CHINA: a blockbuster in the making

I get this question all the time.

“Isn’t China notorious with piracy? Isn’t that bad for movie business?”

The short answer to the question is that yes, piracy is an issue, not just for China but all around the world.

Ten years ago, with a quick stroll through Shanghai, you’d find the streets teeming with hawkers peddling pirated DVDs. They were on every corner. People could buy the latest blockbusters as soon as they were released.

Many thought that it was inevitable that fake DVDs would devastate the film industry but it didn’t.

To answer the question (and perhaps curiosity) better, it is worth remembering that roughly ten years ago, China was also flooded with fake luxury goods, watches, handbags, and frocks.

In recent years, foot traffic has risen in opulent Shanghai malls, Swiss watch sales have shot up, and top European luxury brands from Burberry to LVMH have reported sharply improved revenues from China in the second half of 2016. Chinese consumers buy more luxury products than those in any other country, accounting for about one-third of global sales.

The driving force is simply the growing size of China’s middle class.

As an economic heavyweight, luxury is actually becoming over-dependent on Chinese sales. China was everyone’s dream, but it’s proved a lot harder than anyone expected.

Leading luxury conglomerates, including LVMH (Moët Hennessy Louis Vuitton) and Kering, owner of Gucci, as well as brands like Prada, are reporting disappointing financial results, and have pointed their collective finger at China, where growth in the luxury goods market has slowed to 2% after rising 30% in 2011.

There was discernible anxiety that the mighty Chinese consumer, responsible for one-third of luxury goods and fashion sales, is not living up to expectation as a consumer of fashion and bling – and could even be developing a resistance to ostentatious western brands.

The fact is that Chinese consumers have developed sophisticated sensibilities more rapidly than Western brand managers anticipated. “It’s what I call the French paradox, says HSBC analyst Erwan Rambourg and author of The Bling Dynasty: Why the Reign of Chinese Luxury Shoppers Has Only Just Begun. “If you are a niche brand, everyone wants you. If you are a big brand, then by selling more you compromise a sense of exclusivity and the notion of luxury itself.”

Nor are Chinese consumers necessarily impressed by a luxury label alone. Raw material quality can be seen as a more important attribute than branding or fancy designs, Rambourg notes.

“They’re not only much younger and super-demanding, but they’re also extremely well informed. If you’re complacent and don’t communicate the way they communicate, it’s going to be difficult.”

Now back to the movie business.


Movie ticket sales surge

The growing popularity of movie-going among China’s young urbanites and its burgeoning middle classes is astonishing. In 2015 the Chinese spent more than US$ 6.5 billion on movie tickets – up almost 50 percent on the year before – according to the State Administration of Press, Publication, Radio, Film and Television, with more than 20 cinema screens opening every day to service the demand. If China’s box office revenues grow at their current rate, they will top US$ 11.9 billion by the end of 2017, overtaking the United States.

So gone pirated DVDs, here come the brand-new multiplex cinemas, full of amenities and state-of-art-facilities.

In the US and Australia, film fans can choose Netflix and chill on the couch instead of heading out to the multiplex. But in China, there’s no Netflix and not much privacy, and that’s why there’s a building boom of luxury big-format theatres where people can watch the latest studio movies in full 3D glory.

Government policy

There is a stronger commitment to the creative industries on the part of the Chinese government. Not only does a vibrant national film industry offer valuable soft power potential, but a powerful movie industry can also help steer China towards its post-industrial future.The Chinese government wants its cities to compete with London, Tokyo and New York and it knows that it needs strong creative industries to do that.

Allied with this is a more robust approach to intellectual property (IP) protection. Draft provisions to strengthen the country’s copyright law, China’s 2014 ratification of the Beijing Treaty on Audiovisual Performances, and a forthcoming Law on The Promotion of the Film Industry signal the government’s commitment to protecting film industry copyright in China.

Quality & Substance

China’s box office has faced a rapidly increasing headwind in the form of a maturing audience with shifting tastes and developing sophistication.

Right now, it is ‘Wow, it’s a Hollywood film.’ Soon, the lustre is bound to fade. The audience will demand more quality content and more local choice.

To illustrate my point, I am going to bring the attention to the insight cited in Mary Bergstrom’s 2012 book All Eyes East: Lessons from the Front Lines of Marketing to China’s Youth”.

As the Chinese consumer becomes wealthier, his relationship with society evolves. The benefit structure has evolved too — from more blatant status projection to more substance-driven.

It’s always about substance that shines.

In parallel to the luxury market, as markets mature, there tends to be a more discerning movie audience.

The main lesson here, and also something I firmly believe, is while the world is all eyes on a direct correlation between the size of a target market and the probability of success, it is ever more important not to miss the opportunity to serve healthy niche markets. Niche marketing not only provides independent filmmakers with an opportunity to launch the films successfully but can also help them grow into major players in a larger market.

The keys to success are to stay in touch with your audience, understand their needs and keep a laser-sharp focus on serving those needs with a commitment to continuous innovation and high quality.

Essential extended readings:
Mapping China’s middle class (McKinsey & Company)

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