[Note: below is Chapter 14 from Great Wall of Numbers]
According to the Ministry of Culture, China has now become the world’s largest TV series producer and third largest film producer. While domestically made Pleasant Goat and Big Big Wolf (喜羊羊与灰太狼) and homegrown talent like pianist Lang Lang, actress Fan Bing Bing and comedian Zhou Libo are increasingly popular outside of China, irrespective of where I have taught on the mainland, on any given week my students would invariably ask me what kind of foreign pop culture I enjoyed consuming.
One student I vividly recall in the spring of 2010 had the English name ‘Scofield’ – as in Michael Scofield of Prison Break. (Remember ‘Cena’ from Chapter 2? This was one of his peers). Needless to say ‘Scofield’ was quite a fan of the show, eagerly downloading the latest episode throughout each season. While exact numbers are hard to come by, during its run, Prison Break itself was purportedly the most popular imported TV show from the US, eclipsing even Desperate Housewives. Because of this, Wentworth Miller, who starred as Michael Scofield later appeared in commercials for Me & City (an apparel company) and Ford Motors in China.
While it probably does not come as a surprise to frequent travelers or those with friends living in other countries, US culture is continuously exchanged globally throughout the day. It is perhaps one of the largest, unquantifiable exports that US institutions and individuals produce. It is a type of ‘softpower’ that is the envy of all emerging markets. And its popularity in China is no exception.
As I mentioned in Chapter 8, Chinese, both young and old are voracious consumers of US sports and in particular the NBA. They are also equally interested in other parts of US culture. In addition to paying attention to LeBron and Kobe statistics, after class these same students would frequently ask what I thought about shows I had never heard of at the time: Gossip Girl, Big Bang Theory, Vampire Diaries, ad infinitum.
How do they watch these shows?
While digital video recorders (DVRs) are essentially non-existent on the mainland, in addition to Bit Torrent, there are a number of sites and technologies that stream content on demand such as PPTV, Sohu, iQiyi and Youku (the latter two were mentioned in Chapter 12). Several Chinese video sharing sites have even signed agreements with US publishers to ‘legally stream’ content. Prior to its merger, Youku licensed “Inception” from Warner Brothers and if users wanted to watch it, they had to pay about $.75. Similarly Tudou (which later merged with Youku) licensed “Desperate Housewives” and “Lost” from Disney. This culminated in November 2012 where the new Youku Tudou signed a 5-year deal with Sony Pictures which in turn means that Youku now has an agreement with every major Hollywood studio. In January 2013, Tencent announced that it had signed a similar agreement with several studios including Warner, Universal, Miramax and Lionsgate. For 5 RMB a movie or 20 RMB a month for an ongoing subscription, users of Tencent’s video portal can now view Hollywood movies a mere two weeks after they are first shown in US theaters. But by-and-large, these are historically seen as exceptions, not the rule.
How much of an exception? According to a Los Angeles Times story, China’s bootleg DVD industry “raked in $6 billion in 2010. By comparison, China’s box-office receipts totaled $1.5 billion last year .”
Yet for perspective consider this. My students knew who Katy Perry was before I did. They were fans of Game of Thrones (written by an American) before I even heard of it. They had memorized the lyrics to Lady Gaga songs and their ring tones blared Rah-rah-ah-ah-ah through the halls. They knew what happened to Charlie Sheen (not winning) and could laugh at inside jokes told between Barney Stinson and Ted Mosby. And as mentioned below, it is little wonder that they also consume Mad Men as well.
Translating popularity into revenue
Another Los Angeles Times report recently discussed the popularity of Mad Men on the mainland. While intellectual property (IP) issues are a continued source of debate on both sides of the Pacific, Sohu, a large internet portal, recently signed an agreement with Lionsgate (which produces Mad Men) to distribute it online. While the exact details are not public, other foreign companies have received ad-sharing revenue as these streaming sites place 30-60 seconds worth of pre-roll ads. Altogether the online video ad business on the mainland is estimated to have generated $1.2 billion in 2012.
Could your company sign similar revenue deals? For the time being, probably not, unless you are a relatively large studio such as Disney, Warner Brothers or Lionsgate and have legal representation on the mainland.
