Market Insight

China’s Dalian Wanda signs movie co-financing and marketing deal with Sony Pictures

September 23, 2016

David Hancock David Hancock Director – Research and Analysis, Cinema & Home Entertainment
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Dalian Wanda group, rapidly becoming a global force in the movie business, has taken a further step in its ambition to become the world’s largest entertainment company. Wanda is to co-finance a number of films produced by Sony Pictures, and will also undertake marketing and promotions in China for Sony titles using its ‘consumer-facing infrastructure’. The Wanda Group will also be bringing its understanding of Chinese audiences to Sony’s future projects. This deal goes further than previous steps taken by both Chinese companies and Hollywood.

Sony’s titles are currently released in China by China Film Group and Huaxia Film Distribution.

Our analysis

This is not the first deal involving a Chinese group and Hollywood financing, far from it. Wanda itself has been involved in the financing of the Paramount franchises Teenage Mutant Ninja Turtles and Transformers. However, this is a more wide-ranging deal than has been the norm up to now, which has tended to focus on individual titles and passive investment. Wanda wants to learn more about the content business and to that end is willing to go further.

In fact, Wanda has direct or indirect links with a number of studios already, either via direct investment (Paramount) or its investment in Legendary Entertainment (deals with Universal and Warner Bros). To add Sony means that Wanda is not looking to shut out partners and is happy to embed itself into the content development and production side of the business. This may end up as a complex web of interlinking deals, and could conceivably lead to contradictory situations. Wanda has often said that it would like to buy a studio at some point, and has also said that it would like to do deals with all six studios (these two aims seems mutually exclusive), and had been in talks with Paramount until the recent departure of the interim CEO halted a search for a minority investor.

Wanda is building a wide-ranging entertainment empire. Outside of cinema exhibition, the group has built the largest production studios in the world, owns Legendary Entertainment, acquired Propaganda Gem, a US entertainment marketing company, as well as several China-based movie-related companies: Shimao Cinemas, Chinese movie ticketing portal Mtime, Hoolai Games (games distribution) and Movie Media Cultural Communication, an analytics company. It also owns Infront, a sports marketing company, which itself took a controlling stake in Omnigon, a sports and media consultancy for apps and social media. The one thing that Wanda lacks currently is a global distribution structure, but this deal indicates that it prefers to concentrate on investments in content and exhibition, not the link in-between the two. An indicator of the success of this strategy will be the release of Legendary’s $150m co-produced project The Great Wall (with Matt Damon) later this year in China and next year in the USA.

Wanda has stated that it aims to bring Hollywood technology and expertise to China through such deals. Wanda has also stated that the group is looking to tie up similar agreements with content companies around the world.  In the field of cinema exhibition, if the various acquisitions go through (we are waiting for Carmike shareholders to decide on the proposed acquisition and clearance for the Odeon UCI deal from competition authorities), Wanda will control just over 13,000 screens worldwide, which is only 8.4% of the global screen count but a larger proportion of global box office (Wanda estimates 15%) as these are mostly modern multiplex screens from dominant exhibitors. Wanda’s target is to control 20% of global box office by 2020, and they seem well on course to do that. Within China, Wanda directly controls over 2,100 screens but has a wider presence through its movie ticketing and marketing presence as well as stakes in other cinema circuits.

As for Sony, such an agreement in the Chinese market (still heading to become the world’s largest market by end 2107 according to IHS Markit data) is something of a coup, although there is no sign that it is exclusive. The idea of co-financing is to mitigate the risk involved in blockbuster movie production and Wanda is a very useful partner to have for this. Due to its growing influence and size, China is becoming a chance for studios to have a second go with a title especially if it doesn’t work in the home or international market. The downside is the relatively low level of revenue split that studios are allowed to take home (25%) and the quota that still exists to protect Chinese films. This is currently set at 34 films a year (of which 14 have to be animation or 3D). The way round this is to co-produce films with a Chinese (or Hong Kong) partner. However, a true co-production needs an element of collaboration beyond just a financial input, with cast, crew, location and post-production all having a role in being granted status as a co-production and it sounds like Wanda has thought of that as there is mention of Wanda looking to ‘highlight the China element’ of films. The films in which Wanda will invest have not yet been chosen (or at least not yet named by either party), but we can assume that the ability to become a co-production is one of the criteria, as well as their appeal to the Chinese market in general. Conversely, and maybe more intriguingly, highlighting the Chinese aspects of a global film will also serve to make these Chinese elements more commonplace for the global viewer. This leads back to the government’s stated aim to use the growth of the cultural industries to project ‘soft power’ around the world.

Sony was fifth in terms of market share in the US in 2015 and hasn’t been the top-ranked since 2012 (Skyfall and The Amazing Spider-Man drove it up there) and is also fifth so far this year in 2016. The films in Sony’s slate don’t at first sight seem to be made for China: Ghostbusters 2, and Sausage Party are two of their top three titles, although The Angry Birds Movie performed relatively well. The primary driver of this deal for Sony, along with risk management of tentpole titles, could well be expertise that Wanda will bring on the Chinese market, and how to tap into the Chinese consumer’s tastes. In today’s world, a film will ideally have appeal in US and China, as well as in the international market, in order to maximise its potential.

An interesting case study of the potential upside for Sony comes with the release of Warcraft in China. The video game-based title has been several years in gestation, with Legendary Entertainment (backed by a deal with Universal) putting in place a series of financial, strategic and brand partnerships in order to fully unlock its value. According to data from GF securities, China accounts for at least 10 percent of the 100 million fans of the World of Warcraft game, but the final result shows that it played far wider than this. In the end, Warcraft had the largest five-day opening in China ($156m) for a foreign film, leaving it third-placed so far in 2016 with a gross of $220.8m (or over 50% of the film’s international gross). The overall production budget was a reported $160m. In comparison, the title made only $44.2m in the USA, currently standing at 44th in the yearly box office ranking. Wanda was a key partner, and ended up acquiring Legendary after a smaller stake had been originally mooted. The film opened (in the same week as its US release) on 67% of the country’s screens, at a time when overseas titles were also vying for screen space before the summer ‘blackout’ on non-domestic films came into force. The merchandising was undertaken by Mtime, which has recently been acquired by Wanda, and Wanda played a large role in the promotional strategy (in-foyer activities and promotions such as themed seat covers in the auditorium). The whole strategy was also underpinned by analytics, much used in China, and an area in which Wanda has also acquired a company.

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