What's Behind China's Sudden Box-Office Slump?

COLD WAR 2 Still 1 -H 2016
Courtesy of Edko

China won't be surpassing North America as the world's largest box-office territory quite as soon as expected.

Reports of China's imminent ascendance to the top of the global film market appear to have been slightly exaggerated.

After China's box office expanded a phenomenal 49 percent last year, many analysts predicted the country would push past North America to become the world's largest theatrical market by the end of 2017. The hot streak continued in the first quarter of this year, with box office growing 50 percent year-over-year. But the second quarter brought a jarring reversal, as the market contracted nearly five percent, according to data from Beijing-based Ent Group. The fall was the first year-over-year quarterly decline in half a decade.

Combining the two quarters, China's growth rate slipped to 21 percent in the first half of the year. Any other major film territory would rejoice at that performance, but for China it marks a dramatic slowdown. Early estimates for July have the market softening even further, with box office slipping as much as 15 percent in the first half of the month.

The recent downturn has had an immediate impact. This summer, China’s regulators have taken the unprecedented step of allowing Hollywood releases into the country during its traditional “blackout” period between late June and early August. During this time, which is normally set aside to boost domestic theatrical titles, Paramount's Teenage Mutant Ninja Turtles: Out of the Shadows was granted a July 2 release date, Warner Bros.' The Legend of Tarzan is scheduled to open on Tuesday and Universal's The Secret Life of Pets is set for an Aug. 2 release. 

So, what has regulators moving into panic mode and just how concerned should Hollywood studios be? As with any macro trend in China, the picture is complex and theories abound. But here are five of the key factors, according to experts of the Chinese industry:

1) A Weak Crop of Films

The primary issue, most agree, is a steep drop-off in the number of local Chinese hits. After racking up huge numbers during Chinese New Year in February — Stephen Chow's The Mermaid grossed $528 million alone in the first quarter — local movies totaled just $374 million during the second quarter, a 21 percent drop compared with the same period last year.

“Usually, there are a few dark horse local hits in the spring, and this year there really were none,” one Beijing film executive told The Hollywood Reporter. “If you look at a market that targets 50 percent-plus for domestic films and none are performing for a full quarter, that hurts.”

The losing streak has continued into the summer. Last year, Raman Hui's Monster Hunt opened on July 16 and went on to earn a record-smashing $385.2 million. So far, this July's biggest release, Cold War 2, has grossed $88.7 million and nothing Monster-scale appears to be on the horizon (Jackie Chan's Skiptrace, opening Thursday, is the summer's great hope, with positive buzz emerging from early test screenings).

Hollywood titles did much stronger business in the second quarter — Legendary Entertainment's Warcraft took $220 million, Captain America: Civil War earned $190.4 million and The Jungle Book made $150.1 million — but overall growth was scant compared to last year (and most China watchers had predicted even bigger numbers for those films). Hollywood imports totaled $1.1 billion from April to June, a year-over-year gain of under 2 percent. Last year's hits also were conspicuously bigger: Furious 7 took in $390.9 million, Avengers: Age of Ultron collected $240.1 million and Jurassic World made $228.7 million.

"It's always about the product," says Rong Chen, president of Perfect World Pictures. "And I think it's fair to say that both the Chinese and U.S. product hasn't been quite as strong this year."

2) Changing Demographics

Another factor beginning to constrain Hollywood growth in China is changing demographics. Now that China's largest and most cosmopolitan urban centers are relatively well stocked with movie screens, cinema construction is pushing out into ever more provincial regions of the country.

“As more screens get built in third and even fourth-tier cities, cinemagoers want more local content,” a Beijing-based media investor told THR. “People in these places didn't grow up with superheroes or much Western content, so Hollywood films are very foreign to the average person.”

Agrees a Beijing film exec: “Whether or not people in those lower-tier cities can learn to really love Western movies or not is an interesting challenge going forward. You can't just hold up the Hollywood sign and expect new moviegoers to come like you could two or three years ago."

3) More Expensive Movie Tickets

An estimated 70 percent of all movie tickets are sold online in China, compared to about 20 percent in the U.S. Throughout last year, China's startup ticketing services — backed by heavy investment from the country's rival tech giants (Alibaba, Baidu and Tencent) — offered steep discounts as they fought to secure market share. Chinese distributors often kicked in additional subsidies to drop prices even lower, such that a ticket to a Chinese blockbusters could run as cheap as $1-$2 (full-priced tickets to 3D movies during summer and Chinese New Year can cost as much as $7.50 in China, lifting the yearly average).

"This year, the market has stabilized for ticketing platforms, so they have less incentive to subsidize discounts," says Jie Qiu, CEO of Beijing-based Leomus Pictures (currently developing a Now You See Me China spinoff with Lionsgate). "Only the distributors are still putting in some money."

The average price for a movie ticket in the first quarter of 2015 was $2.54 (17 RMB), according to Ent Group. This year, the price jumped to $3.35 during the same period.

"New moviegoers in smaller cities are very sensitive to price," explains Qiu. "Without the discounts, some of them probably don't go — or can't go as often."

4) Diminishing Returns From Theater Construction

Some analysts believe that cinema construction is already becoming less bankable as a box-office driver for the Chinese industry as a whole.

Earlier this year, Fanink, a Beijing-based market research consulting firm specializing in the film industry, partnered with the School of Economics at Fudan University in Shanghai to produce a research report on the continued growth potential of the Chinese theatrical market. The researchers analyzed existing infrastructure, box-office trends and current rates of urbanization and population mobility in an effort to pinpoint how much box-office growth will continue to be driven by cinema construction.

"If we assume that urbanization continues at the same rate as now, and all other factors remain constant, even if we build movie theaters in all of the remaining empty spaces, the growth brought to the box office from 2015 to 2020 will only be about 26 percent," says Dr. James Li, one of Fanink’s founding partners. "In a nutshell, the conclusion was that the growth that comes just from the construction of movie theaters is beginning to approach a ceiling."

In April, Fanink conducted a nationwide survey by phone to capture current moviegoing habits in China. The company found that 30 percent of people aged 13-59 in urban China — where screens are already abundant — see a film in the theater every year, which compared to 76 percent of Americans.

“There is a larger opportunity — and a big challenge — to grow the market just by recruiting more people to become regular moviegoers,” Li adds.

Running in tandem with theater construction, the cultivation of modern moviegoing culture — most importantly, the phenomenon of the "event movie" — played a crucial part in China's box-office boom of the past decade. Li says further implementation of such practices will become increasingly vital for growth as cinema construction slows.

"If the China market is to keep up these growth rates, there has to be some new growth engines," agrees Jeffrey Chan, COO of Bona Film Group. "The existing ones are flattening out."

Some of the most immediate areas of need: developing Chinese-language franchises and cross-platform intellectual property, greater diversity of genres in Chinese cinema and longer theatrical release windows (currently, it only takes about one month for a Chinese domestic movie to become available for online streaming; the same is true for about one third of Hollywood movies in China).

"The next step," Li adds, "is for China to work on building a more mature and commercial operation that is focused on developing and deploying better content — not just the hardware."

5) Entertainment Sector No Longer Bulletproof?

The most subtle but pervasive factor that could be contributing to the slowdown is China’s increasingly uncertain economic forecast.

China's GDP growth slowed to 6.9 percent in 2015 — the slowest rate in 25 years (and many economists believe the true growth figure was considerably lower). It is probably just a matter of time before China’s broader economic picture has some impact on box office.

“Why should we assume that a single industry can keep growing so substantially and continuously when there is a widespread economic slowdown in the country and in the world?" says Bona's Chan. "Some mild adjustment is probably a natural thing."