- An analysis of the performance of leading movie theatre operators in China vs. the US
- Did liberalization help the sector in China?
- Why co-production was a win-win situation?
- How crowdfunding assisted the industry?
The global movie theatre industry registered a nominal growth of 4.8% CAGR (2005-16), which was affected by the global economic slowdown in 2008. The Asia-Pacific movie theatre industry outperformed each of the industries in different parts of the world, surpassed North America and topped globally (refer to Televisory’s last blog on Global movie theatre operator, present scenario and analysis). This was primarily driven by the Chinese movie theatre industry, which saw an exponential growth in the past decade and grew at a CAGR of 35% (2005-16) to reach USD 6.88 billion (overall Asia-Pacific garnered USD 14.90 billion) and became the second largest movie industry in the world after North America surpassing Japan in 2012.
In the past decade, the movie theatre industry in China witnessed a boom. Thus, the pertinent question is; what led to this exceptional growth? (growing at least twice the rate of the rest).
The personal disposable income in China grew at a CAGR of 11.6% (2008-16) as compared to the global growth rate of 2.5%, which was 3% for the Asia-Pacific region. This resulted in burgeoning middle class in China, which is a significant demographic group of movie goers in the world. Additionally, movie theatre industry’s growth is largely dependent on the spending capacity of an individual and the personal disposable income. Slowly and steadily, movie theatre industry became an important part of outdoor mass entertainment in China, this was in-line with the overall growth of the entertainment sector (theme parks, live performances, sports, musical festivals, etc.). This increased the number of moviegoers in the last ten years despite a rise in average movie ticket prices from $3.48 (2006) to $5.36 (2016), which was a rise of more than 54%.
Although, the average growth of movie ticket prices stagnated in the nation and marginally declined since 2013-16 owing to a shift towards tier 3 and tier 4 cities. This was due to the low spending power and affluence of inhabitants in these cities. The impact of this decline in ticket prices was not visible in the overall revenue growth due to the exponential rise of movie theatre visitors during the period (2013-16). On the contrary, in 2016, there was a decline in the growth rate of visitors because of a weaker crop of films in the second half of the year.
This increase in demand boosted the industry and China added more screens. Hence, as on December 2016, China (40,917 screens) surpassed the United States (40,759 films screens).
However, in spite of an aggressive growth in the number of screens, China still lags in terms of screens per million population from the United States. Moreover, China only has 23 screens per million population as compared to 125 per million in the United States according to IHS Markit, a London-based market researcher. Thus, with a continued investment in the sector and the rising demand from consumers, the screens are expected to grow in the near future, especially in tier 3 and tier 4 cities.
Televisory analysed the performance of few of the leading movie theatre operators in China [SMI Holdings Group Limited (SMI)] and the United States [Regal Entertainment Group (Regal) and AMC Entertainment Holdings Inc. (AMC)] as shown below.
The number of screens remained almost constant for Regal, while there was a persistent increase for SMI since 2014 onwards, the company increased its presence in all major cities (including tier 3 and tier 4). There was a substantial rise in the number of screens for AMC in 2016 owing to the acquisition of Carmike Cinemas Inc. and Odeon and UCI Cinemas Holdings Inc. (approx. doubling the number of screens).
The revenue per screen for SMI declined from 2013-16, this was due to a fall in admissions revenue per screen during the same period and also because of a decline in average ticket price realization from its new theatres in tier 3 and tier 4 cities. The value for Regal remained consistent during the analysis period in-line with the admissions revenue per screen (with almost constant screens). While the revenue per screen for AMC declined drastically in 2016 owing to acquisitions in the final quarter. This resulted in revenue realization from Carmike and Odeon for only one quarter, while there was an overall increase in the number of screens for the year ending (2016).
The EBITDA per screen improved for SMI during the analysis period due to decline in cash operating expenses per screen, this was mainly because of declining films rental and advertising expenses per screen. The EBITDA per screen for Regal mostly remained range bound in-line with the revenues, while AMC witnessed a drastic decline in EBITDA per screen in-line with the decline in the revenue per screen.
*The lower EBITDA for SMI in 2012 was due to substantial expenses incurred on selling and advertisement
On the investment front, SMI saw a surge in the CAPEX per screen to fund the expansion of its screens in major cities across China since 2014 (including tier 3 and tier 4 cities), while AMC witnessed a surge in 2016 to fund its acquisitions.
The exponential growth in China’s film distribution and exhibition sector was supported by the liberalization of government’s policies towards foreign movies and increased the number of domestic movie productions. Traditionally, Chinese movie market has been very restrictive in terms of screening of foreign films in the country. In addition, all foreign films were banned in China, this was relaxed in 1994 when 10 foreign films were released on a revenue sharing model, where 13% of the box office collection was remitted to foreign film producers. In 2001, this was increased to 20 and then 34 (2012), while the revenue sharing with foreign film producers increased to 25% (2012). Hence, with the relaxation of regulations [the number of foreign films allowed to be screened presently is 34 and the revenue share has increased to 25% (although still lower than 50% in the European market)], there was influx of foreign movies which brought in higher box-office revenues (vis-à-vis the domestic movies).
Further, in order to capitalize on the growing Chinese movie market, a number of foreign producers and investors started infusing capital for the production of movies. This was done in collaboration with the Chinese players, which increased the number of films produced in China and led to the growth of the sector. Likewise, this arrangement was a win-win situation for both the Chinese and foreign investors or producers since this allowed global films access in China [as co-produced films were considered made-in-China and enjoyed similar status as domestic movies (such as better revenue sharing percentage, better distribution, etc.)], while also allowing the Chinese films to enter the global market. In 2014, while co-produced movies merely had a presence of 6% on the screens, but their revenue contribution was more than 50% of the total box office collection.
Similarly, other sources of capital for film production emerged in recent years, like crowd funding which allowed for the production of small scale budget films. This permitted ordinary citizens to make micro investments in the upcoming projects. In April 2014, e-commerce giant Alibaba raised USD 11.8 million in less than a week for investment in a film. This refuelled small-scale budget movies in the industry. Moreover, in 2015, there were more than 100 crowd funding platforms in China.
On the other hand, in line with the global industry, the Chinese industry faced novel challenges and competition from the online movie streaming platforms (as discussed in Televisory’s earlier blog). Furthermore, as per an interview of the Chinese streaming giant iQiYi (2016), 2,500 web films were released in China which increased multifold to 700 (2015) from 450 (2014). Although these mediums have shown a promising trend, they are still in their early stages, the long-term impact of these channels is yet to be seen in the movie theatre industry.
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