While Mad Men may not be as popular as Gossip Girl (which is so popular that it is being remade locally ) or Prison Break, according to Ken Ji, who works for the internet portal Soufun, “I think it reflects reality. You can see from ‘Mad Men’ that [the] U.S. was already sort of open in the 1960s. China is developing and moving toward the stage reflected in the show.” Viewers like Ji and my students can also relate to the smoke-filled rooms in the show. According to the same Times piece, “63% of workers are exposed to cigarette smoke on the job.” And in my personal experiences, whether it is on a bus, a restaurant, an elevator or even a doctor’s office – smoking is near ubiquitous in many areas, especially outside of larger cities like Shanghai or Guangzhou. All told, more than 300 million Chinese currently smoke, the repercussions of which I discuss later in Chapter 18.
I mention this because a number of my students and colleagues found it somewhat strange that a working man such as myself, did not smoke. Apparently because Chandler Bing and Don Draper smoke, so too must other foreigners.
How does this help you and your company set up business in China?
Again, remember, understanding your customer preferences and consumer behavior is just as important as the product itself. For example, Kung Fu Panda was a smashing success on the mainland because the American producers got the authentic look and feel of China spot-on, leading to a number of domestic thought-leaders and policy makers asking, “why didn’t a Chinese company make it?” In contrast, one of the most popular Chinese-made sit-coms on TV right now is iPartment – a popular yet controversial show because many of the jokes and situations apparently directly come from Friends, Big Bang Theory and How I Met Your Mother.
What this means for you
Even if you are in the movie production industry you might not know that the Chinese film market is now the world’s 2nd largest box office, scooting past Japan last year. Ernest & Young estimates that the mainland box office will grow 17% annually through 2015 and overtake the US in 2020. There are now over 12,000 theater screens in China, a number that will also double by 2015. And despite market restrictions that prevent nearly all but a select few of foreign films from being screened, foreign films still managed to account for 65% of the revenues for the first half of 2012. In fact, according to Xinhua, box office sales in China “totaled $1.28 billion in the first half of 2012, up 41.7 percent year-on-year, due to imported movies.”
To really give you an idea of how popular foreign films are, in the first half of 2012, out of the 38 imported films screened, 14 were considered revenue blockbusters, and only two of them failed to bring in more than $16 million. In contrast, “among the 141 China-made movies screened in the same period, only 5 percent managed to break even and the rest lost money, industry insiders said.” Altogether, movie ticket sales increased 30% in 2012, reaching a new record of $2.69 billion. And the 76 foreign films screened on the mainland represented 52.4% of ticket sales (compared with 227 Chinese-made productions). In fact, 7 out of the top 10 highest-grossing movies shown in China last year were imports.
In this same Xinhua story, Zhang Huijun, president of the Beijing Film Academy believes that this polarized situation might actually spur more creativity domestically because Chinese producers now ask themselves, “[h]ow can they produce quality films that cater to the audience and generate lakes of cash?”
Yet while this transition and transformation germinates domestically, you and your content company may be able to still capitalize off the popularity of “being foreign” (see also Chapter 3 and Chapter 11) and establish new revenue streams in China. That is not to say that foreign firms can ignore quality. Yet for perspective, this is a country where a mere 600,000 foreigners are year-round residents. In fact, in my own anecdotal experience, I have been photographed several hundred times simply because I looked different (or laowai).
But also consider one challenge that Forbes recently reported on: the difficulties and challenges both foreign and domestic companies have in repatriating their earnings. This is due in part to laws and regulations as well as a large SOE called China Film Group (CFG) which, even with seemingly ironclad contracts, still purportedly extracts a lion’s share of revenue for the films it distributes (it has an exclusive monopoly on mainland distribution).
For example, as I noted in Chapter 10, before setting up and doing business in China, it is highly recommended that you do your legal due diligence. I then quoted an exchange I had with legal expert, Dan Harris, of the law firm Harris & Moure who said one of the biggest challenges of doing business in China was contract enforcement and getting paid. This same Forbes piece above quotes Mathew Alderson, also an attorney at Harris & Moure, who said “getting paid is a big concern” for both domestic and foreign studios alike (and on both sides of the Pacific for that matter).
So a quick recap: foreign pop culture, especially entertainment from the US, is incredibly popular in China. It is readily consumed and easily accessible through a variety of venues and channels, including the internet and movie theaters. China’s movie theater industry has rapidly expanded and is now the largest outside of the US (see also Chapter 11 regarding Wanda and AMC). Yet despite this popularity, monetizing and repatriating the revenue is a challenge for all foreign companies.
Marginal liberalizations and popularity
What kind of headway are foreign firms making into this maturing market? Prior to a deal hammered out earlier in spring 2012 by US trade representatives only 20 US films were allowed to be screened at theaters; the number is now 34. And according to the Forbes article above, in order to prevent “receipt leakage” and to audit the box-office receipts of an upcoming joint production, the US producers are “demanding that a collection agency” be used as 3rd party monitor.
