Why a Chinese Real Estate Company Will Soon Own at Least One Hollywood Studio

This is not an April Fool's joke.

The Hollywood studios only wish it was.

But the truth, as outlined by Robert Cain in a March 31st, 2013 blogpost, is that Hollywood movies are having a terrible time in China right now - underperforming at theaters even as the Chinese audience for new films in theaters grows exponentially.

The appetite for films on the mainland is driving an unprecedented boom in Chinese theater construction. And the big players in today's Chinese theater building fever - just like Marcus Loew, who built America's first chain of luxury movie theaters in the early 1900s - are intent on gaining a steady supply of popular content for their theaters.

If you know your movie business history, you may remember that ninety years ago Marcus Loew bought three financially strapped movie production companies and combined them into one. Even if you're not a film business historian, you may have heard of the company that Marcus Loew created when he combined Metro, Goldwyn and Mayer...

That's right, MGM was created and owned by Marcus Loew, a real estate mogul, based far from Hollywood, who left one of the three studio heads (L. B. Mayer) in charge of what he called "West Coast Operations."

We may soon see history repeat itself - with a real estate mogul buying up a struggling studio (or two?) to guarantee a steady supply of product for a booming theater chain.

And that real estate mogul and his theater chain will likely be based in China.

That's because there is an audience for theatrical films in China that China-watchers anticipate will continue to grow. For example, hit films are now routinely earning over 100 million US dollars at the box office in China - that market is expected to grow exponentially over the next decade - and Chinese real estate developers understand the role of a modern multiplex movie theater in driving foot traffic in a mall or shopping plaza.

How big is the upside? China could build 10 times the number of theaters it currently has and still not have as many theaters per person as the US.

This opportunity is why many American film business mavens (myself included) have been looking to South-East Asia.

But the Hollywood executives who saw the (growing but still the largely untapped) Chinese market as the promised land have had those dreams evaporate in early 2013, as Chinese audiences have been favoring homegrown movies over imports from Hollywood.

As Robert Cain writes: "In the first quarter of 2013, U.S. films’ cumulative grosses in China are down by 22 percent, while Chinese language films are up by 128 percent. China’s tastes have shifted decisively toward local product, with the result that American films are now performing at about the same level they did back in 2010, when China’s market was half the size that it is now."

It's tough to argue with the data that Robert Cain has collected in the chart at the top of this post. While the temporary swings in popular taste are tough to track (it could be that the Hollywood films in early 2013 simply sucked and some anomalous Chinese hits had emerged), it seems clear that Chinese audiences are currently favoring domestic product over "blockbuster" Hollywood fare.

And simple logic suggests that the hold of Western faces and English language films is going to be challenged when the world audience includes a bilion new movie fans who don't speak English or see themselves reflected in the faces of Western stars.

Add in the role of the the Chinese authorities (who currently limit access to the Chinese market to 34 non-Chinese films per year, and who can thwart Hollywood marketing plans by offering only theaters and dates that are not optimal for the small number of non-Chinese films that are let into China each year) and the pot of gold that some Hollywood executives hoped to find in China may prove elusive - at least for the Old World Hollywood studios and stars.

Here's what Robert Cain predicts: "China will soon be the world’s biggest movie territory, with a more profitable business model than Hollywood’s. And it has major international ambitions, but completely lacks the ability to serve the global market. The right strategy for a globally minded Chinese movie mogul will be to acquire a major U.S. studio at a bargain basement price. The only thing they need now is a willing seller."

If Robert Cain is right, and I think he is, the next question becomes which Hollywood studio owner might be willing to sell?

Based on all the data publicly available, the list of candidates is surprisingly long, with 5 of the 6 major studios posting declines in profitability in 2012. Paramount is perhaps the likeliest acquisition candidate... lacking its own active TV series production business (since splitting with CBS in 2006) and suffering a humiliating final quarter in 2012, but other conglomerates might also be willing to uncouple their film divisions. Even Universal - the one studio that posted an increase in profits in 2012 - started off 2012 badly (remember Big Miracle, Wanderlust, The Five Year Engagement, and Battleship?) and there were rumors of unrest and defections until things picked up with Ted in late June and The Bourne Legacy, Les Miserables and Zero Dark Thirty later in 2012.

As Robert Cain concludes: "With North America flat at best, and limited prospects in the industry’s biggest international growth territory, one wonders how much patience the major media conglomerates have left for their film divisions. According to a recent Economist article, pre-tax profits at Hollywood movie studios fell by around 40% over the past five years, and they now account for less than 10% of their parent companies’ profits. According to Benjamin Swinburne of Morgan Stanley [also quoted in the Economist], by 2020 the studios will contribute just 5% of the media conglomerates’ profits. The day will soon come when at least one of these conglomerates decides to unload its studio operations. And who better to buy that studio than a Chinese distributor?"

All I'd add to Mr. Cain's analysis is that the Chinese company that eventually buys a Hollywood studio will likely have real estate interests that include building shopping malls and the properties that anchor these modern shopping malls - a multiplex movie theater.

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