China's Box Office Hit 44.07 Billion Yuan. Not All of It Is Worth Celebrating

We would do well to look more calmly at the easily overlooked worries hidden behind the "good-looking" numbers.

China's total box office has grown 40-fold since 2003. In 2015 it grew 48.7%, the strongest year since 2010. But behind these dazzling figures lie a few facts that few people notice.

Some of them are good news. Last year brought more "hit" films, and some of them even outsold the Hollywood films released in the same slots. They became the main contributors to the year's total, and the companies that distributed them climbed the performance rankings.

But these films make up only 4% of the whole market. In other words, the great majority of films still contribute very little at the box office. A handful of so-called "phenomenal" films propping up a good-looking total is not a good thing.

What may be worse is that the number of films with the most room to grow (those grossing 100 million to 500 million yuan) is falling year after year, while the pool of films that contribute little keeps getting bigger. That may not be good for the market's healthy development either.

There are many more examples like these, some good and some less so. You may think we are too pessimistic, or that we are running down China's film market or doubting its future. To be clear: the market as a whole is booming and pushing hard ahead. But at this frenzied rate of growth, we need to look more calmly at the easily overlooked worries hidden behind the "good-looking" numbers.

At the end of last year, after the annual box office passed 40 billion yuan, Rao Shuguang, secretary-general of the China Film Association, said publicly that 40 billion yuan was really only a new starting point, because the average Chinese person goes to the cinema just once a year, against 4.1 times in South Korea. How to put into practice the new development principles of the 13th Five-Year Plan (innovation, coordination, green development, openness and sharing), strengthen the industry's own drivers of growth, and shift from growth in quantity to growth in quality will be a still bigger challenge and test for Chinese cinema and Chinese filmmakers.

EntGroup recently released its 2015 White Paper on the Domestic Film Distribution Market (the data come from EntGroup's EBOT daily box office database and run through December 31, 2015). We have picked out some points from it that deserve attention and discussion.

Imported films' market share is shrinking year by year. Have domestic films risen?

By number of films, the domestic share has swung widely over the past five years: below 50% in 2012, 61% in 2015. Imported films moved the other way. Their share fell steadily after 2012 and by 2015 was below 40%. Yet even with fewer titles, imported films' annual box office (16.61 billion yuan) still grew a good deal, by 23% year on year. Imported films as a whole remain formidable competitors.

Among the imported films that earned the most this year, 27 came from Hollywood's six major studios and took in 13.44 billion yuan. Universal Pictures led the group, mainly on the strength of Jurassic World (1.42 billion yuan in China, US$1.4 billion worldwide) and Furious 7 (2.42 billion yuan in China, US$1.52 billion worldwide). Clearly, individual imported films are no weaker than in past years, and may be getting stronger.

So a larger market share for domestic films is not necessarily a good thing. It is still too early to say that domestic films have risen.

Screen numbers are growing faster. Have cinemas' returns gone up?

In 2015 the number of screens in China kept rising, reaching 31,626, up 34.1%. For audiences, going to the movies is ever more convenient, with more showtimes to choose from.

But the number of films that reach the big screen, where audiences can rate and review them, has not risen much. China produced 686 domestic films this year, up 11%, yet only half of them, 334, were formally released in cinemas. That is 26 more than last year, an increase of 8%.

In other words, even as screens and cinemas keep being built, China's capacity to distribute films still falls short of what an expanding market needs, and it has not brought more films into the ranks of box office earners. Put another way, half the films that get made are never seen by audiences. Apart from those that fail censorship, a large part of the reason is weak promotion and distribution that has not kept up.

Over the past year a number of new film companies were founded, but some are just starting out and have yet to produce or release anything, while others are inefficient and have added little to the distribution market as a whole. Among private distributors, the five traditional private distributors still account for most of the box office, at 63%. Among the top ten private distributors, Lianrui Pictures and Yinglian Media rank fairly high because they distributed Monster Hunt and Monkey King: Hero Is Back respectively. Lianrui released only three domestic films all year, yet its box office contribution ranked second among all private companies, at 985 million yuan.

"Hit" films have lifted these companies' results, which is good for them. The downside is that the chase for box office returns may bring more distributors hungry for quick profits, and shoddy, slapdash films will remain unavoidable.

Another question worth asking: with more screens and cinemas, how well is each screen used, and has each cinema's box office return improved? To some extent, the new cinemas and the explosive growth in screens have split each cinema's takings. Over the past three years the national average occupancy rate has stayed between 14% and 16%, which is very low. Each seat is earning no more than before. A cinema sells seats and the time to sit in them, so if each screen is used no more than before, the return on the cinema's investment in equipment has not risen either. Seen this way, better facilities make life easier for audiences but may be bad news for cinema investors: heavy spending, thin returns.

