ChinaOpens Door for Foreign Movie Theater Chains, But Will They Enter?
2:58PM PDT 7/9/2019 by Patrick Brzeski
Summary：The country with the world's largestpotential moviegoing audience appears to be inviting foreign investment rightas growth in the sector finally begins to slow.
Body：After years of restrictions on virtuallyevery front of its massive film sector, China has cracked the door open to foreignmovie theater chains.
On June 30, China’s National Developmentand Reform Commission (NDRC) issued an update to its so-called "NegativeList," the official government document that outlines which industries areout of bounds for foreign investment. The number of sectors and sub-sectors onthe list was cut from 2018's total of 48 to 40 this year. The new 2019 listremoved investment restrictions on industries ranging from oil exploration tofarming, as well as one significant change for the entertainment business: Arestriction stipulating that "the construction and operation of cinemasmust be controlled by a Chinese party" was dropped.
The timing of the changes — just days afterPresident Donald Trump met with Chinese leader Xi Jinping at the G20 summit andpledged to back down from threatened tariff increases — struck many in theindustry as an encouraging sign that Beijing's trade war retaliations wouldn'tbe engulfing Hollywood's vital China business anytime soon. (HBO Asia'sTaiwanese original series The World Between Us received permission from Chineseregulators to stream on Tencent Video the same week, offering encouragementthat Beijing may have lifted a recent freeze on U.S. video content approvals.)
"In the context of the trade war,there is a tendency for small concessions to be made here and there, and thisis probably one of them," says Mathew Alderson, a partner at HarrisBricken Attorneys & Consultants in Beijing. "It's hard to imagine thatthey would have taken this step had that meeting resulted in an escalation oftensions."
Exactly what the new rules allow remainssomewhat unclear, however. Although the "operation and construction"of cinemas by foreign firms appears to be permitted now, ambiguous wordingretained elsewhere in the document leaves unresolved the question of whethermovie theaters in China can be directly owned by international parties, orunder what ownership structures. (Does the usual requirement of entering into ajoint venture with a Chinese firm still hold, for example? And just how largecan the foreign party's share of the business be in practice?)
"Flexibility in interpretation andimplementation is a familiar strategy from Beijing," adds Alderson."We won't fully know what's possible until some international companiesactually try to work through this system and we see how it is applied."
How much opportunity for growth is left forforeign firms to capitalize on in China's massive exhibition sector is anotherquestion. "You certainly can't say that companies going into theaterconstruction in China now will be getting in on the ground floor," pointsout Lindsay Connor, a partner at Manatt, Phelps & Phillips, who regularlyrepresents Chinese studios in international deals.
Over the past two decades, China's theatricalexhibition footprint has exploded from hundreds of screens to a networktotaling more than 64,000 — the largest and most state-of-the-art exhibitionoutlay of any country on the planet. Beijing-based Dalian Wanda Group, bothChina's and the world's largest exhibitor, already has a multiplex occupyingprime real estate in virtually every major Chinese city.
Meanwhile, most indicators suggest China'sgreat theater-building boom is finally reaching a leveling-off point — and thatthe sector could even be ailing. "It's significant that this announcementhas come now, because what we see is that the Chinese industry is intransition," says Rance Pow, president of Shanghai-based cinema consultingfirm Artisan Gateway.
In the first half of 2019, ticket salesrevenue in China fell 2.7 percent compared to the same period last year,according to Artisan Gateway's data. Most observers have blamed the drop on adownturn in domestic film production caused by Beijing's tax crackdown andcensorship uptick over the past year, along with other domestic financingchallenges. But an increase in average ticket prices — from RMB 35.6 ($5.17) in2018 to RMB 38.6 ($5.61) this year — has masked a more worrying trend: a 10.3percent decline in total admissions in the first half of the year, and a 16.7percent slip in the average box office revenue generated per movie screen.
"We're starting to see what looks likethe beginnings of a consolidation stage in the Chinese exhibition industry,which would be led by the failure of some smaller companies, and at some pointbigger failures of business," Pow says.
It's perhaps natural, then, that Beijing issuddenly more receptive to bringing in some international resources andoperational best practices — especially since the domestic champions arealready so well-entrenched.
Despite the difficulties — both thoseperennial to doing business in China, and the cyclical downturn — it's unlikelythat the major international theater chains will eschew Beijing's invitationaltogether, as ambiguous as it may still be. China may already have 50 percentmore movie screens than North America (approximately 64,900, compared with40,300), but its population is more than four times that of the U.S. (1.39billion compared to 327 million).
Adds Connor: "The Chinese market hasbeen substantially serviced by the rapid rise of local theater companies, butit's still far too big a market to ignore. I suspect every major theatercompany will be giving this a very hard look."