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The Rise of Netflix and the Mainland Film Market Dominate at Cannes

Will Netflix crack the China market, while destroying the European film industry? Can the growth of the mainland film market make up the global shortfall in theatrical revenues? Delegates at Cannes had, at least, some of the answers.

Photo: Crouching Tiger, Hidden Dragon II: The Green Legend.
Crouching Tiger, Hidden Dragon II: The Green Legend.
Photo: Crouching Tiger, Hidden Dragon II: The Green Legend.
Crouching Tiger, Hidden Dragon II: The Green Legend.

Two topics of conversation dominated the Marche du Film at this year's Cannes Film Festival – the rapid rise of mainland China's film market and the equally astonishing growth of US video streaming giant Netflix, which is now available in more than 50 countries. At times, the two topics became intertwined as film executives speculated about just how and when Netflix would gain a toehold on the mainland.

What the global film industry is mostly concerned about is whether China and Netflix represent an opportunity or a threat. While box office receipts are important, the independent film business has always been propped up by ancillary revenues – the money made from DVD distribution, followed by sales to pay and free TV.

Now that ancillary distribution is moving online, the DVD market has all but collapsed – meanwhile broadcasters worldwide are buying fewer movies. Theatrical distributors, the people who usually buy "all rights" in their country and then sell them on to ancillary distributors, have become extremely cautious and rarely "pre-buy" a film before it's completed.

As a result, sales companies worldwide are trying to figure out if selling to the fast growing, but heavily regulated, China market will ever make up the shortfall. Alternatively, they are wondering whether selling directly to Netflix – potentially forsaking a cinema release – represents a sound business strategy.

For sales companies handling Chinese and other foreign-language movies, it's even more difficult to secure pre-sales. Distributors now want to wait for the finished product and ideally see if it's a hit in its home country. So, while Hong Kong and Beijing-based companies were out in force at Cannes, most were selling films that are still in development or production. Deals were, therefore, discussed but seldom finalised.

The Marche du Film, though, is a useful platform for launching new titles. While most Hong Kong and Chinese companies had announced their upcoming titles at Filmart in March, a few held back their newest wares for Cannes.

Hong Kong-based Golden Network Asia launched sales on its US$50 million action-comedy Railroad Tigers, starring Jackie Chan as a 1940s railroad worker foiling Japanese soldiers, while Peter Chan Ho-sun unveiled his upcoming biopic of Chinese tennis player Li Na. Introducing the movie, which he is selling through his Hong Kong-based We Distribution company, Chan said: "This film won't just be a biopic. In tracing Li Na's life, it also follows how China has evolved over the past few decades."

Beijing-based Wanda Pictures, meanwhile, used Cannes to promote The Ghouls, its upcoming blockbuster directed by Wuershan and starring Chen Kun, Huang Bo and Shu Qi. US indie powerhouse IM Global is handling international sales on the treasure-hunting fantasy adventure, excluding the US and Asia, which Wanda is handling itself.

Wuershan described the film as "a big-budget commercial adventure film, but with a Chinese story and featuring such elements as feng shui." Wanda Cultural Industry Group Vice President Jerry Ye said the studio had spent three years developing the $40 million project, hoping to establish it as a global franchise in both the Chinese and international markets. Wanda, which co-produced with Huayi Brothers and Enlight Pictures, sold the film into several Asian territories before arriving in Cannes. It is now gearing up for a pan-Asian release in December.

IM Global has also picked up the international rights (outside the US and Southeast Asia) for Hollywood Adventures, a Chinese action comedy produced by Justin Lin, the director of a number of the Fast & Furious films who is currently working on Star Trek 3. Produced by Enlight Pictures and Bruno Wu's Seven Stars Entertainment, the film is set in Los Angeles and stars Huang Xiaoming, Tong Dawei and Vicky Zhao Wei. A China-wide release has been scheduled for 26 June.

According to Stuart Ford, founder of IM Global, The Ghouls and Hollywood Adventures represent a new and ambitious style for the mainland's filmmakers. He said: "We're seeing more of these big Chinese movies. In terms of production values and visual sophistication, they can compete with anything else out there."

Encouragingly, it wasn't just Chinese blockbusters that were making headlines. One of the hottest sellers in the market was a much smaller Chinese film in the Cannes competition – Jia Zhangke's Mountains May Depart. This was snapped up for the US by Kino Lorber, while distribution was also secured in string of other territories, despite the movie not having won any major awards to date.

As with many Chinese arthouse movies, Jia's film is being sold by MK2, a French company that is also selling the two Japanese films in Cannes' Un Certain Regard section – Naomi Kawase's An and Kiyoshi Kurosawa's Journey To The Shore. Another French company, Wild Bunch, is handling Taiwanese filmmaker Hou Hsiao-hsien's competition title The Assassin, which won best director, as well as the Hirokazu Kore-eda's Our Little Sister, a Japanese movie that went to US distributor Sony Pictures Classics.

Photo: Assassin: A China, Hong Kong, Taiwan production.
Assassin: A China, Hong Kong, Taiwan production.
Photo: Assassin: A China, Hong Kong, Taiwan production.
Assassin: A China, Hong Kong, Taiwan production.
Photo: The Mountains May Depart.
The Mountains May Depart.
Photo: The Mountains May Depart.
The Mountains May Depart.

Indeed, Japan had a strong showing at Cannes this year, with four titles playing in the main sections and a big presence in the Marche du Film. This was partly down to a new government initiative, Japan Day Project, which hosted a Japan Pavilion and a seminar programme exploring how to adapt Japanese manga, games and films.