"A low average occupancy rate (note: only 14.95%) is normal, because what cinemas sell is occupancy at prime-time screenings. Neighborhood cinemas get their crowds on Saturday and Sunday afternoons, commercial cinemas mostly after people get off work. There is no good fix for off-peak screenings, and morning shows across the country are mostly empty," Feng Henan, operations manager at Beijing Red Carp Digital Cinema Chain, told The Beijing News.

We should add that we are glad to see that, even as audiences complain about how many bad films came out this year, there were finally some good ones worth discussing again and again, such as The Coffin in the Mountain, Mr. Six, The Dead End and The Final Master. We have also compiled lists of the 10 best films and the 10 worst films of 2015 for your reference.

Are more films grossing over 500 million yuan necessarily a good thing?

Among domestic films, those grossing over 500 million yuan took 56% of the box office, up from 45% last year, a very fast rise. There are indeed many more films above 500 million yuan, and 1 billion yuan is becoming the new dividing line, but these films are still only 4% of all films released in the year. Most films (87%) gross under 100 million yuan, and this much larger group contributes less to the box office every year. The middle tier (films grossing 100 million to 500 million yuan) is also contributing less each year: 33% this year, down from 42% last year.

Clearly, most films have not shared in the gains from the expansion of screening capacity, and the market has become an oligopoly. A small number of films that count as "hits" earn most of the box office, while mid-sized films with room to grow contribute too little, which may also be a bad sign.

If more films could earn 100 million to 500 million yuan, the market might grow in a healthier way, because that would encourage new filmmakers and new kinds of films. Once this group grows larger, making a film would no longer depend so heavily on the star actors, famous directors, big budgets and franchises that most hits rely on.

Distribution has entered a multi-window era. Do traditional cinema chains matter less?

No.

Cinema chains and distributors have always fought for control, in China as in Hollywood. But in general, in the Chinese market, those who control the market and the channels have always had more say.

As distribution moves from film prints to digital and the internet, and parallel windows such as phones, computers and TVs open up, low-budget films that never get a cinema release do benefit: they gain new platforms to be shown on and new sources of revenue. But for most films, traditional offline distribution is still the mainstay. And the traditional distribution market has shifted from revolving around prints to revolving around screening slots, so distributors must join forces on promotion to fight for slots and win more schedule time. The cinema chains still carry a great deal of weight.

That is why the "presale model" has now become standard for films. And as distribution goes digital and exhibition spreads across multiple windows, release strategies combining online, offline and multiple windows are growing more varied.

But from another angle, the distribution window has grown shorter. So the question is: are the "new cinema chains" (the internet and television) competitive yet?

Clearly not.

The two new windows, online cinema chains and TV cinema chains, are still searching for a way to make money. Online cinema chains, through pay-per-view, monthly subscriptions and similar models, can take at most 70% of on-demand revenue. TV cinema chains are comparatively better for producers' revenue, but that market is still at an early stage.

So among distribution channels, the traditional cinema chains still hold the power. 90% or more of a film's revenue comes from the cinema box office.

Yet the conflict between the internet distribution that the "new cinema chains" stand for and traditional offline distribution seems to be sharpening. In 2015, for example, an internet video company tried a zero-window release, putting a film online on the same day it opened in cinemas. Traditional distributors, whose interests were hurt, organized a joint boycott. There is still no agreed standard for how long the gap between cinema release and online release should be so that neither eats into the other and both sides gain the most.

Online ticketing has been reshuffled too. Who should be afraid of the fight among the "ticket scalpers"?

According to data from the National Film Special Fund Office and Analysys, the share of movie tickets sold online rose from 25% in 2013 to 75% by July 2015. Buying online has plainly become the most common way to get a ticket. Buying tickets has become easier and faster for audiences, which is good news.

With the formation of Xinmeida (the merger of Meituan and Dianping) and the tie-up between Weipiao'er and Gewara, the online ticketing landscape is becoming clearer. Some say competition in this niche has only just ignited. But looking at the changes across the whole film industry chain, it may matter more to study how these "ticket scalpers" plan to use their respective strengths to move into distribution than to debate which of them is gaining or losing market share.

Most of these players came in through ticket sales and promotion, but over the past year they have worked more closely with cinema chains and studios, co-producing and co-distributing a number of films, and the box office those films cover shows the "ticket scalpers'" ambition. They have moved beyond selling tickets into content, production, distribution and other stages. They know more precisely what audiences want, and the data that only these internet platforms hold will play a part in future decisions on film investment and scheduling. How they will shake up the industry from here is far from settled.

One more point cannot be ignored: BAT (Baidu, Alibaba and Tencent) have also been moving deeper into film and television, through ticketing platforms and through investments in traditional film companies, video sites and the like. They are trying to use the power of capital to link up every part of the industry chain. This means the traditional distribution market faces not just ticketing platforms and internet distribution platforms, but the bigger-name players pulling the strings behind them.