China's Film Market Is Booming. Keeping It Growing Is the Hard Part

The demographic dividend that has driven the growth of China's film market is slowly losing its magic.

Ordinary article

Look back now at the box office over this year's Spring Festival and the weeks that followed, and one thing is confirmed: China's film market is a market of young people. When they go home for the holiday, the film market goes home with them.

Box office set a new record over this year's Spring Festival, but one pattern deserves more attention. Before the holiday, almost every one of the ten highest-grossing theaters in the country was in Beijing, Shanghai, Guangzhou or Shenzhen. From February 8, takings at theaters in cities like Wenzhou, Putian and Taiyuan shot up, and those theaters pushed into the top ten. Maoyan's data shows something similar: the share of box office coming from third- and fourth-tier cities rose from 33% in January to 46% on the first day of the Lunar New Year.

This has a lot to do with how people move around during the Spring Festival. Young people go home from the first-tier cities, and they take their spending power to their hometown theaters.

Which confirms, again, that inside a movie theater it is young people who are most active.

They have also become what Zeng Maojun, president of Wanda Cinema Line, calls "the future." "I think the film market of the future belongs to young people," Zeng said. "North America has lost a lot of young viewers over the past few years, so I believe the center of the global film industry will definitely be in China."

He said this at a forum during this year's Shanghai International Film Festival, titled "The Future of Cinemas · Cinemas of the Future." The subject was theater chains, but the real discussion was about where Chinese film is headed.

Everyone in the Chinese film business believes the biggest market of the future will be China.

In their picture of it, China will one day have the most theaters, the most moviegoers and, finally, the highest box office. Building theaters is the crucial part.

When Ng See-yuen, president of UME Cinemas, got into the theater-chain business in 2001, China had just over 2,000 screens. Now it has 31,000. But Zeng Maojun thinks that "the rapid growth of Chinese cinemas will only start to fall off once the total number of screens in China passes 70,000."

Nearly all of them are pinning the gap between 31,000 screens and 70,000 on the lower-tier markets. It was by relying on third- and fourth-tier cities that Dadi Cinemas came to own more screens than anyone else in the country, and Zeng Maojun has said Wanda will focus its expansion on third- and fourth-tier cities too.

Almost every product in the Chinese market shares this trait: it goes to the lower tiers for share and for growth. One question remains. If there are no young people in the lower-tier markets, who are all those fine big screens for?

The boom years of China's film market ran on a demographic dividend, and that dividend is running out

A Hollywood film taking more money in mainland China than at home in the United States stopped being news a while ago. Warcraft is the latest example: pushed along by Chinese money, its mainland box office ran far ahead of its American take, and unlike the pile-on from American critics, it scored 8.0 on Douban, a respectable mark.

The gap between money and reviews is plain. Zeng Maojun puts it down to the tastes of young people. Fang Bin, general manager of Dadi Cinema Line, went further, arguing that this difference in taste will eventually produce two forces that rule commercial cinema worldwide: "Behind China's economic development there has to be cultural development as well. Global film culture will split into two poles, one American, one Chinese. What fails in America won't necessarily fail in China, and what succeeds in America won't necessarily succeed in China, because there are two standards now."

Both of those standards are judged by young people.

Young people are the main guarantee behind China's continued box-office growth. Put bluntly, what the Chinese film market does right now is sell tickets. Studios and theater chains alike want to sell more of them. More people spending more money on films means the box office grows. So the "engine" of box-office growth has three main parts: more screens, films that pull in more viewers, and a bigger audience. All three amount to a dividend handed over by population.

But the dividend is disappearing. Figures from Fanying show that newly built theaters bring in less and less money. Theaters built before 2011 averaged 7.9 million yuan in box office in 2015; theaters built in 2014 averaged only 5.28 million yuan.

That is because most new theaters are sinking into third- and fourth-tier cities, where population density is low, so the growth they add is limited. Chen Qin, a PhD in economics, ran an economic research model and calculated that, leaving aside the cost of building more theaters and holding the pace of urban migration steady, the market has only 26% of potential box-office growth left in it.

Ng See-yuen said at the forum exactly how he feels about it: "Cinemas should be built according to where the population is. I often say that a good thing turns bad once it reaches Chinese hands. People used to speculate in stocks; now movies are doing well and everyone wants to run a cinema. Even the owner of a foot-massage parlor wants to open one. There is no barrier to entry, so you get box-office theft and padded numbers, which you don't see anywhere else in the world."

What about making better films, then? That looks like a far better answer. Taking a single theater as his example, Chen Qin found that every one-point rise in the average Douban score of the films showing that weekend lifted box office by 350,000 yuan.

But in the eyes of many studios today, a film that sells tickets — Warcraft, say — is a good film. Follow that logic and the films the future needs are the films young people need, which means the films that are popular now: comedies, special effects, stars, something the whole family can watch. Four of the top five domestic films of 2015 were comedies; the fifth, Mojin: The Lost Legend, sold itself on its effects.

So will future cinemas be showing nothing but Warcraft? Ng See-yuen is worried about it. He doesn't think Warcraft's haul is normal, and he doesn't want it to become normal. "Chinese audiences are getting younger and more childish. We lack a deep culture. We are serving 'children,'" he said. "A normal film market serves everyone, but the share of adults — the older group — going to the movies is falling, which is why producers end up serving a juvenile audience."

Theaters can add only so much to the market, and a conservative approach to production makes it hard to widen the audience films attract. It seems the only way left to keep box office growing is to raise ticket prices.

