Wrapping up our phone interview just a little past 5.30am Los Angeles time, Robert Simonds couldn't wait for the rest of the day to start. "I'm off to have more fun," enthuses the chairman and CEO of American film and television studio STX Entertainment. A fun ride would be an understatement to describe the past 12 months for Simonds.
The veteran film producer, most famous for his star-driven, highly profitable comedies such as This Means War and The Pink Panther, started his own studio last year. Although the first feature it produced and distributed, entitled The Gift - a thriller starring Jason Bateman and Rebecca Hall - won't open until next month, STX Entertainment has already scored financial backing from venture capital firm TPG and Chinese private equity Hony Capital, and a three-year agreement with Huayi Brothers Media Corp - one of China's major players in the film scene. "When we decided to form a new studio, we knew from early on that China is not an add-on or a gimmick," Simonds says. "We need China to be in the fabric of the company. That's where our Chinese partner Hony comes in."
The deal marks an unprecedented collaboration between Chinese investors and Hollywood production and distribution studios, reflecting on the prevailing changes of China's fast-growing film industry.
According to EntGroup, the number of cinemas in China increased from 1,687 in 2009 to 5,300 last year, yet the growth rate of cinema numbers dropped 4.1 per cent over 2012. Multiplex cinemas, leveraging the thriving commercial real estate, has been an investor favourite - for example, Dalian Wanda Group's 2012 acquisition of the AMC cinema chain.
In light of the slowdown of the property market in recent years, however, investors are looking for other alternatives to expand their portfolio in not only cinema chains but also content providers - film production houses both homegrown and from overseas. The Chinese film industry also sees a new strain of professional investors who look beyond their traditional assets such as real estate, insurance, construction and mining.
"For the past 30 years, China has been the world's factory and is now becoming the world's market," says John Zhao, founder and CEO of Hony Capital - the firm manages a portfolio of 46 billion yuan (HK$58.2 billion) in assets. "We've identified opportunities in the fast-growing culture and media sector - the Chinese film market is expanding its influence on Hollywood [productions], and today's Chinese consumers are more focused on cultural consumptions. This is why we are investing in content production companies such as STX Entertainment. I'm sure more investors will start to pick up this trend."
Chinese investment in Hollywood studios such as Hony and STX's deal might be the first of a few to come - homegrown production houses funded by Chinese private equities are not scarce. Chinese private equities with the hope of carving a share of the world's second-largest cinema market boasting box-office sales of a total of 29.6 billion yuan last year include Gopher Asset Management, Fosun International and Chinese Media Capital.
Gopher's collaboration with Bona Film Group, for example, resulted in a 1 billion yuan fund started in 2013 which finances the development and production of Bona's film and TV projects. The production slate includes The Taking of Tiger Mountain - a 3D epic action film directed by Hong Kong veteran Tsui Hark - and Moscow Mission, the first project under Bona's co-production agreement with Fox International Productions.
"Content is king," says Yin Zhe, Gopher's founding partner and president. "The industry is dependent on content providers and hence our move into film productions. There have been hit-and-misses, but I believe the industry has great potential."
Titles from the collaboration include a slew of box-office hits and award-winning films. The Taking of Tiger Mountain, for instance, was a box-office hit, grossing over 880 million yuan, while Sean Lau was named best actor at this year's Hong Kong Film Awards for his role in the crime thriller Overheard 3.
Professional investors funding a film slate of diverse genre and subjects could benefit filmmakers in the long run, says Cheuk Pak-tong, professor at Hong Kong Baptist University Academy of Film.
"It's a healthier way to support the film industry, because obviously it covers a variety of films," he adds. "Not only the big-budget titles pegged for commercial success could be funded, but also the small-to-medium budget productions and other alternatives could have a chance to shine."
This kind of collaboration also allows private equities to leverage on the film companies' knowledge and resources. "We reduce the risks when partnered with a film company," says Gopher's Yin. "We don't have the resources to screen hundreds of film [scripts] a year, so we need a strong partner [who understands the market]."
