbusters and was responsible for c.50% of worldwide revenue for the top seven grossing films in 2016.  Thus, the Chinese market is a significant driver of profitability for these “blockbuster” productions and offer redemption to those which underperform in Western Markets.
This pace of growth is astonishing in light of the regulatory framework that governs all cinematic releases. Access to the Chinese consumer is defined by a single agreement between Hollywood and the Chinese Government limiting both the number of foreign films allowed into China (57 per year), and the profits allowed out.  In addition, the Government requires movies to be censored, posing problems for WB, as it is difficult to satisfy the tastes of the US consumer and Chinese Government all at once. To secure a valuable release slot Hollywood studios are beginning to portray China in a more positive light (a strategy which seems to be delivering results – in 2016 only 34 movies were allowed into China). This has not gone unnoticed in the US political sphere; representatives from both sides of the political aisle have expressed “growing concerns about China’s efforts to censor topics and exert propaganda controls on American media.”  If a trade war with China were to occur then it is possible that distribution access to China would become impossible for WB.
To mitigate this risk and evade government quotas, WB has recently been entering into co-producing agreements with Chinese movie partners to create local Chinese content.  However, the explicit tailoring to Chinese consumers results in content which cannot be monetised outside of China. This represents a change to WB’s current content model which has historically relied on global blockbusters to drive demand.
Whilst this provides a short term solution for WB, the co-production model is unsustainable. There is a risk that, as in other industries, China wants WB to hand over expertise to their Chinese partners, only to have the Chinese companies eventually replacing WB.  Right now, Chinese studios produce mainly comedies with limited appeal which lack the brand names that make a reliable hit. However, investment is taking place and local quality movies will improve over time; Dalian Wanda (China’s largest commercial property group) is currently developing one of the largest movie production facilities in the world in Qingdao. 
To lock in longer term supply chain security WB should invest in local production infrastructure. The movie industry is changing, success in China is no longer about censoring US content and selling it to western obsessed Chinese consumers. To retain access to the market, and embrace the shift in consumer tastes, WB must move to a fully owned local production model and own locally produced content, circumventing political quotas and maintaining control of their IP.
This throws up a number of questions: Is this the beginning of a paradigm shift in Hollywood’s content strategy? Is the rising dominance of China fundamentally changing Hollywood? Does moving to a local production model creating locally relevant content mean that budgets for US movies will decrease?
- Patrick Frater, Variety.com, “US and China struggle over film quotas” February 2017
- Stephen Follows, “How Movies make Money in Hollywood”, July 2016
- Michal Lev-Ram, Fortune Magazine, “Can China Save Hollywood?”, July 2017
- Mark Hughes, Forbes.com, “How China Has Taken Over The Worldwide Box Office In 2017”, April 2017
- Patrick Brzeski, The Hollywood Reporter, “China Box Office Remains Sluggish in 2017, Despite Big Hollywood Gains”, July 2017
- Hannah Beech / Hengdian, Time Magazine, “How China Is Remaking the Global Film Industry”, Jan 2017
- Patrick Brzeski, The Hollywood Reporter, “Warner Bros. and Ratpac are doubling down on Chinese-language film production”, April 2016
- Nancy Tartaglione, Deadline.com, “Does Trump’s Trade Probe Impact the Film Industry?”, August 2017
- Michal Lev-Ram, Fortune Magazine, “Can China Save Hollywood?”, July 2017
Student comments on That’s all Folks: Warner Bros in China
The essay captures an interesting trend in the entertainment industry with regards to supply chain. However, I would challenge the author’s recommendation in the following aspects:
1. If the Chinese government has that much of censorship of content creation, how confident is the author in recommending building local production infrastructure that would be approved by the government? Furthermore, would it be cost efficient to do so? My assumption would be no to both questions.
2. Is it really to WB’s advantage to cater to local market with local content given local competitors? The top grossing film in China in 2017 is a locally produced film funded by 21 Chinese companies. It seems challenging for WB to go at making local contents alone if it’s objective is still to maximize return. But the author brings up a good point of IP protection, but at what cost? Or should WB continue to supply Hollywood content to “western obsessed Chinese consumers”? I see WB with a stronger competitive advantage at this, but I question how western obsessed Chinese consumers really are. With recent records of top grossing films in China, I think the answer is not much.
3. Does Chinese studios investment’s in Hollywood films have any impact on the bilateral relationship? With a similar purpose – trying to learn and eventually get ahead of Hollywood studios, Chinese production companies are actively investing in Hollywood films. Perhaps Chinese government would be hesitant to make its relationship with western entertainment industry any more tense than it has been before.
A really interesting essay. For me it posed a couple of questions:
1. Would it really be profitable to set up local production facilities in China to produce movies suited to Chinese tastes? Do enough other markets have similar tastes to generate enough export revenues to cover the high production costs? After all, Chinese consumers are sophisticated and these will be movies with a high production value.
2. If no, I think the co-production model is a sensible way to cater for the Chinese market. Admittedly, it doesn’t maximise profits but WBs also significantly reduces their own risk and footprint in China, which would be beneficial should trade between the two countries come under pressure.
3. Finally, this article raises an interesting question on adapting US films to suit the tastes of Chinese consumers/ government. Is this censorship or is it simply smart commercialization by the US movie studios?
I would like to disagree with the first comment on this article with regard to the argument around whether US-made content has wide appeal in China. While it is true that the top grossing film in China in 2017 was locally produced, it is also true that five of the top ten grossing films in 2017 were produced in the United States (according to IMDb) – one each from Universal Pictures, Walt Disney Studios and Warner Brothers and two from Paramount Pictures. Thus, I would argue that Warner Brothers need not, and in fact should not, cater content to local culture. Instead, it seems that Chinese consumers are specifically seeking out the glitz of Hollywood.
