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Home Entertainment Taking Second Look at Chinese Market

9 Oct, 2013 By: Erik Gruenwedel

For years communist country placed strict limits on U.S. movie imports, in addition to being ground zero for pirated movie discs. Now studios are licensing content to Chinese-backed digital distributors

What a difference three years makes.

The Chinese appetite for movies — notably from Hollywood — is growing exponentially, with theatrical revenue overtaking Japan to become the second-largest market after the United States, according to the Motion Picture Association of America.

And where there’s a theatrical market, home entertainment is sure to follow — albeit cautiously. Twentieth Century Fox Home Entertainment China, Warner Bros. Home Entertainment Group, Paramount Home Media Distribution, Miramax, Lionsgate, Universal Studios Home Entertainment and Walt Disney Studios Home Entertainment have begun licensing content to Chinese-based transactional video-on-demand and subscription VOD platforms.

Top-grossing Chinese movies are expected to rival U.S. films within five years, according to Dong Ping, chairman of Hong Kong-based ChinaVision Media, which helped produce 2001 Oscar-winning Crouching Tiger, Hidden Dragon.

"For many youngsters in China, particularly those born in the 1980s and 1990s, going to the cinema is something very trendy and stylish,” Ping told the South China Morning Post.

The explosion in Chinese moviegoers has resulted in Hollywood revisiting a region infamous for hostile trade policies toward foreign movies (no more than 34 studio films allowed in annually), and more importantly, ground zero for theft of intellectual property, including movies, books and music.

Indeed, in 2010, the Office of the U.S. Trade Representative found that 79% of the pirated products — notably movie DVDs — seized at the border originated from China.

More recently, piracy using new technologies is an emerging problem. U.S. copyright industries have reported growing problems with piracy using cellular telephones, palm devices, flash drives and other mobile technologies. In some countries, these devices are being pre-loaded with illegal content before they are sold, according to the U.S. Trade Representative.

China, according to the U.S., has made some improvement in how it approaches counterfeiting and piracy of intellectual property.

“The United States is heartened by many positive steps the Chinese government took in 2009 with respect to these issues, including the largest software piracy prosecution in Chinese history, and an increase in the numbers of civil [intellectual property] cases in the courts. However, the overall level of IP theft in China remains unacceptable,” wrote the Trade Representative.

Caution to the Wind

While concerns about digital piracy supplant prior concerns regarding illegal DVDs, studios nonetheless are signing content license agreements with Chinese digital distributors with almost the same determination they are inking agreements with SVOD platforms like Netflix, Amazon Prime Instant Video and Hulu Plus.

Disney in September inked a deal with instant message provider Tencent for its transactional video-on-demand and subscription streaming service, dubbed “Hollywood VIP.”

Hollywood VIP will have access to about 1,500 Disney, Pixar and Marvel movies, including The Avengers, Toy Story 3 and Pirates of the Caribbean, among others. The platform also has content agreements with Warner Bros., Lionsgate, Miramax and Universal.

Disney releases will be available on transactional VOD, the same day as their packaged-media street date. SVOD access is limited largely to catalog content.

While the deal pales in comparison to Disney’s pay-TV agreement with Netflix, it underscores the lengths the media giant will go to support the pending Disney Shanghai amusement park, in addition to casting Chinese nationals and altering scenes in Iron Man 3 for the country’s theatrical market.

YOU On Demand Holdings, a Chinese VOD and pay-per-view service based in New York, has content license agreements with Screen Media, Warner, Disney, NBC Universal, Paramount, Lionsgate, Miramax, Magnolia Pictures, Gravitas Ventures, Film Buff, K2 Communications, 3net and Big Mama Digital Entertainment (karaoke), among others.

Fox Home Entertainment’s Chinese transactional VOD partners include Youku, Sohu, iQiyi, Wasu, Voole and Megajoy. The Fox TV Group also has  ad-supported VOD deals with Tencent, iQiyi, Sohu and Letv.

Rovi said its DivX Plus and video encoding solution, Rovi TotalCode, have been adopted by China’s STM Holdings Ltd. for a new VOD service, available at more than 20,000 Internet cafés in China.

In Demand — the PPV, subscription VOD and VOD joint venture co-owned by Comcast, Cox Communications, Time Warner Cable and Bright House Networks — inked a deal with Beijing-based media company Seven Stars Media Limited.

“It’s exciting, almost like déjà vu with how it started here in America,” said In Demand CEO Robert Benya.

In 2012, the U.S. accounted for more than $1.5 billion in VOD revenue, more than triple the No. 2 country (Italy at $466 million), and dwarfing the VOD revenue brought in by No. 3 China ($259 million). However, by 2018, China is forecasted to bring in $549 million in VOD revenue, good for No. 2 behind America’s $1.78 billion, according to Digital TV Research.

Smaller Windows

In addition to upping content availability on Chinese digital platforms, U.S. studios are tweaking home entertainment release dates in an effort to circumvent piracy while mining incremental revenue.

Lionsgate began streaming original series “Orange Is the New Black” on YouTube in China the day after its July 11 SVOD premiere on Netflix. Working with Asian partner Celestial Tiger Entertainment, the launch marked the earliest that a U.S. television show premiered on an international digital platform, according to the mid-major.

“[‘Black’] … generated more than 7 million views in China in its first three weeks,” CEO Jon Feltheimer said during the company’s most-recent fiscal call.

Meanwhile, Disney and Sony Pictures Entertainment are offering transactional VOD access in South Korea to theatrical releases still playing in movie houses.

Calling it an experiment, Sony Pictures in April began offering VOD access via cable, satellite or telecommunications provider to Quentin Tarantino’s Django Unchained three weeks after it bowed in Korean theaters. Likewise, Disney's animated Wreck-It Ralph and Brave were available on transactional VOD four and five weeks, respectively, after their theatrical debut.

Similar strategies could emerge at U.S. studios marketing content in China depending on the appeal of digital distribution and strength of select movies in theaters.

That’s because a transactional VOD rental is seven times more profitable to a studio than a kiosk or rental subscription; and a sellthrough transaction is 20 to 30 times more profitable. Both retail options generate higher margins than the typical movie ticket.

“We think we can meet consumer needs while maintaining sound economics by creating the right release window,” Warner Bros. CEO Kevin Tsujihara told an investor group last year.

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