Is China slowing down?

The Chinese box-office is up by 21% in the first 6 months of 2016 compared to the same period of last year when it amounted $3.22B. Last year it surged by 49% to $6.78B for the year.

So, are Chinese movie tickets sales slowing down?

It should be taken into account that in the first 6 months of last year Furious 7, Avengers: Age of Ultron, and Jurassic World, which together grossed $860M were released, whereas this year the top 3 Hollywood releases, Zootopia, Warcraft, and Captain America: Civil War grossed $647M . In total, imported films have seen only 5% growth year-on-year, whereas domestic films have fared better, with receipts growing 33% from $1.5 billion to $2 billion in the first half due mostly to the exceptional results of The Mermaid, which grossed about $527M.

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‘The Mermaid’ grossed $527M in China.

Therefore, so far we can’t claim any “conclusive change” in the general growth trend in the market, but a shift related to the titles that have been released so far in 2016 compared with 2015.

In addition, it should be taken into account that the 6-month average CNY to USD rate has fallen from 0.1608 to 0.1529 or 4.91%.

What we can claim for sure by now is that Chinese moviegoers have different tastes. For instance, Warcraft grossed $221M and only $46M domestically, on the contrary Star Wars: The Force Awakens grossed $124M in China and $937M domestically.

There is another big difference. Movie tickets are relatively more expensive in China than they are in the US, at least in the cities. The price of 2 tickets to the movies in Beijing is 元117 (元117) or $18 (about the same price of monthly utilities in a luxury studio in downtown) even though the average price is starting to slip — down about 2.5% to $5.36. IMAX and 3-D premiums are continuing to hold up and driving overall revenue. Also, another opportunity is given by the fact that movie tickets are usually cheaper when purchased online in advance.

All in all, China saw a 40% growth in screens, now totaling about 32,000 or about 23 every million people but box office was up 48% in 2015.

To sum up, there is still room for substantial growth in terms of exports, due also to their greater openness to welcome foreign product, however the Chinese market is now already mature enough to be worth of being considered in terms of major investments in local productions, co-productions, as well as joint ventures and stable distribution partnerships.

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Fancy a negative pickup?

Superman, The Empire Strikes Back, Never Say Never Again and Lone Survivor. What do these films have in common?

They were all financed and distributed according to a negative pickup arrangement. Even Terry Gilliam’s Brazil, a negative pickup for Universal Pictures produced by Arnon Milchan: in this particular case, the studio had creative disagreements with the director over choice of star, content, and duration, and failed to resolve these issues to its satisfaction, because the negative pickup had essentially granted Milchan final cut.

The negative pickup is a type of film financing arrangement, an interparty agreement in which the parties involved are bank, completion guarantor, producer, and distributor, usually bank financed with the collateral being a Distribution Agreement from a trusted and creditworthy Distributor or Studio then owning distribution rights upon delivery of a completed film negative by a stipulated date and in accordance with the terms of the agreement, where the pickup price shall include cost of budget (which has to include a completion bond which premium usually amounts 3-5% of the production budget and contingency), cost of interest, origination fee, bank and legal expenses.

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Superman (1978)

The Producer, having agreed to sell distribution rights for certain territories to a Distributor (or two, in the case of a split rights deal where one gets domestic and the other international rights) who has in turn agreed to pay on delivery within the Distribution Agreement, borrows funds for production to be repaid on delivery from a Bank within the Loan and Security Agreement, whereas a Completion Guarantor oversees production and has right of takeover within the Producer’s Agreement, and agrees to guarantee delivery per Distribution Agreement or repay the bank within the Completion Guarantee.

