China's Film Market Spent 2016 Watching Its Hopes Collapse. Where Does It Go From Here? | QDaily's 2016 Year in Review

QDaily will be rolling out a series of year-end review articles for 2016. Stay tuned.

QDaily's film of the year for 2016 is Zootopia. It used Hollywood's industrial craft to tell a story with a complicated core, pitched exactly right, and won over both the critics and the box office.

In 2016, it was the only one of its kind.

Early in 2016, Longteng, Hehe Pictures and Enlight Media sat down together and signed a sky-high box-office guarantee for The Mermaid.

Nobody has ever settled on the size of that guarantee — some say 2 billion yuan, others 1.6 to 1.8 billion — but whichever figure is right, it set a record in Chinese film history. A few years earlier a deal like this would have made plenty of people hesitate. But the red-hot box office of 2015 had lit a fire of hope, and it pulled still more capital into one of the few consumer markets in China still growing fast.

After the 2015 stock market crash, entertainment was one of the few consumer businesses that could keep growing at speed, which also made it an attractive place to put money. So capital that had left the stock market, foreign exchange and precious metals converged on film and television.

The lead guarantor was Hehe Pictures. The money ran through a fund Hehe had set up; the other two companies took part only by subscribing to fund products. Hehe's largest shareholder is China Minmetals Trust, whose expertise is not movies but investment and capital operations. Trust companies are also good at designing deal structures and inventing financial services. In this piece of financial engineering, Stephen Chow had banked a handsome income well before the film reached theaters.

The Mermaid did not disappoint. From the day it opened it broke box-office record after record, finishing at 3.39 billion yuan — the highest-grossing film in Chinese history, nearly 1 billion yuan ahead of the runner-up, Monster Hunt. Enlight Media has been making films for a decade and has taken 20 billion yuan at the box office; The Mermaid alone accounted for 17% of it.

That number thrilled the film business. Others like it followed: 44 billion yuan, the total box office for 2015; 48.7%, the growth rate for 2015; 60 billion yuan, the target for Chinese cinema in 2016.

Everyone waited for a hopeful spring. The moment the Spring Festival holiday ended, hundreds of film and television companies started hiring — old firms and new startups, executives and entry-level staff — and the job posts filled WeChat Moments and industry group chats. It felt like spring.

Spring arrived in March. Hope was already leaving.

At the time, the failure of Ip Man 3 looked like nothing more than a greedy businessman trying to squeeze a film for everything it was worth. The businessman, Shi Jianxiang, chose financial engineering. Like Hehe, he guaranteed the film's takings and set up a fund — but instead of selling that fund to other companies, he packaged it as a peer-to-peer wealth-management product and sold it to ordinary savers, generating cash for his other businesses and using it to move the stock market. To make the scheme safer still, Ip Man 3 faked box office on a large scale.

Under public pressure the authorities opened an investigation, and Ip Man 3 never reached the numbers it wanted. But Zootopia was strong, March's box office looked fine, and Ip Man 3 seemed a minor episode. The market as a whole still looked healthy.

April's box office fell year on year, but you could console yourself: no blockbuster this year to match last year's Furious 7. May's drop had no such excuse. So in June the authorities broke with four years of custom and set aside the domestic-film protection month, importing at least one Hollywood blockbuster a week. That stopped the slide, but it could not save the summer. July fell year on year and August rose only slightly. The lead built by The Mermaid and the Spring Festival season was almost spent, and by then nobody dared mention "60 billion."

From "let's take a run at 60 billion" at the start of the year to "as long as it beats last year" now, China's film market spent a year watching its hopes collapse. Beyond the numbers, moviegoers would put this year more simply: so many bad movies, there was nothing to watch.

None of it happened overnight. Somebody had to pay for years of restlessness and hollowness in the business. The only question is who — the companies chasing profit, the officials chasing targets, or the audiences who once looked forward to the movies and have given up?

Were There More Bad Movies This Year?

Much of what audiences know about movies comes from the big ones. They get the most marketing and distribution, and they take the most screens. If they all turn out bad, audiences will conclude the whole market is bad.

This year's big films fell short on word of mouth. So far five domestic films have passed 1 billion yuan; three of them scored below 6 on Douban, and the five averaged 5.9 — and that average was propped up by Operation Mekong's 8.1. Last year's five 1-billion-yuan domestic films averaged 6.7, and only one scored below 6.

Broadly, going to the movies is another way of paying for content, and next to a streaming site's 15-yuan monthly membership, a 30- or 40-yuan ticket looks expensive. A trip to the theater also costs time. Without better content and a better experience to justify it, it is hard to persuade anyone to pay for what is playing.

