THE NEW HOLLYWOOD
In April, the Securities and Exchange Commission (SEC) sent letters of inquiry to four Hollywood’s studios — Warner Bros., Universal Pictures, 20th Century Fox and Sony Pictures — informing them that it was investigating their business practices in China.
According to Reuters, while neither the SEC, the Motion Picture Association of America (MPAA) nor the individual movie companies would formally discuss the matter, it is assumed that at issue is possible violations of the Foreign Corrupt Practices Act that makes it illegal to make improper payments to foreign officials for business purposes. Such payments are not uncommon in China.
Stay tuned to see whether formal charges will be brought against the studios and whether, if convicted, they will suffer anything worse than a slap-on-the-wrist penalty. However, the SEC investigation points to a deeper change transforming the Hollywood studios’ business practices.
The MPAA reports that in 2011, 758 films were theatrically released; of these, 169 were studio films and 589 were non-studio, many indie works. More revealing, between 2002 and 2011, studio releases have declined by 43 percent (from 296) while non-studio releases have increased by 20 percent (from 490).
(In 2009, the MPAA stopped reporting on estimated costs of movie productions.)
More telling, the MPAA reports that total box-office revenues reached $31.6 billion in 2011 of which the international share was nearly 71 percent ($22.4 billion) while North American (i.e., U.S. and Canada) revenue was $10.2 billion. (The international market is organized between Europe, Asia and Latin America.) These numbers take on greater significance when seen in terms of how the movie market has shifted over the last five years. In 2007, total box-office revenue was $26.2 billion, of which North America accounted for $9.6 billion while the international component was $16.6 billion.
Over this five-year period, while the overall market grew by 20.6 percent ($5.4 billion), the relative share of the international box office as a component of the total increased to 70.9 percent from 63.3 percent.
The takeaway from the restructuring of the movie business is two-fold: first, the Hollywood studios are releasing less (and one could expect more expensive IMAX and 3D) movies and, second, they are garnering a growing share of box office revenue from international markets. One can anticipate these twin tendencies to increase over the foreseeable future.
Which brings us back to China. As is self-evident to nearly anyone, the Chinese economy is booming, contributing to the restructuring of the U.S. economy and society, including the movie industry. In 2011, China accounted for only $2 billion in box-office revenue. Two indicators of changes underway in China are the increasing number of movie theaters (especially IMAX and 3D) and an increase in the number of foreign films permitted to be released in China.
As the Chinese economy expands, the number of movie theaters is growing rapidly. According to the MPAA, Chinese screens doubled over the last five years to 10,700 and are expected to increase to 13,000 by the end of 2012. Most illustrative, in 2011 IMAX announced a deal with Wanda Cinema Line to build 75 Giant Screen theaters in China.
This development points directly to the issue apparently raised by the SEC inquiry into how the studios are operating in China. China has long maintained protective regulations limiting the number of foreign films released to 20 movies each year and for distributors (i.e., the studios) to collect only up to 17.5 percent of the box-office revenue. In February, China agreed to start letting in an additional 14 foreign movies per year and increase their box-office revenue share returned to foreigners to a maximum of 25 percent. These new films will be high-end formats like IMAX and 3D.
No matter what happens with the SEC and the Hollywood studios, one can count on the Chinese market increasingly becoming the driving force of the U.S. entertainment industry.
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David Rosen is a writer and business-development consultant. He is author of the indie classic Off-Hollywood: The Making & Marketing of Independent Films (Grove), originally commissioned by the Sundance Institute and the Independent Feature Project. He can be reached at email@example.com. For more information, check out www.DavidRosenWrites.com and www.DavidRosenConsultants.com.