The interparty agreement defines effective delivery, inspection, quality control (usually 10-14 days), cure periods (usually 10 days) and arbitration procedures (a period of time that bears interest) as defined by IFTA if Distributor, Producer and Completion Guarantor argue over whether effective delivery has occurred or not, and thereby who repays the Bank, the Distributor if effective delivery has occurred or the Guarantor if it has not, and at that point the Guarantor owns the film. Therefore the Guarantor has both Preliminary (Production Analysis) and Balance of Requirements (Document Analysis) and reviews all the related documents before issuing the bond: the Guarantor does not like essential elements (e.g. stars), and also can stop enhancements (additional items added to production) and force the producer to pay from his own salary.

Pre-sales is a variation of negative pickup in which distribution rights are sold territory by territory resulting in multiple Distribution Agreements that are used as collateral for the loan, where there is usually a Minimum Guarantee plus revenue share arrangement for each primary territory (secondary territories are usually not accepted as collateral), an advance paid immediately and the rest upon delivery, there is usually one or more sales agents who get a 10% fee collectible once the bank has been paid back (so agents usually oversell till 120% to get their fees), unsold territories can be added up as collateral paying an extra interest on the gap and usually only if they are worth twice the financing gap and such gap does not exceed 20%.

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Brazil (1985)

A negative pickup arrangement reduces the downside risk for investors that the film does not find a distributor at all, perhaps because it is not as good as anticipated, from the studio’s point of view it is not taking much risk because if the negative is not delivered or delivered not exactly as agreed, then the studio has no obligation, and safer also for the producer because such requirements are purely contractual and not regarding artistic value of the work. Furthermore, the distributor does not share the risk that the film goes over budget, since a completion guarantee will have been provided, the producer may get a better deal from competing distributors upon a potentially good film, and it enhances foreign sales potential. However, the producer still has to obtain financing from sources other than the studio or distributor that is a bank or other investors; also, the arrangement embeds a risk/reward ratio in the sense that the more risk the producer assumes relative to the distributor, the better deal the producer will be able to negotiate, and is potentially less rewarding for the producer and less expensive and somehow speculative for the distributor, requiring complex transactions and high therefore high transaction costs, thus definitely belonging to producers with a proven track record, major and trusted distributors and a relatively small circle of qualified professionals and financiers.

#RomaFF9 showcases new patterns of film distribution

The ninth edition of the Rome Film Festival is coming to an end having showcased some interesting new patterns of film marketing and distribution.

The film market named The Business Street has brought to Rome 811 professionals, of which 295 buyers, 104 world sales agents e 246 producers from 52 countries, with a 30% increase of international participants (35% more buyers and 14% more world sales agents). A very needed initiative for boosting the film business.

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Among the main happenings, the panel organized by Europa Distribution has been a unique occasion to discuss and dissect the new trends of digital distribution, focusing on how professionals in different territories implement and define different strategies to keep up with the pace of an industry that is in constant change. As consumers have drastically changed the way of watching films and have risen their expectations on availability of content, professionals have had to re-think their communication strategies and look for new ways to communicate with the audience. These new challenges have paved the way for innovative and creative marketing and distribution strategies, designed to increase the audience reach both in cinemas and across additional platforms.

Tim Grady, President of Adopt Films, has pointed out that ideally VOD shall come one week after theatrical, while everything needs to be curated, as there is so much content. He highlighted the importance of non-theatrical releases, even though, regarding day-and-date, distributors like IFC and Magnolia can easily do day-and-date because they own theaters, whereas others cannot unless they rent the theaters. As far as Netflix, he says it is a safety net for independents.

Somehow forced by the sluggish Italian market to have a different and more conservative approach is Stefano Massenzi, Head of Acquisitions and Business Affairs at Lucky Red. He says that local exhibitors want at least 15 weeks between theatrical and digital release and they would like to get a cut of VOD revenues in exchange for shortening the windows but distribution cannot agree upon the deal because it already pays advertising and VPF and that is enough.

Differently, Katie Ellen of the British Film Institute and Madeleine Probst of Watershed Cinema have pointed out that exhibitors must take risks if they want to flourish and work in synergy with VOD creating a halo effect for it, whereas Kobi Shely of Distrify has added that VOD helps understanding who the audiences are thanks to big data.