To some film companies, though, better content means big stars, big IP and slapstick, and a better experience means a dark, glaring 3D screen. Audiences today are no longer content with simply having something to watch. Universal had to apologize for the 3D conversion of Jason Bourne, and Wong Jing, who had a 1-billion-yuan hit at Spring Festival, watched his National Day release Ace vs Ace die quietly. Tolerance for bad movies has reached its limit.

Partly this is because audience taste is improving while film companies still read that taste with two-year-old experience. And in content generally, consumers have more and more to choose from.

Streaming sites pushed their own content hard this year. They paid heavily for licensed shows and put real thought into their own web series, and all of it substitutes for movies. A film that leaves theaters now often turns up online within a month, which has cut the release window sharply and taken away the fear of missing it forever. On content alone, streaming sites are already good enough to replace the cinema.

Ang Lee said he shot Billy Lynn's Long Halftime Walk at 120 frames a second, in 4K and 3D, because he wanted to bring audiences back to the theater. What technology does to the experience is now one of the few things a cinema still has. But Ang Lee made a film with care first, even a film people argued about. Technology can add to content; it cannot replace it. If technology ever becomes the only reason to go, a cinema will be no different from the experience room at a science museum.

The Big Studios Didn't Deliver Their Slates, But They Found Other Ways to Make Money

Every January the major film companies publish a long slate to show their strength and attract investors. By this December most of those projects are still words on paper.

Wanda completed 90% of its slate last year; this year it led distribution on only three or four films, and apart from investing in The Great Wall it has nothing in the New Year holiday box-office fight. Huayi Brothers, once the biggest private studio, looks worse off: besides The Wasted Times in the New Year season, the only films it distributed itself were The Boy, New York New York and Rock Dog, which took 75 million yuan between them.

Still, they found other ways to make money.

Looking back, the Ip Man 3 scandal exposed much more than faked box office. Cao Haitao, an investor in cultural industries, told National Business Daily that very few people make money investing directly in film and television projects: however high the box office, once the theater chains and everyone else take their cut, the margin is thin. "If you want to make money, the money has to come from somewhere else — if a listed company buys out the equity you invested in, you can double it, or multiply it dozens of times." In other words, for capital chasing high returns, the way to a bigger gain is to buy a stake in a film and sell that stake on at a high price.

Financing, leverage, betting agreements — riding the wave of money pouring in, film people picked up far too much vocabulary from finance, and many of them turned their attention from making films to making deals.

Producers are the people who put up the money for a film. Quick Draw 《快手枪手快枪手》, with a reported budget of 80 million yuan, is not a big investment by today's standards, yet it drew 16 production companies, seven of which have no other project to their name so far. Quite a few of them are not called "XX Media" or "XX Pictures" but "XX Investment Management." People in the business say many were set up to invest in this one film.

Quick Draw was budgeted at 40 million yuan, but through a series of negotiations Wanda packaged it as an 80-million-yuan project and sold off most of the stake it held, close to doubling its money. So although the film took only 53 million yuan at the box office, Wanda did well out of it.

Films look more and more like startups: money comes in, the valuation goes up, the backers cash out, and the release works like an IPO. But not every listed company ends well, and in the film market most projects still lose money.

Nobody wants to lose money, and capital has its own ways of shaping how a film is made. The investors who arrive late tend to be the least experienced, and they still believe big stars plus big IP equals a hit. Once the film is shot they push to place it in whatever release date looks best, which is exactly why films pile onto the same weekends. Around National Day a glut of them opened at once, and in the days just before the holiday, daily box office hit a bitter low of under 30 million yuan.

Hollywood Had a Decent Year, But It Couldn't Rescue the Market

Through December 12, imported films had taken about 18.639 billion yuan, up 1.706 billion from last year's 16.933 billion. Growth will still be in double digits — slower than last year, but faster than the market as a whole.

A good part of that growth came from sheer volume. Eighty-seven imported films have opened on the mainland this year. Add Marauders, I.T. 《绝对控制》 and The Snow Queen: Winter Spell 《冰雪女王之冬日魔咒》, all dated for late December, and the mainland will see 90 imported films this year, against 63 last year.

The China-US film agreement expires in 2017, and the renegotiation will probably mean China opens its film market wide. "Learn from Hollywood" has become one response. More and more Chinese companies are attached to this year's Hollywood releases: the first production company listed on Hacksaw Ridge, now playing, is China's Bliss Media. La La Land, an Oscar favorite, carries money from Dianguang Media. Warcraft, which took nearly 1.5 billion yuan, was funded almost entirely by Chinese companies, and Wanda and Tencent both built unprecedented marketing campaigns around it.

None of this hides the basic fact that Hollywood films still do not travel comfortably to China. Hollywood blockbusters used to win on story, spectacle and stars; now Hollywood has come down with sequelitis, and it is hurting the studios in North America as well as here. Chinese audiences are buying less and less of what Hollywood sells.

