By Alan Lau
May 12, 2007
The first decade of the new millennium seems to be a golden period for mainland cinema, but it is the screens rather than what is showing that are hogging the headlines. Local and foreign operators alike are auditioning for a leading role in the China cinema story, investing substantially on the mainland. At stake is a share of a box office that has been growing a staggering 23 per cent a year on average since 2001.
However, despite staggering box-office growth, uncertainty lingers over the enthusiasm of Chinese consumers. Recent growth has been as much a product of the low starting point as of new demand.
The mainland's box office in 2005 was worth just US$250 million, one-20th that of Korea's and one-fifth that of Hong Kong's, relative to gross domestic product. It is also small compared with home video sales; on the mainland, box-office takings are only 33 per cent that of home video sales, while the Korean box office brings in eight times more than home video.
Four road blocks have hindered the advance of mainland cinema. The first, a mixture of symptom and cause, is infrastructure, which lags behind many other regional markets. On a per-million population basis, mainland China has six screens, while Korea and urban India have 20 and 40, respectively.
Penetration in mainland urban areas is higher, at 14 screens per million people, but still below regional averages. Many could be better maintained, and seats and sound systems often need an overhaul.
Operators also find it difficult to access the latest films. Because only 600 mainland screens have computerised ticketing, distributors cannot monitor and collect box-office takings, so they are wary of providing new films. In 2005, only 2,400 out of the 7,700 mainland screens showed the latest movies, most of which were in wealthy coastal regions.
Second, even if they could cut a deal with distributors, a 20-movie annual quota on foreign films and content censorship of Hong Kong co-produced works means there are not enough available, severely curtailing visit frequency. On average, mainland cinemas run 70 movies a year, compared with 300 in India and Korea.
Third, at an average price of 70 to 80 yuan per ticket, the cinema is beyond the means of most mainland consumers.
However, the jury is still out on whether this makes a difference, with the experience seemingly more important than the price for the wealthy. Realising this market has not been fully "creamed off", many operators are even raising prices. Golden Harvest Films in Shenzhen, for example, offers a premium cinema experience for more than 200 yuan.
Finally, and perhaps most troublesome, is piracy that is as high as 90 per cent on the mainland. Most new offerings are available on the streets just three to seven days after cinema release, if not earlier, forcing distributors to count their release window in days rather than weeks or months.
However, many still see a bright future. Shanghai Lianhe, Beijing New Film Association and China Film Stellar Theatre Chain are the frontrunners among domestic operators, with a combined 772 screens in more than a dozen provinces. Multinationals such as Golden Harvest Films and Edko Films are also concentrated in the coastal first-tier cities.
For non-mainland investors, those from Hong Kong and Macau have the inside running through the Closer Economic Partnership Arrangement with Beijing, in which they have been able to invest fully in mainland cinemas since May 2005.
For other foreign investors, it has been a rockier road to deregulation. In January 2004, the government tested a policy allowing them to hold up to 75 per cent of cinemas in seven trial cities—Beijing, Shanghai, Xian , Chengdu , Wuhan , Nanjing and Guangzhou—but cut this back to 49 per cent in August 2005. Regulatory uncertainty is causing some to rethink their plans, but for those committed to the market, a back-door route through an equity stake in a Hong Kong investor could be a good option to a mainland partner.
Once the ownership structure is determined, operators can choose from several entry strategies. For those that wish to "cream off" the first layer of mainland demand, blanketing a city or region to gain a dominant position in the market could be a winning move.
For those with access to capital and the risk appetite, spreading their investment to gain national scale as soon as possible is a possibility. These operators should look to target the first- and second-tier cities before expanding into the third-tier.
As cinema chains penetrate second-tier markets beyond Guangzhou, Beijing, Shanghai and Shenzhen, pricing strategies may need to change. Entrants are talking about pricing at 30 to 40 yuan, or even lower in some markets where spending power is less, but latent demand is strong.
For those familiar with the regional market and skilled in mergers, acquiring and converting rundown cinemas into upscale operations can accelerate penetration. With a big-name operator, distributors may be more likely to supply the latest films.
As in any new market, investors must be prepared to accept risks. By installing modern infrastructure, operators hope to kick-start a movie culture on the mainland. They are gambling that the remaining road blocks will turn out to be little more than speed bumps.
Alan Lau is a partner in McKinsey & Company's Hong Kong office, and co-leads their Corporate Finance Practice in Asia.
This article was originally published in the South China Morning Post.