The VOD in Europe is growing and therefore digital distribution is by far the hottest topic to discuss at the moment.

Trends-of-the-European-Market

The conference Audiovisual market and regulation: an industry at crossroads, hosted by the Italian Presidency of the Council of the European Union and organised by the Directorate-General for Cinema of the Italian Ministry of Cultural Heritage and Activities and Tourism, has provided an opportunity to discuss the changes that need to be made to the European regulatory framework in the light of the changing scenario, paying particular attention to technological developments, the role of new players, future business models and the status of independent audiovisual producers.

It has been pointed out that the arrival of new players such as SVOD platforms is going to change the role of typical film producers, who are going to become crossmedia producers and experiment new forms of creativity. For instance, Netflix opens up new opportunities for local producers because they need to connect with local audiences.

It is also going to change the role of theaters, which will be the place for exceptional experiences and social gatherings, while pan-European day-and-date releases experiments show a low rate of cannibalization and increased availability of movies and global audience.

The main pros of digitization has been found to be new alternative production formats associated with lower costs, new alternative release and marketing strategies, larger consumption of audiovisual products, whereas cons may be piracy and changing consumption habits connected to a generally lower willingness to pay for quality content. The main trends observed in the audiovisual market in the latest five years show EU market share down from 20.7 to 15.4 percent, US market share up from 59 to 68.8 percent, and physical home video decline not compensated by digital.

Christoph Schneider, MD of Amazon Instant Video Germany added that free TV is benefiting from having previews on new digital non-linear services because this creates awareness, whereas YouTube’s representative underlined how they are opening up opportunities for the film industry through creating engagement, and BskyB’s Director of Policy and Public Affairs, David Wheeldon highlighted that they have been offering new online services in addition to the traditional ones and they have been very successful. Christopher J. Dodd, former US Senator and now CEO of MPAA has said that disruption is the opportunity as Netflix has invested $7B in feature production, while 50B films and 56B series were consumed digitally in a year, even though a better and more productive dialogue between content and tech providers is needed, and also search engines need to cooperate not driving traffic toward illegal services.

Many rules and regulations that apply to linear players do not apply currently to non-linear services: for instance, advertising and restrictions of audience, hate speech rules, promotion of european works. Authors want their cut of the pie and share risks and benefits as much as they are the production level. Both production and distribution will increasingly be driven by big data, but level of requirements are currently quantitatively different for linear and non-linear services.

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Meanwhile, the difference between broadcasters and non-linear services is fading, as some pay-TV distributors try to compete on the SVOD market: for instance, BSkyB with Sky Now, Canal Plus with Canal Infinity, HBO with HBO Go, CBS, and even smart TV producers such as Samsung and Sony push content to audiences, therefore acting by regulation as service providers, perhaps. Meanwhile, piracy and copyright are crucial issues to address. Most of the pay-TV distributors will look for deals with Netflix, but they will probably continue to provide their own transactional VOD service or third service.

AVMS (i.e. AudioVisual Media Services) that offer OTT services (e.g. Netflix) are covered by the directive because they exercise editorial responsibility over the content: the debate is whether the directive should also cover other internet gatekeepers such as Google. The art.13 of the directive imposes to promote European works on the platforms but it is not clear as of how to do it, therefore this is up to the member States (e.g. a section for European works, a section in the home page, financial obligations, or a percentage in the catalogue). Obligations are currently applied depending on where the service is based, not upon where it goes to (e.g. Netflix is based in Luxembourg).

The best method for promoting European works is considered to be marketing effort, whereas financial contribution to production funds makes sense, according to VOD operators, only if they get something in exchange such as exclusive licenses. Also, a question should be asked as if theaters do not have (at least not in every Country) quotas, why should VOD operators do? One thing is sure, there is a mandate from the European Union to foster creative industries, production, audience development.

