Troubled Seoul

With boxoffice receipts down and production costs rising, South Korea's film sector stands at a crossroads

For the past decade, the South Korean film industry has been growing each year, often quite dramatically. From a record low of 42.2 million in 1996 (good for about $214.9 million), attendance soared to 166.7 million last year (about $1.1 billion), making South Korea the fifth-largest theatrical market in the world in 2006. Along the way, Korean movies' market share rose from just 16% to 64%. Exports increased from almost nothing to a high of $76 million in 2005.

By most estimates, numbers like these should point to overwhelming success. But the fact is that most people in the Korean film business are losing money, and the situation is on the verge of growing worse due to rising costs and a declining number of exports. Locally produced fare isn't attracting the audience it once did, and rumors of layoffs at Korean film companies are rampant.

Simply put, the Korean movie industry is in crisis.

Says Jonathan Kim, producer and CEO of Dyne Film: "Korean films are going down in a big way."

Kang Woo-suk, one of South Korea's most successful filmmakers, echoed those sentiments last month during a press conference where he told reporters that the money available for investing in the movie industry was disappearing rapidly, derailing his plan to create a $50 million investment fund.

"The money in Chungmuro has dried up," he said, referring to the area of Seoul that the South Korean movie business has traditionally called home.

One of the first warning signs that the industry was facing problems was a precipitous drop in export revenue -- down to just $24 million in 2006, largely due to the declining popularity of South Korean films in Japan.

Complicating matters further, the South Korean government has backed off its recent investment in the industry. Since 1998, more than 50 government film funds have poured nearly $600 million into the sector, but many of those funds have expired.

Now, production companies -- which already were struggling to secure the kind of financing necessary to pay top actors and directors the high salaries that they demand -- might be in for another price hike thanks to a new labor pact that could increase costs by up to 30%.

Under the deal between the Federation of Korea Movie Workers' Union and the Korea Film Producers Assn. that goes into effect July 1, workers will earn their incomes on a weekly basis -- a change from the previous, per-project system -- with the work week capped at 66 hours. Although films with budgets of less than $1.1 million are not covered by the deal, that's only a small fraction of features: The average per-film cost was more than $5.3 million in 2006, up from $4.4 million in 2005 and just $2.7 million in 2001.

"The biggest questions we have are: Can we, and how can we, cut down our costs?" asks MK Pictures CEO Lee Eun, who adds that financial losses throughout the industry "have (forced) MK to become more conservative and cautious about selecting projects, moving more toward commercially viable films."

Art house distributor Sponge House sees lower-budget alternative cinema as a potential solution to the current malaise. "We're trying to make a new style of Korean films," says Eugene Song, international business manager at Sponge. "We're trying to find good theater locations that will show our movies and expand the market."

Korean filmmakers' characteristically poor relationship with exhibitors isn't making things any easier. Foreign films typically split revenue with movie theaters 60/40, while most Korean productions divide revenue 50/50 -- a holdover of a business tradition from back when homegrown films performed miserably at the boxoffice and producers needed every advantage they could find to get theaters to screen their films.

For years now, Korean films have outperformed Hollywood product, turning the unequal boxoffice split into an anachronism. But movie theater owners (and their powerful corporate parents) are opposed to changing the current system if it means less money in their pockets.

South Korea's major multiplex chains all belong to large entertainment conglomerates -- CJ CGV is part of CJ Entertainment, Megabox is part of Mediaplex, and Lotte Cinema (and Lotte Entertainment) are part of Lotte Group.

It's the ancillary markets, however, that are suffering the most. Whereas home video sales can amount to 250% of revenue in the U.S. or even 300% in Japan, Korean films typically pull in just a few hundred thousand dollars.

Even "The Host" -- the most successful Korean movie of all time, with more than 13 million admissions -- is expected by its producers to sell about 30,000 DVDs. That works out to about $700,000 from home entertainment on a film that made about $90 million at the boxoffice.

"That's the difficult question (facing) the film industry," says Jeong Tae-sung, COO of Showbox Inc., one of South Korea's largest distributors and the same company that released "Host." "The ancillary revenue problem has been growing, but until now the difference was made up by foreign sales and general market growth. It is time to do something about it now."

Most insiders agree that doing something won't be easy when Korea's online and physical piracy continues largely unchecked. Pirated DVDs fill Seoul's subway stations, and dozens of Internet sites offer high-quality downloads and streams for mere pennies. Prosecuting violators is a difficult, time-consuming business.

"The (South) Korean government sacrificed content owners for the (Internet technology) business," Dyne's Kim says. "They were so concerned with developing technology, but they were not so concerned with protecting the content for that technology."

Despite the movie industry's complaints, the government has done little to correct the problem. The fact remains that if the Korean home video market were even a little stronger, many more films would be profitable.

A few in the industry are finding a way to remain positive in the face of such overwhelming challenges, saying that the film business is cyclical and that for every downturn, there's a spike in profits down the line.

They also point to an increase in the overall number of films released in South Korea as a positive change. Between 2000 and 2004, an average of just 67 films were released each year. That number grew to 83 in 2005 and 108 in 2006.

"Because gross revenue for Korean films increased in 2006, I don't think it is really a crisis for the Korean movie industry," observes Ko Jeong-min, a senior researcher at the Samsung Economic Research Institute. "There were too many movies made, though, decreasing their average revenue."

"I think it is time to take a little break, to concentrate on sorting the system out," Showbox's Jeong adds. "The same number of films are breaking even as in years past, but the problem this year was too many productions."

The big question is how long the Korean film industry can hold out while making the large structural changes it needs in order to mature. "Imports might affect the market a little, but Korean customers are used to Korean movies," Ko says. "They'll continue to prefer Korean movies to Hollywood."

Others, like Kim, are not so sure: "Once we lose our grip, I just don't know."

MORE SEOUL FILM COVERAGE

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