The involvement of professional investors in film production has shaken up the traditional structure of Chinese film financing formerly and predominantly funded by wealthy individuals on a film-by-film basis.
"The funding will significantly reduce the challenges and risks associated with individual project financing," says Bona's CEO, Yu Dong. "It allows us to plan the timing of future releases more effectively and shortens the pre-production process, while maintaining creative control over our films and TV series, and gives us the opportunity to meaningfully increase our production market share."
STX's Simonds agrees and says: "All the investors in our projects are professional investors. We have been approached by Arabic princes, Russian billionaires and Texas oil billionaires, but we are not interested. Wealthy individuals are not doing it to build a company, but they are [only looking for] glamour and fun, and they could change their mind. That's not the business we are in."
Instead of micromanaging details of each individual film project, professional investors focus on a much bigger picture of the studios' growth and development. "We don't intervene with the details but advise on the financial and strategic aspects," says Tracy Cui, managing director of Hony, who oversees the STX Entertainment project. "We look at aspects such as development direction, long-term strategy and opening up new markets." Hony has actively facilitated the Huayi Brothers' deal with STX Entertainment.
With the growingly sophisticated demands of Chinese cinema-goers, local film productions no longer limit themselves to filmmaker-driven and mega-budget blockbusters. They have switched to producing story-telling films that resonate with today's society. Such titles include the deadpan comedy Lost in Thailand (2012) and the romantic comedy Finding Mr Right (2013), which set box-office records and have resulted in a slew of similar films following suit.
While big-budget, action-packed and special-effects-pumped titles still make up the majority of co-productions, STX Entertainment focuses on star-driven, mid-budget films to fill a gap in Hollywood as well as the Chinese film market.
"Many American companies are trying to sell their films to the China market, but STX wants to tell stories that have a universal appeal," Hony's Zhao says. "If we could find engaging stories which address issues shared by Chinese and American audiences and reflect cultural exchange, then we could find the common ground for the Chinese, American and global audience."
STX Entertainment, with backing from strong Chinese partners, is looking to finance, produce, market and self-distribute 12 to 15 films annually. Simonds disclosed that about 12 titles will be designed for a global market that may or may not be shown in China, while ideally three will be co-productions.
Huayi Brothers will co-finance at least 18 films to be produced over a three-year period beginning in 2016.
The studio opts for a strategy to produce mid-budget titles - ranging from US$20 million to US$80 million - starring an A-list cast. The 15 or so movies in production include The Free State of Jones starring Matthew McConaughey, Secret in Their Eyes with Chiwetel Ejiofor, Nicole Kidman and Julia Roberts, and the action thriller The Foreigner starring Jackie Chan, which was recently reported as being in final negotiations. These films reflect the studio's approach. "We want to design a partnership [with China], not just find a source of capital," Simonds says.
The Chinese cinema market might be growing fast, but not without challenges such as state censorship, lack of copyright legislations and distribution monopoly. Investors and analysts, however, are cautiously optimistic about the cinema sector opening up to a more market-driven direction.
"I believe the trend of private equities' involvement in film productions will continue because of the market potential and the market demand," says Lie Fu, veteran film critic and co-founder of Guangdong Dadi Digital Cinema. "Going to the movies has now become a lifestyle for many."
Film professor Cheuk also agrees and says: "The market is bound to open up. The rating system for motion pictures could eventually become a tipping point for the market opening up."
As ties between Chinese and Hollywood productions grow closer, the studios are spearheaded to position themselves to anticipate the market opening up. Many are betting on the introduction of a rating system as well as the loosening of China's quota system that restricts foreign movie imports.
The limit of 34 titles a year is expected to open up further in 2017-2018, Lu Hongshi, vice-president of the China Movie Channel CCTV-6, said at last year's Beijing International Film Festival.
"It's a big market, and there's a whole lot of room," Simonds says. "When the market opens up, somebody who's positioned well will completely take off. We are positioned to be the bridge. Our dream is to be a company working effectively in the world's two biggest film markets - America and China. "
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