It has also been acknowledged the positive effect of fiscal incentive schemes supporting film and audiovisual productions in Europe, such as tax shelters, rebates, tax credits, together with slate funding mechanisms both from the EU, the States and the Regional funds: in particular, there has been some movement away from a tax shelter model, which is less transparent and has historically seen abuse, even though it has the advantage to provide cash flow during production.

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The Italian Minister of Culture, Dario Franceschini has closed the conference saying that we need rules at the global level or the market will be easily dominated by global players that skip national or even continental regulations, that cultural exception is useful to protect national identities, that we need to improve the connection with audiences and the international circulation of works, because creative industry is the main strategic sector for Europe.

All in all, a flexible mindset is needed to operate profitably within the changing film industry, whereas a set of rules may help to guide the flow if there is clear evidence of necessity.

Disney and other majors enjoying tax relief schemes internationally

The act of centralizing productions is, more than ever, out-of-date. Better taking advantage of incentives and other opportunities given by globalization. Hollywood makes no exception to this trend, as studios have started moving out of their Californian facilities, also for big budget feature films, while the golden state is trying to get them back (FYI, California want Hollywood back).

According to an analysis by The Guardian, Disney has earned $272 million in production incentives from the U.K. government, which offers tax breaks for films shot in Britain by film production companies within the UK corporation tax net. Introduced in 2007, the Creative Sector Tax Relief scheme allows film projects with a budget greater than $32 million to claim back up to 25 percent (increased from 20 percent) of the first $32 million of qualifying UK expenditure, then up to 20 percent of their production costs. Qualifying films must pass a cultural test or be an official co-production, intended for theatrical release, and must spend 10 percent (reduced from 25 percent) of their budget in the U.K., with 70 percent of their labor costs going to European workers. Tax relief is available on qualifying UK production expenditure on the lower of either 80% of total core expenditure or the actual UK core expenditure incurred. Most importantly and differently from other systems, there is no cap on the amount which can be claimed.

Together with tax benefits, the Government is investing in specialized labor creation and production facilities such as Pinewood Shepperton studios, which recently received government approval for its long-delayed expansion plans worth $340 million. The “Pinewood Studios Development Framework” includes doubling the existing Pinewood Studios by adding a total of 100,000 square meters of new facilities, including studios and stages, workshops and production offices, to build another 10 stages and create 3,100 new jobs.

The past few years have seen the company ramp up its productions in the country, specifically at Pinewood Studios, which has welcomed the likes of Star Wars: Episode VII, Maleficent, Alice in Wonderland: Through the Looking Glass, Cinderella, Avengers: Age of Ultron and several other major titles from Disney’s Marvel, including recent Guardians of the Galaxy and upcoming Doctor Strange.

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Guardians of the Galaxy director James Gunn and character Rocket Raccoon .

Since 2007 Disney has spent a total of $2.3bn on film-making in the UK, including a significant chunk of the $250m production budget of the fourth Pirates of the Caribbean film, believed to be the most expensive in history, which grossed more than $1bn, according to industry analyst Box Office Mojo. Last year Disney’s UK film costs peaked at $531m, around 18% of the $3bn that the studio spent worldwide. The UK’s share was up from 11% in 2012.

Last year, it claimed back $81 million, believed to be the largest ever to a single studio, a third of which was accounted to Thor: The Dark World, another Marvel title shot in Pinewood. Disney has already spent more than $180 million on Star Wars: Episode VII and Avengers: Age of Ultron alone, according to the accounts.

Accounts released this year show that Disney has already spent more than $180m on the Star Wars and Avengers films alone. Other studios are also filming more in the UK. Warner Bros currently has three movies in production there, including one based on the 1960s television series The Man From Uncle, directed by UK director Guy Ritchie.

