Plex appeal

With Warner Bros.' recent decision to abandon plans for a major expansion in China, Asian exhibitors hope to fill the gap.

BEIJING -- Less than two weeks after U.S. entertainment giant Time Warner turned out the lights on its Chinese movie theater business, South Korean exhibitor Megabox Cineplex announced Nov. 20 that it had sealed a deal with local partners for the first of two $4 million multiplexes it plans to open in Beijing before the city hosts the 2008 Summer Olympics.

Although it operates 10 of South Korea's hottest cinemas, Megabox's reputation in the exhibition world was only one factor in closing the deal. The company also enjoyed a strategic advantage thanks to its sister company Orion, which has operated in China since 1993 and produces one of the nation's favorite snack items, Choco-Pie.

"Through Orion, Megabox has the reputation of having worked with Chinese locals, who've grown to trust us and our movie business abilities," says Andy Jeong, an executive in Megabox's Beijing consulting office.

Megabox's Seoul-based parent company Mediaplex will have a 49% stake in the new 1,700-seat, eight-screen multiplex facility, which is tentatively scheduled to open in Beijing's university district of Haidian in March. Beijing-based entertainment company Mega Media will take a 41% stake in the venture, while the state-run cinema circuit Xinyinglian will take the remaining 10%.

But Megabox is not alone in taking the Korean Wave one splash further by grabbing a piece of China's growing moviegoing market.

Seoul-based CGV and MK Pictures also are keen to turn a profit in a nation where ticket sales climbed 30% to 2 billion yuan ($254 million) last year. Last month CGV opened a 20 million yuan ($2.5 million) six-screen, 918-seat venue near Shanghai's People's Square in a joint venture with the Shanghai Film Group.  And, according to Jessica Lee, a CGV development executive, they are now looking for multiplex sites in Beijing and Guangzhou.

Their enthusiasm is understandable: In 2005, China had 1,243 cinemas, with 2,668 screens -- one screen per every 487,000 of the country's 1.3 billion citizens -- according to data from the State Administration of Radio Film and Television's film bureau. With a market so dramatically underserved, the growth potential is simply enormous.

Megabox's Jeong is optimistic that the company's move into Beijing will pay off. "We are expecting a handsome return from the sites because of the upgrade in lifestyle expected in Beijing around the Olympics," Jeong says.

Of course, the fact that so many South Korean companies are bullish on prospects in China raises questions about Time Warner's decision to pull out of investing there. Warner Bros. International Cinemas cited regulations restricting foreign ownership of Chinese businesses to a 49% stake when it announced its withdrawal from China after finishing only five of the 15 theaters it had planned (HR 11/9). WBIC consulted on all of the projects with an option to invest, putting money into three, according to WBIC president Millard Ochs.

Some industry insiders say that WBIC's perceived hopes of controlling theaters in China were unrealistic from the start, as they seemed to be based on a short-lived 2002 policy that saw Beijing allow foreign investors to own as much as 75% of a mainland cinema property.

Ochs says the company's China strategy was to demonstrate the way cinemas ought to be designed and operated so that movies could be seen on the big screen with great sound and service. WBIC, which previously withdrew from deals in Britain, Portugal, Spain and Taiwan, had hoped to inspire other companies in China to get into the theater-building business.

"The good news is, our knowledge transfer for both design and operations has happened, so I am confident that China will succeed in the film industry without us -- we would like to have stayed in China," Ochs says, adding that Beijing's restrictions on foreign investment prevented WBIC from proper reporting of its earnings in keeping with accepted U.S. accounting practices.

Warner Bros. continues its other work in China, trying to sell its Hollywood movies and, increasingly, attempting to make commercial movies with Chinese filmmakers in a co-production joint venture with state-run China Film Group and the private studio Hengdian Group.

But making money at the boxoffice in China is a challenge, since it is still easy to get illegal copies of films on disc and online despite an increase in government anti-piracy enforcement. Ng See-yuen, president of UME International Cineplex, a chain of cinemas on the mainland whose name stands for "Ultimate Movie Experience," says the only way to make money in theaters in China is through majority ownership. That luxury was denied to WBIC but, in a key exception to the rule, was afforded to Ng's Hong Kong-registered company under the Closer Economic Partnership Arrangement, which was signed in June 2003.

Under the CEPA, Beijing agreed to let Hong Kong businesses raise their stakes in mainland cinemas to 75% from the previously allowed 49% beginning Jan. 1, 2004. Then, a year later, Hong Kong companies were allowed to take over 100% of their mainland cinemas. Not surprisingly, Hong Kong-based producers such as Bill Kong (2000's "Crouching Tiger, Hidden Dragon") and companies like film production giant Golden Harvest are behind many of the mainland's newest multiplexes.

Another Hong Kong company, the diversified Sun Wah Group, even shared its CEPA advantage with Japanese media giant Kadokawa, starting a joint-venture theater enterprise that plans to open 20 mainland cineplexes by 2008, with an initial investment of about HK$100 million ($12.8 million).

UME's Ng was not surprised by WBIC's China exit. He and others in the industry felt the U.S. giant's widely perceived motive to push its own movies would never sit well with censorious Chinese authorities. In the name of protecting local filmmakers and preserving "a harmonious society," mainland rules restrict the number of imported (non-Hong Kong) films that may share in their own boxoffice receipts to 20 each year, and censors cut scenes from many of the films allowed in.

"Originally, (WBIC) thought they could distribute their films by owning theaters," Ng says. "But content is a very sensitive subject in China, and now (WBIC) knows this."

Happy to settle for a minority slice through a joint venture, Megabox's Jeong sums up the feelings of many in the industry. "Warner Bros. was too aggressive, asking too much and complaining too much," he says.

Still, some just beginning to enter China's cinema landscape say they owe Warner Bros. a debt of gratitude for pushing so hard, even as they view the company's withdrawal as a cautionary tale.

"We need powerhouses like (WBIC) to lead the market and work ... in developing and opening the market," says Jim H.J. Park, a business development executive with Seoul-based MK Pictures. Next month, MK will open a six-screen theater in Zhengzhou, an inland boomtown of 3.3 million along the Yellow River in Henan province. The 1,100-seat multiplex marks the debut effort of MK Poly, a joint venture formed in December 2005 between MK and two units of the Beijing-based developer the Poly Group, Eastern Dragon Film Co. and Beijing Bona Culture Media International Co.

Park says the joint venture plans to open two more theaters in China next year, most likely in the southern boomtown of Shenzhen and the southwestern city of Chongqing.

"(There are) opportunities for everybody at this stage with or without (WBIC)," he says, adding that "we intend to become more careful with our blueprints, acknowledging the difficulty of China's market (after) watching (WBIC) pulling out."