Who’s afraid of the big, bad B.A.T.?

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Most of the talk at this year’s Shanghai International Film Festival (SIFF) revolved around whether China’s big three internet companies – Baidu, Alibaba and Tencent (B.A.T.) – will engulf the local film industry before its had a chance to mature.

China’s eye-popping box office growth makes it easy to forget that the domestic movie industry is still only around 15 years old – at least as a commercial enterprise. Larger producer-distributors, such as Huayi Brothers, Bona Film Group and Enlight Media, haven’t had long to figure out how to produce appealing content – then market and distribute that content across a vast nation – before Baidu, Alibaba and Tencent (collectively known as B.A.T.) swept in and started to dominate every aspect of the business.

The internet giants are busily creating an end-to-end digital ecosystem for film and TV content encompassing production and investment, using their own cash and crowdfunding; online marketing and ticket sales for theatrical releases; and streaming films and TV shows on their online video platforms. They’re also following in Netflix’s footsteps by using “big data” to inform the content they produce.

It’s a strategy encouraged by China’s premier Li Keqiang, who introduced the concept of “Internet Plus” – using mobile internet, cloud computing and “big data” to drive entrepreneurship in China. But the new competition must be alarming for China’s traditional film studios, which still need to grapple with old world problems such as rising p&a costs and scarcity of experienced talent.

Alleviating some of their concerns is the fact that the digital giants have also become a new source of capital – Huayi Brothers has received investment from both Alibaba and Tencent, while Alibaba has also bought a $380m stake in Enlight Media. “When I first met [Alibaba founder & chairman] Jack Ma, he said he wants to disseminate content through more channels and he reaffirmed that you need good content to expand the industry,” said Enlight chairman Wang Changtian, speaking on a SIFF panel. “We’re in a good position because content is the core of everything. We’re working for the audience – not B.A.T. or Jack Ma.”

The content is king mantra was repeated throughout the festival – surely the traditional studios are in a strong position with their experience in producing profitable content and should be able to benefit from these new distribution platforms and capital flows? But Bona Film Group chairman Yu Dong questioned whether the film industry was ready for this transformation.

“We’ve been through 12 years of initial reform, but the deep reform of the film industry has not yet started,” said Yu, referencing the film industry’s evolution from a socialist central planning to capitalist system. “The era of the internet has arrived and is having a big impact on this reform. The weakness of the domestic film industry, coupled with the impact from imported films, may lead to collapse.”

While acknowledging that the new digital ecosystem could help movies to flourish, he also warned against it becoming a “closed loop”. “Within this loop, content is the one link that can’t come from the internet because owning an intellectual property doesn’t mean you have a script,” said Yu, who was unveiling a 26-picture slate with leading producers and directors later that day. “Translating IP into movies takes talent and that is the place reserved for the movie industry.”

Whether or not creativity will get a starring role in China’s new digital film industry, resistance against B.A.T. is probably futile. Baidu, Alibaba and Tencent are all $100bn plus companies for whom a foray into the movie business is pocket change.

Also speaking at SIFF, Alibaba’s digital content chief Patrick Liu said the company would launch a new streaming service, Tmall Box Office (TBO), in the next few months. He added that Alibaba’s crowdfunding platform, Yulebao, has so far raised $110m for 20 Chinese movies and, if regulations allow, could also be expanded to invest in Hollywood films.

“We are not competing with [traditional film studios] but contributing our systems to improve innovation and efficiency, which will result in better products for consumers. We will flourish together,” Liu said.

Of course the big question is how much additional revenue B.A.T. can generate for the movie business and whether or not China’s old school film studios can position themselves in that revenue flow. Some content producers have already voiced concerns about discounted online ticket sales. Much like Amazon, B.A.T. can use the popularity of movies to drive users to their other ecommerce platforms and don’t need to turn a profit from every segment of the value chain.

The most obvious way China’s studios can benefit from the digital upstarts is by selling content to their online video platforms. But in order for prices to remain buoyant, the streaming services owned by B.A.T. and their smaller rivals Youku Tudou, LeTV and Sohu need to figure out how to create a pay model in a market where content is mostly streamed for free.

A recent report from Deloitte, unveiled at the Cannes film festival, found that losses in the online video industry amounted to $150m in 2014. As Netflix well knows, streaming is an expensive business thanks to bandwidth fees and the cost of acquiring content. But Netflix can rely on its growing subscription revenues. In China, subscription fees accounted for only 5% of revenues, compared to 63% for advertising. The Deloitte report also found that only 12% of users in China have ever paid for content and only 2% have consistently paid.

Baidu-owned streaming platform iQiyi announced during SIFF that its paying streaming subscribers had reached five million as of June 15, an increase of 765% over the previous year. But these figures are a drop in the ocean of China’s 433 million online video users.

If streaming does become profitable the bounty could be huge, not just for local film studios, but also for overseas content owners. IM Global chief Stuart Ford was bullish on this front when he spoke at SIFF’s Winston Baker forum: “You don’t need to be a soothsayer to say that five years from now, digital and pay-TV revenues in China will be the single biggest revenue stream of any movie globally,” Ford said.

But if streaming doesn’t become a sustainable business, the content producers will hurt more than B.A.T. for whom online video is just a tiny corner of their digital empires. It’s crucial for local producers that prices for digital rights are not squeezed because there is no other revenue stream in China outside of theatrical. And while box office is rising, reliance on a single revenue stream is risky, especially as the export market for Chinese movies remains small.

Whatever happens over the next few years, Hollywood should watch closely because it’s going through the same process – just with bigger, older studios and more deeply entrenched traditional business practices. The convolutions in China’s movie business are no different to what’s happening in the rest of the world. It’s just that this show is being played on fast forward.