But some complain the tax relief can backfire as a boost to the British film industry. In November Edgar Wright, the director of British movies Hot Fuzz and The World’s End, said: “While the tax break is good for Hollywood films shooting here, it’s probably not that great for British films shooting in the UK. Some middle-to-low-budget films are going to find themselves without crew because all the American films are shooting here.” Well, we say people must adapt their habits and lives according to economic developments, this is why institutions like European Union were born, that is in order to ensure “free movement of goods, services, capital and persons”.

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Pinewood Shepperton studios near London, UK.

Other countries should follow a similar path as creative industry is a strategic sector for connecting cultures within the globalized market. The Italian government, for instance, recently boosted film tax credits available at 25% of qualifying production expenditures for international feature films, going from a cap of $6.7m per project to a cap at $13m per company, whereas the overall tax credit for the cinema and audiovisual industry will increase from $147m to $154m, both kicking in from 2015 and available to television and web content producers too.

“Netflix rhymes with Wet Chicks” for Sandler, means an opportunity for all

Any game changes and evolves, so players’ attitude, and laws and regulations need to evolve accordingly.

The primary game changer Netflix has just announced, right after declaring that the first day-and-date worldwide release of a blockbuster will happen soon, that they are going to produce and distribute as soon as 2015 four feature films starring Adam Sandler, therefore coining the term web film, which is a film meant specifically for online distribution.

Said Sandler: “When these fine people came to me with an offer to make four movies for them, I immediately said yes for one reason and one reason only: Netflix rhymes with ‘wet chicks.’ Let the streaming begin!”

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We’ve seen Netflix give TV a run for its money with a number of well-worth-watching original series, including House of Cards, starring Kevin Spacey, and prison-set dramedy Orange is the New Black. Now it seems the streaming video service has set its sights on the big screen… ish. And this means, for some, that they are continuing to thumb nose at theaters.

Well, probably. But first of all it means adding opportunities for talents. Ok, not everyone is Adam Sandler: the actor’s films, most of them comedies, have grossed more than $3 billion globally, and he is going to keep his agreement with Sony, while his films consistently rank among the most viewed by Netflix members, both in the U.S. and overseas. Therefore Netflix is prepared to pony up as much as the majors studios do for a Sandler film, which, on average, costs in the $80 million range. But this latest Netflix’s move is designing a new path, where theatrical release is not the only synonymous of artistic dignity anymore, where online distribution is not some kind of underground and neither alternative, but a perfectly viable and smart option.

Because, hey folks, not everyone can make it to the theater… right? Well, now not everyone wants to make it to the theater. Which will mean, in my opinion, that quality of theatrical releases is going to rise as there will be movies meant for the theater and others which will be better off with other types of distribution strategies. As a result, theater programmers will not be pushed by distributions to get packages of content, whereas will be able to select according to their specific audience. And audiences will be willing to pay a premium price for premium content and premium experiences. This is a win-win-win paradigm, just like it happens any time market opens up with new opportunities.

Furthermore, as said in the first paragraph, I believe also that laws and regulations related to funding production and distribution need an update. For instance, in Italy at the moment productions are eligible for tax benefits and public funding only if the film is meant priory for theatrical release and such benefits are assigned proportionally to previous year theatrical box office. Such provisions create a non-sense overcrowded line for accessing theaters even when strategic thinking would not suggest it, even for one week only or less, therefore saturating the market and lowering the quality.

Business models are changing, but theaters will be alive in 100 years for now because people need that kind of social gathering and they enjoy the magic, no doubts about it. They will increasingly be the destination for a premium or very customized experience, whereas new business models will get into the game because probably “being able to compete for consumers’ attention and dollars over the preciousness of access is a thing of the past” and so “people should have the opportunity to see it on a big screen if they want to, but if they want to watch it at home, they can stream it” as Netflix’s Ted Sarandos says, adding up to his concerns that “as theater owners try to strangle innovation and distribution, not only are they going to kill theaters, they might kill movies.” (video: Keynote Address | 2013 Film Independent Forum).

All in all, a more open discussion between the parts of the value chain is desirable in order to stay closer to customers needs and flourish in a fast changing market.