And that runs into opposition from the internet.

Look closely at the past few years and Chinese film turns out to be a huge, quiet O2O market

The internet's effect on film needs no explaining by now. Online ticketing platforms moved first, striking directly at the business of movie theaters and their standing.

Buying online is cheap, you pick your own seat, and now you can get refunds and make changes. Those advantages have kept pushing online ticketing's share up. In 2015, close to 60% of tickets were issued online; on the first day of the Lunar New Year the figure reached 83%.

The reason is that internet users and moviegoers overlap heavily in age. CNNIC survey data from 2016 shows that as of December 2015, Chinese internet users were dominated by the 10-to-39 age group, 75.1% of the total; the 20-to-29 bracket was the largest single share at 29.9%. That is precisely the core moviegoing crowd.

Something often strikes us as odd: American films are marketed through traditional channels like the TV networks, while China looks nothing like that. The reason is simply that in China the non-internet audience has not become the bulk of the moviegoing public.

Marketing in China can no longer be done without the internet, for the same reason: moviegoers and internet users are largely the same people. When Zootopia took off this March, fans promoted it, argued about it and made their own fan works, and all that word of mouth on social networks did real work for the film. These days, from the moment a project is greenlit, everyone from the director to the cast is already out online talking it up.

So for the film market, the internet can take part at every stage — early development, promotion, the final sale, merchandise included — a complete O2O chain.

Besides young people, who else is going to the movies?

It is worth noting that young people's reliance on the internet has already reached film content itself. Comedy is the mainstream genre in China's market now, and most of the jokes come from internet forums; web shows like Never Expected (《万万没想到》) and Diors Man (《屌丝男士》) have even been turned into features.

You have probably noticed, too, that the lines between films, TV dramas, variety shows, web series and web movies keep blurring. Their styles seep into one another until the forms are hard to tell apart. The result is that Chinese film has never developed a full hierarchy of content.

Which makes it hard to split the moviegoing audience into different groups. "The people who go to the movies are young — young people are all online — so studios make films that suit young tastes — which makes it hard to attract anyone else — but the people who go to the movies are young …" It looks like a loop with no way out.

Hollywood blockbusters, with their industrial standards and their strong stories, were once thought capable of bringing something different to the Chinese market: content that owes nothing to Chinese internet culture and might even shape it.

But Hollywood isn't trying to make good content either. It is trying to make hits. QDaily has written several times about how Hollywood is running low on ideas, with most of its films now sequels or franchise entries.

The average American moviegoer is about 40, yet the force driving Hollywood blockbusters now comes increasingly from overseas markets, China above all. We analyzed earlier how many of the Hollywood blockbusters opening in June had Chinese financiers behind them. And differentiation rarely comes out of a hit formula.

Hollywood no longer bares its teeth the way it used to. In 2015, imported films took less than 40% of the box office, and for the first time a domestic film sat at the top of China's all-time chart. This year only three imported films have passed 1 billion yuan, and their weak showing is one of the main reasons the market cooled in April and May.

There is also a sad fact: Hollywood blockbusters struggle to reach into third-tier cities. Information channels there are relatively limited, foreign film companies have no grip on local distribution, and they certainly can't run dozens of roadshows deep into those places. The third-tier-city population and the non-internet population that domestic films fail to reach are just as far out of reach for Hollywood.

Theater building and O2O platforms together drove the market's growth these past few years, and what they can still contribute is shrinking.

Cinemas do have a range of assets in hand today: IMAX, giant screens, Dolby, ScreenX, 4D. IMAX above all — after several years of operation, "it isn't really a blockbuster unless you see it in IMAX" has become common sense for a lot of people. Zeng Maojun has gone so far as to say, "We're not ruling out that our next step is to keep every IMAX screen we have in the country off the outside platforms." When Warcraft opened, Wanda kept its midnight IMAX shows off the e-commerce ticketing platforms; you could only buy on Wanda's own platform. "It worked very well. The moment we opened up our IMAX halls, a few cinemas sold out in seconds. In about ten minutes the midnight IMAX shows across the country were nearly all gone. We quickly added a 2:30 a.m. show, then a 4:30 a.m. show, and those basically sold out too."

But under the current all-platform release model, different channels get you at most into a different hall, not to different content. For that, cinemas would need chain-by-chain distribution.

Chain-by-chain distribution, put simply, means a film doesn't open nationwide but in a few regions, or on a few theater chains. Today's preview screenings are a variant of it.

Cinemas don't control chain-by-chain distribution, though; the strategy is still set by the studios. Fang Bin said: "A film comes in and I show it only to non-members, or I show it in this hall and not that one, and the distributor and the studio come looking for you — why have you cut my showtimes, why are you shortchanging me?"

For now, how to offer different content — the root of attracting different kinds of moviegoers — is still a problem without an answer. Studios think they have found a familiar road to money, and capital has poured into film in volume. It wants profit, it wants safety, and it is in no hurry to try new kinds of films.

Wanda Cinema Line's market value has passed 100 billion yuan, ten times what it was when the company listed at the start of last year. Zeng Maojun thinks it is still too early to talk about a bubble.

A good market, especially one growing this fast, covers a lot up. It supplies confidence, enthusiasm, a more urgent itch to grab share, and blind capital. Only when the blind phase passes, when competition sharpens or growth runs into trouble, will companies settle down and think hard about being different.

Judging by April and May, that point is getting closer.

Cover image credit: tvtropes, farandula