This unprecedented level of promotion for Japanese content ended with an "All-Japan Power Players" summit. This saw the heads of Japan's leading studios discussing their strategies for expanding into international markets.

Yoshishige Shimatani, president of Japan's Toho, which collaborated with Legendary Pictures on the recent English-language Godzilla reboot, explained how the company has since set up a division to work on remakes of its content. He said: "Sales of Japanese movies are small. We need new strategies and can't just dub our movies into other languages and try to export them."

This strategy is markedly different to that of the Chinese studios, which are bringing on board US sales agents to sell the original versions of their movies overseas. China, though, doesn't have the rich base of manga, anime, games and other pop culture products that Japan has developed over the past 60 years.

When it comes to content flowing in the other direction – from West to East – Japan is still an important market for Western sales companies, but they now appear more fixated on the China market, at least if this year's Cannes is anything to go by. The world is agog at the China box office – Fast & Furious 7 recently grossed $390 million on the mainland in just five weeks. Tapping into this fascination, the Marche du Film hosted its first-ever China Summit, discussing such issues as the Chinese theatrical market, co-production and video-on-demand (VOD).

The summit made it clear that, despite its eye-popping box office figures, China won't be making up for lost theatrical and ancillary revenue in other parts of the world any time soon. China's import quotas for theatrical releases will not be expanded until 2017 and it's now notoriously difficult to mount successful co-productions. Since 1 April, even the previously freewheeling VOD sector has been subject to quotas and censorship.

During the China Summit's VOD panel, Po Hou, Managing Partner of Deloitte China, explained that the online video user base reached 433 million last year. Revenues, he said, which are mostly derived from advertising, were also rising rapidly – up 76% to $4 billion in 2014. Despite this, China's online video platforms continue to lose money, with last year's losses amounting to $150 million, compared to $100 million in 2013.

According to Po, the solution is for the industry to switch to a subscription model, similar to Netflix, rather than rely solely on advertising revenue. He was optimistic that this could happen, given that a large proportion of China's online video users are young undergraduate students. He said: "We certainly hope that this age group, as they earn money, and as they get used to paying for high-quality content, will enable the sector to grow bigger."

The takeaway for foreign producers was that it's better to work closely with Chinese partners, creating products that can work with both Chinese and Western audiences, rather than simply attempt to sell into China. While market access is limited, there's no denying that China is shaping up as a source of film finance for those in the know and those with the right partners.

This year, for instance, Luc Besson's EuropaCorp announced that it had renewed its output deal with Shanghai-based Fundamental Films. This arrangement has seen some $50 million pumped into Valerian, Besson's upcoming sci-fi epic starring Dane DeHaan and Cara Delevingne.

It also emerged that Wanda Pictures has invested in The Weinstein Company's upcoming boxing drama Southpaw, directed by Antoine Fuqua. At the studio level, the China Film Group invested in Universal Studios' Fast & Furious 7, which is now the highest-grossing film in China ever. Some observers say that, with such a powerful ally on board, the film's success is no mere coincidence.

Photo: Southpaw: Upcoming boxing drama.
Southpaw: Upcoming boxing drama.
Photo: Southpaw: Upcoming boxing drama.
Southpaw: Upcoming boxing drama.

The other event that enthralled Cannes – but left some people feeling queasy – was an on-stage interview with Netflix Chief Content Officer Ted Sarandos. While Harvey Weinstein, the founder of Miramax Films, who is already in business with Netflix, hailed the company as visionary, a European producer stood up and claimed they would "destroy the film ecosystem in Europe" within 10 to 15 years.

The fears here stem from the fact that Netflix doesn't contribute to European film subsidies and is pushing for 'day-and-date' releasing, a system whereby a film is released simultaneously in theatres and on streaming platforms. France currently protects the theatrical window by preventing films from playing on TV or VOD for three years after theatrical release.

In his reply, Sarandos stated that Netflix would invest in European production and defended the 'day-and-date' model. He said: "Nothing we are saying or doing is meant to be anti-theatres or anti-cinema. I'm confident that if films play day-and-date, they can still compete. People need choice and theatres might have to give up some of that revenue but, in total, more movies will be seen."

Netflix has been buying up world rights to a slew of movies – including Ridiculous 8, starring Adam Sandler, Cary Fukunaga's Beasts Of No Nation and the Crouching Tiger, Hidden Dragon sequel from The Weinstein Company. All of them will stream on the Netflix platform and may not play in cinemas if they object to the day-and-date model. Producers of these movies get paid upfront, rather than participating in the "back-end" revenues that are part of the traditional film financing model.

It's clear that Netflix is upending the Western models of financing and distributing independent movies – and US cinema-owners and large segments of the European film industry are understandably alarmed by this. It is less clear, though, what this actually means for Hong Kong and Chinese producers, who have never relied on European subsidies or been locked into Western models of financing films. Netflix may be threatening the 'film ecosystem' in the West, but it will have to sit up and beg to enter the China market, which already has too many big internet companies offering online video.

The test for Asian producers will be whether they can do business with the new gatekeepers of the West – Netflix, Amazon, Hulu, iTunes and their ilk – and ensure their product is visible and easily available to consumers everywhere in the world, not just in China. For Western producers who want to do business with China, offering this kind of access may be their entry ticket into a market that still needs global exposure, while having no shortage of cash.

The 68th annual Cannes Film Festival was held from 13-24 May 2015.

Liz Shackleton, Special Correspondent, Cannes

Content provided by Picture: HKTDC Research
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