Hollywood Scales the Great Wall
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Chinese are going to have access to more movies … well, legitimate ones, at any rate. This is because last week their government and America's agreed on a deal in which more Hollywood films will be allowed to screen in the big Asian country’s theaters. Previously, China had a strict quota of 20 American films per year.
The deal allows for only 14 more movies, which isn’t a huge number considering that the big Hollywood studios typically release around 600 annually. It’s also kind of limited considering that every one of those 14 will have to be an “enhanced format” offering. This is a fancy term for IMAX and 3D films, which not coincidentally fetch significantly higher ticket prices. Needless to say, this heavily restricts the participant list to those who actually make those kinds of pricey movies. Walt Disney (NYSE: DIS), Time Warner (NYSE: TWX) and little-engine-that-could Imax (NYSE: IMAX) will dance under the limbo pole, but the producers of lower budget, traditional-format movies won’t be able to clear the bar.
In spite of the restrictions, this is a move in the right direction that will end up enriching not only the studios but the little producers as well. As with nearly every other good or service, movies are booming in China. In 2011, total box office in the nation amounted to $2.1 billion, a leap of nearly 30% over the tally of the previous year. For perspective, the most recent international box office total amounted to $21.2 billion. China already has a big impact on the movie business and that’s only going to grow.
This, despite the inaction of the country’s government. According to the letter of the law (specifically a ruling handed down by the World Trade Organization in 2009), China is supposed to have a wide-open movie market by now. Yeah, right. Tight and controlling, the government is reluctant to open any of its markets freely to anyone, so full access wasn’t going to happen anytime soon. In light of that stubborn resistance to full competition, even this new deal’s small concessions mean something.
Like everywhere else in the world, Chinese people want to see Hollywood movies and this demand isn’t going to melt away. Nor is it going to be reduced by piracy; even the relatively poor Chinese are willing to fork over a few bills to enjoy a clean print of a movie on the big screen rather than download a shaky camera bootleg to play on their computer or TV.
By American standards, studios get the butt end of the deal when they release movies in China. Up until now the country had but a single film distributor, which happened to be a state-controlled monopoly. This entity took anywhere from 82.5% to 86.5% of a movie’s proceeds, exclusive of costs. As part of the new deal, those heavy numbers will drop to around 75%. This is still far more than the 50% or so distributors and exhibitors take home in America and in other foreign countries, but again it’s a step in the right direction.
And over time it’ll boost Hollywood’s business considerably. The agreement between the two countries is only the start of a series; the ball has begun to roll and China will eventually have to give in to Hollywood/Washington trade office pressure and the weight of the WTO’s ruling. Sequels in the series will almost certainly feature an increase in both the number and type of allowed films. Look to the big studio-owning conglomerates to benefit first and well, particularly Disney, which will secure an important toehold in the market when it opens a theme park near Shanghai in 2016 or so. The “mini-majors”, i.e. production companies or units that don’t have their own distribution arms, will see a boost, but probably further down the chain. One specialist player that’s already gotten a head start is DreamWorks Animation SKG (NASDAQ: DWA); if its plans are realized the company will actually circumvent the quota entirely when it opens a production studio in Shanghai within the next few years. The move is a bold one but probably won’t be copied too widely, as it’s a joint venture only minority-owned by DWA. On the plus side, by planting its flag in-country and establishing a native company, in effect, the production house will be able to freely distribute its wares.
Regardless of how they do it, Hollywood studios will tap deeper and deeper into the hot Chinese market in the coming years. If all goes well and that market continues to be liberated, it’ll be one movie that will have a very happy ending for investors.
Motley Fool newsletter services recommend Walt Disney, DreamWorks Animation and Imax. The Motley Fool has no positions in the stocks mentioned above. Eric Volkman has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
