As China was preparing for the lunar New Year holiday in January, Steven Xiang, the chief executive of Huanxi Media, was readying what was expected to be one of the blockbuster productions of the year.

The Hong Kong-listed Chinese film-maker had received Rmb600m from distributors who planned to release feel-good comedy Lost in Russia in many of the 80,000 cinemas across the mainland on January 25, at the height of the national break, and was expecting to receive much more in ticket sales.

But just hours before the film’s planned debut Mr Xiang was forced to swiftly change tack when the authorities began implementing lockdown measures around Wuhan, the city at the heart of the outbreak and China’s seventh largest, in the face of the Covid-19 virus.

He decided that it made more sense to stream the film than to screen it, through a combination of Huanxi’s own platform as well as several operated by tech group ByteDance — all available for free.

Within three days Lost in Russia had been watched 600m times, including 25m by people confined in their homes in Wuhan, but the move came at a cost: instead of taking a chunk of the anticipated Rmb2.4bn box office revenue, Huanxi received Rmb630m from ByteDance. It returned the money it had received from distributors.

“We went straight into streaming and we did it for free so nobody could accuse us of trying to profit from the pandemic,” Mr Xiang recalls, sitting in his Hong Kong office surrounded by posters for Huanxi-produced films.

One of China’s so-called New Economy companies, Huanxi considers technology and the consumer internet as much as the traditional business of making movies.

Though dwarfed by Hengdian World Studios and state-owned China Film Group it has consistently produced some of the country’s biggest box office hits in the past few years, thanks in part to a distinctive model inspired by DreamWorks, the US film group which was founded by filmmakers rather than businessmen.

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Huanxi has a unique shareholding partnership with many of China’s top directors, giving them equity stakes in the company in exchange for exclusive rights over their productions, “much like the DreamWorks system [in] its early days”, says Mr Xiang.

But its recent experiences lay bare the multiple challenges studio executives like him face.

Line chart of Box office revenues ($bn) showing China is closing the gap on the world's largest film market

Although most mainland cinemas had reopened by early August, along with their international peers film studios are weighing when to release films into theatres in the era of social distancing and when to put them directly online.

Entertainment groups also have to decide what will appeal to both domestic and international audiences. The US has more than a quarter and China about a fifth of the worldwide $42.5bn market for box-office sales according to data provider ComScore, although this year the gap will narrow dramatically.

These issues come at a time when the world of entertainment is witnessing a decoupling between China and the US, just as trade, finance and technology are, following years of joint ventures and Chinese investment in Hollywood. The nationalist backlash in China over Disney’s Mulan — as pirated versions of the film surfaced on social media ahead of the official release earlier this month — suggests that the Chinese romance with Tinseltown is slowly coming to an end.

But most crucially Chinese producers have to satisfy the authorities as the content of films is ever more closely scrutinised. China’s top film regulator was merged with the ruling party’s propaganda department in 2018, a move executives said had resulted in a tightening of censorship. If a locally produced film fails to receive approval from the censors and the government, it cannot be screened in China — which is where the vast proportion of revenues originate.

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Many producers frequently have to make changes at their behest. Come the national day holiday next month Huanxi will release Leap, about Chinese volleyball star Lang Ping who led the national team to victory in the 1984 Olympics. Another feel-good, patriotic tale, Leap nevertheless had to shift focus slightly to emphasise the collective team nature of the triumph to satisfy Beijing.

However, the rules are sometimes opaque. Soon after the relaxation of lockdowns across the mainland Huayi Brothers, one of China’s largest film studios, released The Eight Hundred, a film depicting 800 troops holding off an attack by the Japanese in Shanghai on the eve of the second world war. It had initially been pulled from showing at China’s flagship film festival last year.

For weeks afterwards, social media was abuzz with a debate about why regulators approved the movie as it depicts Chinese soldiers fighting under the flag of the Kuomintang, which was then at odds with the Communists and occupied Taiwan since 1949, in a move which Beijing considers illegal. The film has now become the world’s top box office hit so far this year. 

Lost in Russia, a feel-good comedy for the new year holiday, was released on streaming platforms after China began implementing shutdowns in response to Covid-19 © Huanxi Media
Leap, a forthcoming Huanxi release about Chinese volleyball star Lang Ping, shifted focus to emphasise the team spirit of her Olympics triumph to satisfy Beijing © Huanxi Media

But Huanxi has one advantage over Chinese rivals. It has allied with Maoyan, a Beijing-based firm that started life in 2017 as an online ticket service, a business in which it now has a more than 60 per cent market share, but has evolved into an entertainment platform, distributor and data provider whose apps offer real time information on how many people have viewed any production, in every individual cinema or on any internet platform.

There is nothing even remotely as granular in the US, industry experts say.

Together the two groups have collaborated on films such as Dying to Survive, about a Shanghai resident suffering from leukaemia who smuggles in cheap cancer drugs from India. Though difficult to watch, such productions can still make commercial sense if they are targeted carefully. Maoyan is also an investor in Huanxi, with a 7.5 per cent stake.

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“To make a movie more attractive to the audience, you need good content,” says Maoyan founder Peter Zheng. “But then we rely on data to leverage the advantage of good content.”

Alliances such as that between Huanxi and Maoyan are vital for survival in China’s increasingly competitive film landscape and are critical in attracting the best directors. Indeed some — many of whom studied their craft in the US and have now returned home — believe that mainland filmmakers now have more power than the studios, just as they did in the golden years of Hollywood.

“Huanxi doesn’t behave like a studio, they provide platforms to the directors and give them freedom,” says Chen Daming, a director who has made several films for Huanxi. “Data can help marketing but it can’t help on content creation.”

Thanks to such granular information, groups such as Huanxi have far more control over the distribution, promotion and pricing of their content than in the past. The group reported a net profit of HK$20.3m in the six months to June, compared with HK$321.5m a year earlier, making Huanxi one of the few studios to show a profit, Mr Xiang adds.

Huanxi will soon release One Second, the latest movie from China’s most famous director, Zhang Yimou. Mr Xiang plans to release it in cinemas — which since last week have been permitted to be three- quarters full in China — and shortly thereafter stream it. 

“People go to the cinema for the special effects and action films,” he adds. “It doesn’t make sense for an artistic film to linger in the theatre. We keep experimenting.”




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