One consideration that I would recommend Warner Brothers take into account when developing future releases is the specific type of US-made movie that Chinese consumers prefer. The author of the article notes that ‘China’s box office is disproportionately skewed toward blockbusters.’ Additionally, all five of the US-made movies mentioned above are action-oriented. Warner Brothers could use this criteria as a guide for content, while avoiding topics that garner government sensitivities, to better position themselves for success in the current environment. I believe this strategy could allow them to reap the rewards of the fast-growing Chinese cinema market while avoiding regulatory road blocks from a content perspective.
If trade issues between the US and China continue to escalate, WB may have to explore alternative production methods, such as co-producing with Chinese movie partners, to ensure that they have access to Chinese consumers. However, even in this scenario, I would advise that WB remain focused on blockbuster action movies as much as possible.
I think WB still has a lot to offer to Chinese consumers, such as access to Western movie stars and license to iconic blockbuster characters, including comic book superheroes. So long as American culture still has global appeal, movies by WB and other American studios will not lose their relevance in their Chinese market.
Investing in local production facility might not work as a long-term strategy because the Chinese government can easily change its laws to circumvent such setup if it wants to protect its own entertainment industry. Relying on soft power such as stars and iconic characters is a more sustainable play in China.
Great discussion. I struggle with evaluating the dynamics of the Hollywood – China relationship. Does Hollywood need China purely has a consumer market to their global product? Is Hollywood, or in this case, WB adjusting to local content to keep access to this market? Or could they be afraid that if they don’t do it, then someone else will, and Hollywood will have lost the train to the next “Bollywood”? Also, by investing locally, can they really trust the Chinese government to not change the rules of the game again half way through? Very curious to see how this industry will evolve.
A really interesting article which made me think a lot. I spoke to some friends about this and they raised a good point which really has not been addressed. Warner Brothers and other mega studios are, at the end of the day, chasing the all powerful dollar. The influx of China influence over movie production is in fact being allowed because studios look to China as the latest funding source. About 20-25 years ago you would have seen the exact same trend with Japan, where there was a huge influx of film financing coming out of Japan and Japanese personalities being given cameo roles in the movies with Japanese money backing. This is what we are seeing right now with a number of blockbuster films being co-produced by Chinese companies or at a minimum being financed by Chinese money. It is not uncommon to find a well known Chinese personality being given small parts in those films. I would assume this trend will last until Hollywood finds the next preferred source of film finance.
The observations you note in this article is definitely a trend, which will only continue to intensify. To that point, if Warner Brothers does not invest in co-production in the Chinese market, someone else will. If they choose to remain involved, through joint venture’s and other mechanisms, they are able to control content and develop a relationship with the Chinese consumer. The potential to capture huge amounts of revenue growth over the next few decades by helping build domestic production studios (in a JV) is a huge opportunity for WB. On the broader concern that the studio is changing their content to placate both Chinese government and the public – I think this happens in every market new products go into. Sure, there are limitations on political and social topics you could discuss, but I imagine that would be a smaller percentage of content than is normally assumed. Further, if WB is truly invested and aligned in the success of potential Chinese JV partners, they could had domestic content subject to local tastes/censorship being the driving force of their revenues from China.
I’d like to address the last two questions raised, namely:
Is the rising dominance of China fundamentally changing Hollywood?
–I would argue that Hollywood blockbusters are continuing to perform well in China under the status quo (and, as the author states, profits in the Chinese market often subsidize losses that films incur in other markets). From the facts presented, I don’t see signs of a major shift within Hollywood itself for the time being (it seems Hollywood is continuing to produce similar films to past ones that, while successful in China, aren’t geared toward that market — with the exception of toning down politically charged content). That said, the point about potential trade limitations in the future could change this. Should that occur, I think Hollywood might focus its efforts more on films appealing to Western markets, given the increased difficulty of marketing them in China and the consequent need to maximize profits elsewhere.
Does moving to a local production model creating locally relevant content mean that budgets for US movies will decrease?
–Given the high growth-rate of the film industry in China, I believe there is space for a number of players in this market. Should WB partner profitably with local producers, I believe this will generate incremental revenue streams that could allow these projects to fund themselves, as opposed to diverting capital away from Hollywood budgets. That is, if WB-China partnerships are profitable and don’t cannibalize WB-Hollywood revenues in China (which seems possible, given China’s appetite for more content — 144% growth in three years) then I think this strategy could actually improve revenues for WB as a whole.
Very interesting reflection on a topic that I don’t see getting much analysis in the popular press. I think that there are a number of examples of US / Western companies that have been slow to gain traction / easily pushed out by local competitors in China as a result of a better understanding of the local preferences and/or a desire of the local population to utilize a Chinese alternative (uber, amazon, whatsapp etc). I would be curious to learn the degree to which heritage brands, such as WB, have sufficient traction and popular appeal so as not to be supplanted by a local competitor. Relatedly, there has been some push back in U.S. cinema where anticipated Asian castings have been substituted with white American actors – it would be interesting to see what, if any, impact this has had on the market viability of these different films in the Chinese market.
This was an interesting read. As mentioned, the Chinese market has reached a point that it can just not be ignored by any production house. And while it is an extremely huge market for the hollywood big names, the viewing audience is also evolved to appreciate good films to the point where even some bollywood(the Indian movie industry) movies have been widely accepted in China . So the way I see it, movie houses need to have a multi pronged strategy : hollywood blockbuster movies, create local content and promote movies that really connect with the Chinese consumer market.