Mergers & Acquisitions

Chinese animation studio behind Kung Fu Panda 3 dreams of global box office success

Pearl Studio to use new Chinese owner’s expertise to grow at home and globally

PUBLISHED : Saturday, 10 February, 2018, 9:01am
UPDATED : Saturday, 10 February, 2018, 9:01am

Like Po, the protagonist of its successful Kung Fu Panda 3 film, who transcends from a student of the martial arts to become a kung fu master, Oriental DreamWorks, which started out five years ago as a joint venture with DreamWorks Animation, is now independent.

Last week, the company’s Chinese shareholder, CMC Capital Partners, which invests in companies across the spectrum of content, platform, technology and services in media and entertainment, bought NBCUniversal’s 45 per cent stake and renamed it Pearl Studio.

Pearl’s chief executive, Frank Zhu, says CMC’s takeover underpins its vote of confidence in the Pearl team, which has absorbed the best know-how from Hollywood and built its own expertise, from creative development and production to commercialising the films it produces for a global audience.

“The Chinese shareholder’s full ownership will allow us to be even closer to the China market, to leverage CMC’s industry value chain and [resources] in the media sector,” Zhu said in an interview. Details of the deal were not disclosed, but the joint venture was valued at US$350 million in 2012.

Even as the Shanghai-headquartered company aims to be a world-class entertainment company for a global audience, it is well aware that its biggest market is at home.

China’s animation industry – film ticket sales and ancillary businesses such as product merchandising and spin-off productions – is forecast to grow at an annual compound rate of more than 10 per cent, according to PwC, which is also forecasting the industry to reach US$36 billion by 2022 from US$24 billion last year.

Zhu said the company would be releasing one to two animated feature films globally each year in the next five years, from a “creative inventory” that currently has more than 100 projects in various stages of development.

Achieving a global box office hit is a tall order, but Zhu said the key was to work with a good global distributor whose market analysis is risk management at its best. This close collaboration begins before the green light is given to a project’s development.

Ancillary businesses

The other important element of success is the ancillary businesses that are tied to an animated film – online games, location-based entertainment such as musicals and live performances, television spin-offs, sponsorships and joint promotional retail, to name a handful.

“This is the advantage of an animated film. Our reliance on box office ticket sales won’t be too huge. It’s also spreading the risks,” said Zhu.

He did not disclose the numbers but said income from the ancillary businesses for Kung Fu Panda 3, produced jointly with DreamWorks Animation, far exceeded the US$153.9 million the film took in mainland box office ticket sales.

Just how much entertainment companies are able to reap from these businesses depends critically on how a story is told and characters are built.

“An emotional connection [with the audience] drives ancillary businesses behind the film,” Zhu said. “Movies need to build characters that become part of people’s lives. A good friend.”

The extension of a film franchise, therefore, means more and sustainable opportunities for monetisation, even though the scale of ancillary businesses in China remains small at less than 5 per cent of box office ticket revenues.

But the online retail boom in China, the world’s largest e-commerce market on track to being worth US$840 billion in 2021, is a huge boost and provides an important sales channel.

The mainland’s film market remains highly regulated; it allows a total of 34 imported films a year to be shown across cinemas on a revenue-sharing basis, with the foreign side taking about 25 per cent of the local box office take. There are hints that Beijing could raise the cap by another dozen or more films, with foreign distributors’ cut of revenue moving towards the international average of 40 per cent, state-owned media has reported.

Yet, this is no indication that China is relaxing its grip on foreign content under the leadership of President Xi Jinping.

To get around these restrictions, foreign film companies have turned to co-productions with a Chinese partner, the number of which has grown in the past several years.

But not everyone is a winner. The Great Wall, the biggest ever Sino-US production directed by Chinese director Zhang Yimou at US$150 million, earned way less than investors expected in China (US$171 million) and globally (US$320 million).

Kung Fu Panda 3, also a co-production, however, grossed US$153 million in China and was a global hit.

Intellectual property

Pearl and DreamWorks have successfully sustained the Kung Fu Panda 3 franchise’s life by strengthening and creating new intellectual property around the film and its characters, who have over the years built a strong connection with audiences.

Liu Wei, chief executive of October Media Group, the studio behind one of China’s top 10 highest grossing animated films The Monkey King: Hero is Back, said Chinese film companies vary in their ability to monetise their IP.

While it is crucial for a company to do well in its core animated film productions, managing its IP from the outset is equally important as this paves the way for sustainable ancillary businesses, he said.

The Monkey King received positive results and we are now working on related elements along the IP value chain, such as trading product merchandising rights, and with partners on the upstream and downstream stages, forming a mature [monetisation] mechanism,” he said.

October Media is also working on a sequel to The Monkey King and another animated feature, Deep Sea.

Reversely, Chinese internet heavyweights such as Alibaba Holding Group, which owns the South China Morning Post, are also hoping to extend the success of online games to film screens.

Alibaba Pictures is producing and will distribute Legend of the Ancient Sword, derived from 3D role-playing video game Gu Jian Qi Tan 2, originally developed by Shanghai Aurogon and published in 2010 by Gamebar. Alibaba bought rights to the second game.

Game characters go down well with China’s young people, who also make up the bulk of spenders, said Wilson Chow, PwC’s technology, media and telecoms leader for China and Hong Kong.

“Many IP characters are popular … in particular, mobile games that originate with a China storyline and characters,” he said.

Pearl Studio is producing its second feature film, Everest, which tells the story of a group of misfits who embark on a quest to reunite a young yeti named Everest with his family at the highest point on Earth. Everest is scheduled for release in 2019. Pearl will continue to collaborate with Universal and DreamWorks on the film, with Universal as its distributor outside China.

No limits

Pearl announced this week that it will produce Over the Moon, an animated musical adventure film, exclusively for Netflix as part of its move to tap new formats and platforms. The film, a story about a girl who builds a rocket ship and blasts off to the Moon in search of the legendary Moon Goddess, will be released in 2020, in Chinese cinemas and on Netflix worldwide.

“Netflix is already a phenomenal platform. It was something that didn’t exist before … we adopted an open mind and embraced it,” said Pearl Studio’s Zhu.

Industry players and analysts say there is no limit to the growth potential of China’s animation market, amid an expansion of the broader film and entertainment industries, with abundant supply of capital courting fewer projects in the country.

PwC projected that the country’s cinema box office revenue will hit US$15.08 billion in 2020, overtaking the US market’s US$11 billion. Animation films will make up 10 to 20 per cent of China’s total box office sales in the next five years, as they have since 2012.

But when it comes to moviemaking, Chinese companies in general have lagged behind well-established Hollywood studios, even though there are areas of expertise in the business where they are equally accomplished, as films such as Kung Fu Panda 3 and The Monkey King show.

At the heart of what makes or break an animated film is the storytelling.

“Great stories and great content will always prevail, whatever the platform they are told from,” said Zhu.