Yet again, despite these hurdles, the popularity noted above indicates that pent up demand for foreign cultural products is not likely to subside. So what can you or your company produce that can capitalize off its cultural ‘uniqueness?’ And again, remember “Made in the USA” is actually a perceived badge of quality (see also Chapter 11).
What other types of entertainment are popular?
The third most-searched query on Baidu (which at 80% has the largest search engine market share in China) in all of 2012 was for 4399, a new popular gaming portal that develops easy-to-use casual games that are popular with younger demographic segments. NetEase is the 2nd largest tech company in China; it employs more than 6,000 and generated $7.29 billion in 2011. While it has diversified and operates both a large popular portal (163.com) and a cloud word processor called Youdao Yunbiji, one of its biggest revenue sources is World of Warcraft (WoW) developed by US-based Blizzard Entertainment. WoW is globally the largest (by revenue) massively multiplayer online role-playing game, with around 10 million subscribers. NetEase is Blizzard’s official partner in arguably the most popular, foreign revenue generating game on the mainland. In fact, by some estimates, half of all WoW subscribers are now from China.
While I briefly touched it in Chapter 6 and Chapter 13, online gaming in China is a large and growing industry. Just how big? According to Pan Chenyu of PricewaterhouseCoopers (PwC), “China is now the world’s largest online gaming market, contributing one-third to the global revenue in this sector in 2009, or 56 percent of the Asia Pacific total.” In fact, sales revenue for online games in China for 2012 reached $9.69 billion, an increase of 35.1% from the previous year. And a recent report from China Daily noted earlier in the chapter, “the turnover of China’s mobile gaming market is soon going to hit 5.2 billion yuan ($835 million) as the number of players reach 270 million.” With approximately 330 million players (150 million who are below the age of 19), perhaps you can port or develop games for this market.
What else is consumed besides electronic games?
Based on my own anecdotal evidence, despite their on-again-off-again love-hate political relationship, many Chinese (especially under-30) consume large quantities of Japanese entertainment. Yugi-oh collectible cards are sold in convenience stores and entire series of anime such as One Piece, Sailor Moon, Naruto, Full Metal Alchemist and Shin-chan are downloadable from the same video sites noted above. In addition, local video arcades are full of systems originally from Japan such as SEGA and Namco and toy stores in larger cities are stocked with Japanese imports (like Hello Kitty).
Each large city typically also has stores that import and sell “officially” banned products like consoles such as Sony’s PS2 as well as Microsoft’s Xbox 360 (ironic since they are both manufactured in China as well). Since being officially banned in 2000 due to parental outcries over “wasting time,” companies like Nintendo have reworked their products to fit the legal framework and while they still face domestic knockoffs and clones (like the “Vii”); Nintendo has managed to generate revenue through their a local partnership in the iQue and iQue DS consoles which are made and distributed on the mainland.
In November 2012 I spoke with Kyron Yang, a native of Kunming who is now completing a graduate degree in computer science at the University of Utah. Prior to his graduate studies he worked as a voice actor for a genre of games called “street mechine” (卡战三国). It is a genre of turn-based, role-playing styles blended between a collectible card game and traditional action game and is sometimes played on consoles at video arcades. Essentially a player controls a character or several characters that in turn collect cards and can use those cards to perform certain actions (e.g., fight). In East Asia, this type of game is increasingly popular with both teenagers and adults, yet is also very popular with younger demographics. According to Yang, “the market for this type of games is very competitive because the mechanics are relatively simple, much like ‘paper, rock, scissors.’” Yet one word of caution, there are now policies that restrict the amount of hours that games can be played by minors thus solely targeting this demographic could place growth restrictions on your firm. Perhaps a company looking to build an entertainment venue like those discussed in Chapter 11 (Main Event, Dave & Buster’s) could find success by using these types of game consoles in their venues targeted at a wide range of demographics.
Takeaway: despite being the largest film market outside of the US and the largest TV producer globally, China’s maturing entertainment industry is dominated by foreign imports. Whether it is movies, TV shows, music or even games, Chinese consumers have a seemingly insatiable appetite for foreign-made entertainment. Yet with this demand also comes challenges in the form of bootlegging, regulatory hurdles and capital controls (see also Chapter 10). At this time the market may only support physical sales and value-added services (theaters) yet small inroads have been made in terms of liberalization and revenue sharing. As usual, be sure to do your due diligence before diving in. The rewards may still not justify the investments.