And The Oscar Goes To…

ColtonColton Growney, Investment Strategy Analyst

Many of us tuned in to watch the Oscars this year. So in light of the awards, in honor of Leo DiCaprio’s (and Ennio Morricone’s) first Oscar win, and with the news that The Revenant may soon be cleared for a Chinese release, I thought it would be interesting to take a look at recent films and the rising importance of the international box office—especially China.

Coloton_Movie_RevenueIt is important to note that despite its slowing economy, China’s box office is growing at an astonishing rate. Gross domestic box office ticket receipts in China show 40% annualized growth over the past ten or so years, to ¥44 B in 2015 (around $7 B, compared to $10 B in the U.S and Canada). In fact, the size of the Chinese box office has doubled from 2013 to 2015. The scale of the Chinese movie market is expected to overtake the United States by 2017. Meanwhile, the percentage of a movie’s international gross from foreign markets has increased over the past six years, as has ROI. A given American movie produced in 2015 can reasonably be expected to receive about 25% more of its revenue from international audiences than one released back in 2010, and many films earn much more abroad. Can you guess what the most profitable movie of the past six years has been? Hint: it was released in 2015, and three of its actors presented an Oscar on Sunday night, despite some technical difficulties with a microphone.*

Likewise, domestic movie successes have increased over the past few years. James Cameron’s Avatar (2009), which is one of the highest-grossing films in recent memory, led the Chinese box office until Transformers: Age of Extinction came out in 2014. Since Transformers, eight movies have out-grossed Avatar, five of which were Chinese. The highest-grossing Chinese movie of all time, The Mermaid, was released in February 2016, and broke the domestic record during the 2016 Chinese New Year, when movie-goers broke an international record for highest-grossing single week for a geographic territory. This may reflect an increased ability of Chinese studios to produce blockbuster content, in addition to the growth of viewership.

The U.S response to a growing base has also somewhat warmed its relationship with Chinese consumers. Many recent movies have incorporated Chinese geographies or plot points, including The Martian (2015), Gravity (2014), Pacific Rim (2013), and Transformers, to name a few, while other movies have added Chinese product placements (Transformers, Iron Man 3, Transcendence) or were scrubbed of characteristics perceived unfriendly to Chinese audiences (Pixels) to increase chances of widespread viewership.

Coloton_ROI_Movies

Source: TheNumbers.com

However, the Chinese market for movies remains difficult to crack, and in some ways, the Chinese box office is a microcosm of what we observe in capital markets. For instance, only a certain number of foreign films are allowed into the country each year through state-owned distribution channels. This is undoubtedly a political process, and subjects movies to strict content controls. A recent example of this is in The Hateful Eight—scenes exhibiting gore were extensively edited for Chinese viewers, and the movie flopped. Or, alternatively, a movie can collaborate financially with a Chinese film company in order to make a stronger case for admission to the market, as The Revenant did with ‘substantial’ backing from Guangdong Alpha Animation. Meanwhile, even domestic films may manipulate their successes, as Monster Hunt (2015) may have by ‘selling’ tickets to empty theatres (sound familiar?).

Due to the importance of politics in China, it is likely that companies with ties to the state will come out on top. State run studios like Shanghai Media Group, which has partnered with DreamWorks, and distributors (and Netflix competitors) with government ties such as LeTV, Sohu, and Yoku Tudou, will probably lead any developing cultural revolution in Chinese cinema. Therefore, while American movie studios and distributors have all worked hard to grab a piece of the Chinese consumer’s wallet, it is possible that the domestic industry will have first dibs. The stream of culture may even flow from East to West someday in the future, though as long as stars like ‘Xiao Lizi’ hold the public’s imagination, (‘Little Leo’ DiCaprio’s title in China), the domestic industry will continue to follow Hollywood’s lead.

*By the way, the most profitable movie (with a budget of higher than $50b) of the past six years is Minions (2015), a spin-off of the ‘Despicable Me’ franchise. Without making generalizations, the films with highest profitability have tended to have a substantial foreign component. And interestingly, the movies with high domestic profitability (USA) relative to their international take appear to be: American Sniper (2014), The Hunger Games (2012), The Lego Movie (2014), The Lorax (2012), and Lincoln (2012), all of which are (arguably) ‘American’ themed.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.