At the same time, Chinese and North American tastes are pulling apart. Warcraft is the textbook case: propped up by Chinese money, its mainland box office far outran its American take, and where American critics savaged it, its Douban score once reached a respectable 8.0.

The gap between box office and reputation is plain. Zeng Maojun, president of Wanda Cinemas, puts the phenomenon down to the taste of young people. Fang Bin, general manager of Dadi Cinemas, thinks this difference in taste will eventually produce two forces that dominate commercial cinema worldwide: "Behind China's economic development there has to be cultural development. Global film culture will split into two poles, one American and one Chinese. A film that fails in America will not necessarily fail in China, and a film that succeeds in America will not necessarily succeed in China, because there are two standards now."

Because of that split, some people in Hollywood have even suggested that a Warcraft sequel should skip the United States altogether and treat China as its main battleground. "Making movies for China" has in fact become a serious subject in Hollywood. Studios lean on local companies for marketing and open up more and more equity to attract Chinese investment; Sony has gone as far as a long-term strategic agreement with Wanda. Expect more films cut to Chinese taste: cheap to make, packed with explosions and action, with a few familiar Chinese faces in the cast. You know this formula all too well.

The question is whether films like that will be any good.

As Capital Moves In, Animation and Art-House Films Are Rising

Plenty of money, plenty of audiences, plenty of theaters — the only shortage is good films. Good films need good filmmakers to make them, and this year brought more programs to encourage new ones.

Unlike past programs, which were mostly for show, this year a fair number of new names did break through. Bi Gan's Kaili Blues took only 6.47 million yuan, but it caught the attention of investors, and he set up his own Dangmai Pictures to keep making art films. The FIRST Youth Film Festival, full of first-time directors, won backing from Alibaba and Hehe Pictures and began holding pitch events for investors.

A new director's first film is usually an art film: cheap, and it needs little in the way of industry resources or production muscle. Art films have long been shorthand for threadbare, but this year they seem to have caught a break. Nuanliu Culture, founded by Jia Zhangke, raised 30 million yuan at a valuation of 300 million — though that, of course, has plenty to do with how Jia runs the place himself.

Animation moved the market faster. Animated films took nearly 6.5 billion yuan in China this year, more than 40% above last year. Kung Fu Panda 3 early in the year, Zootopia in March, Big Fish & Begonia in the summer season and, most recently, Your Name. all did well.

That is only the surface. Animation as an industry has genuinely gained ground on past years, but look closer and the questions multiply. Big Fish & Begonia, a labor of love, did good business, but its run came to look more like a fan film, mainly because the plot was hollow (its values caused plenty of argument too). Makoto Shinkai, after watching some of its footage, said Chinese animation has no technical problem.

In other words, this year's success in animation proves China has a market, not that it has the ability to make things. That is not a bad thing, but it raises the bar for whatever the animation business does next.

Policy

A flood of substandard content and an ever-wider choice of entertainment are pushing people away from cinemas. At the same time, years of continued investment have given China roughly 40,000 screens, and keeping them from sitting idle requires enough content to fill them.

The government's eagerness to manage release dates this year comes partly from anxiety about that contradiction.

The "domestic summer protection month" first appeared in 2012 and usually ran from late June to the end of August. This year, for market reasons, it started late, in early July, and ended on August 23 with Jason Bourne and Ice Age: Collision Course. A measure four years old was now adding to market risk, because domestic films were missing in both quantity and quality. The clearest result was that total box office through August still looked weak, and the grand ambitions announced at the start of the year were starting to sound like bluster.

Which makes the sprint through the last two months of 2016 easy to understand.

On October 13, Zhang Hongsen, head of the Film Bureau, said: "Going from the peak of 2015 to the turbulence of 2016 has been a valuable trial by fire for Chinese cinema. But almost every indicator shows that the fundamentals of the Chinese film market are still sound!" To keep that "still sound" true, imported films were then scheduled in bulk, and November and even December became crowded. Worth noting: this was not the first time. When the slump first showed in April and May, several blockbusters were imported in June to give the market a shot of adrenaline.

The intervention was clumsy. Audience attention was spread too thin, the results fell short of what was hoped for, and the marketing and release plans of a number of films were thrown off. Even the blockbusters the regulators counted on missed their targets, and November's box office still fell year on year.

When ordinary people look back on this year, they will not blame the losses on the government's meddling in the final months. They will complain that almost no film left an impression and that the market was full of bad movies — which is indeed the root of it. But a better question than that one is: who made all these bad movies, and how did there come to be so many? And if the rules on imported films open up further, what will be left to rescue a domestic industry already this weak?

2016 was not a year to feel good about. We still have audiences who love movies and filmmakers devoted to them. But if audiences cannot find good films, and good films cannot earn a good return, this year will turn out to be only the prelude to a long winter.

Cover image: stills from Operation Mekong, The Mermaid and The Great Wall.