How Subsidies Distorted China’s “Record” February Box Office

By Patrick von Sychowski | March 5, 2015 8:44 pm PST
China box office micro-channel Dragon Blade

Much has been written about how China’s cinema box office ‘overtook’ that of the United States this past February. While we have already covered how much of this is down to skewed arithmetic, often without proper context, it now seems that this “record” may require a large asterisk.

Major subsidies by mobile micro-channel ticket providers means that total box office spend over the Chinese Lunar New Year (also known as Spring Festival) period was over-stated by as much as half a billion yuan (USD $80 million), amounting to over one eighth of total earnings, thus easily wiping out the USD $10 million difference between US and Chinese box office in February.

The question of China’s total box office earnings last month hinges on whether we mean “box office” to be what people paid for their tickets or what cinemas earned from the sale of the same tickets. In most countries the two are more or less the same[1], but in China there is a significant difference due to the role played by third-party micro-channel smartphone ticketing services (the mobile e-commerce platforms commonly known as “electricity suppliers” in Chinese).

Micro-channel mobile ticketing providers such as Gewara, Cat’s Eye (Maoyan) and many others are locked in a fierce price war, offering cinema tickets for as little as CNY ¥9.90 (USD $1.58) or CNY ¥19.90 (USD $3.18), to win customers. These companies buy tickets in bulk and at a slight discount ahead of time directly from the cinemas, who thus have assurances of sold seats.  They then turn around and sell these tickets at a subsidised price to savvy smartphone-owning cinema goers. In addition to a low price, these providers offer assured seat selection and convenience.

China’s Lunar New Year season this past February was a particularly busy time for these micro-channel cinema ticket providers. On New Year’s Day Cat’s Eye sales alone reached CNY ¥100 million (USD $15.95 million), while Public Comment sold 6.5 million individual tickets. The battles on screen in this holiday’s blockbuster “Dragon Blade” were nothing compared to the war going on between the different third party ticket providers.

China box office machines

Hangzhou network gives a good overview of just how cheap the tickets on offer were:

In fact, the smoke of war has been rising for a long time. The first moves were by Taobao and Weibo who offered 19.9 yuan [USD $3.18] cheap Chinese New Year ticket deals to catch the main piece of action. Soon micro-channel movie ticket suppliers followed suit, launching 188 yuan [USD $30] Chinese New Year deal to watch 12 movie shows, which works out to just 15.7 yuan [USD $2.50] per ticket.

But the two giants clearly underestimated the fight required against these challengers to survive and remain king of the hill, as well as new entrants – such as Baidu mobile.

During the Spring Festival, films like “Emperor’s Holiday”, “Triumph In The Skies” and many other titles were available from micro-channel Public Comment online for the low price of 9.9 yuan [USD $1.58]. For “Dragon Blade,” Cat’s Eye was offering 14.9 yuan [USD $2.38] cheap deals. [Chinese actress/star] Angelababy appeared in endorsements for Baidu, advertising the services directly on television. As long as you book Baidu tickets through your mobile phones, the cost is 10 yuan [USD $1.59], paid through Baidu wallet means a discount of minus 10 yuan, meaning that the end price is effectively one yuan [USD $0.15] for a ticket.

By way of comparison, an un-subsidised ticket for a 3D screening of “Dragon Blade” costs CNY ¥40 [USD $6.38], meaning that most micro-channels offer at least a 50% subsidy. What would normally cost anywhere from CNY ¥35 up to CNY ¥80 for an Imax or PLF ticket could thus be had for CNY ¥10 or less. This is not so much cinema tickets discounting as price and market distortion.

The battle rages to win market share and customer loyalty on Chinese cinema consumers’ iPhone, Galaxy and Xiaomi smartphones, with many multiplexes sporting nine or more competing ticket machines [see above] where the impossibly cheap tickets can be collected from. The micro-channel operators are prepared to lose money to win customers and are burning cash at an astonishing rate.

So how much subsidy went into the CNY box office month? It is estimated that the two largest micro-channel platforms alone each provided over CNY ¥200 million (USD $32 million) in subsidies, which would amount to over 10% of the total box office over the Lunar New Year holiday period. Even if we assume that all the other micro-channels put together only provided subsidies amounting to half of what either of these two did, that would still equate to CNY ¥500 million (USD $80m), but quite likely even higher. China’s box office “win” over the US by a margin of USD $10 million was thus only made possible by subsidies that might quite possibly have exceeded a staggering USD $100 million.

Beijing Daily went so far as to say that the subsidies distorted the box office to such degree that for “the entire film market [there is a] chaotic sense of proportion.” Increasingly there are voices being raised internally against the negative impact this is having on the market.

Viewers are happy to buy ultra-cheap movie tickets, theater attendance increases and micro-channels are willing to pay the difference, with everyone seemingly happy. However, China Star Studios Zhongguancun manager Liu Hui was not happy, “micro-channels’ crazy cheap tickets activities are unfair competition, in fact, disguising the true cost of buying.” He believes that this chaotic low price war, can in the short term improve customer frequency, making them feel they have a good deal. But ultimately they disrupt the normal operation of the theater, and for the development of the film market this is not a good thing.

When New Film Alliance vice president of Huayi Brothers Studios Ning recently visited several top-ranking cinemas in the capital, he discovered that there is no change in the market share since last December befoore Christmas. The audience buy fewer tickets at the box office, but cinema attendance has not declined, because the audience is now going via micro-channels to buy a ticket. Theater box office receipts has not been affected, though the selling of drinks and snacks has been, because the audience goes directly to the auditoriums, with few concessions.

So while cinema goers are happy with cheap tickets, producers are worried about the long term implications for the market. It also creates a false expectation that tickets can always be bought cheaper online than at the cinema’s own box office.

But exhibitors are themselves locked into a fierce battle against one another in increasingly saturated Tier 1 and 2 markets, making them reticent to turn down micro-channels that offer to buy cinema tickets in bulk. In addition, the online ticketing platforms for individual circuits (with the exception of majors like Wanda) are often under-developed and under-promoted, compared to the sophistication of Cat’s Eye [see below], which further offers tickets to all cinema chains, not just one.

Cat's Eye china cinema app

Furthermore, cinemas can still sell and make money from soda and popcorn, regardless of what price or to whom cinema tickets are sold. It could even be argued that cheaper tickets through third-party platforms frees up discretionary spending that cinema patrons can divert to concession, of which cinemas keep 100% of the revenue.

In the short term, there is thus no incentive for theatre operators to turn their back on this arrangement, even if it means a lobby littered with different ticketing machines. As Beijing Daily notes:

Theater managers worry that the micro-channels’ low fares go against the laws of the market, given the major subsidies. It is unclear how far this can go on until the subsidies are completely used up. “Micro-channels are taking a heavy hit to to fuel their market. But even with these venture burning through money in five or ten years, once the fares have been so low, the expectation for movie tickets will be below market costs, what will the film industry do then?” said Wang Ning, saying that for viewers accustomed to low fares persuading them back to the cinema when the price goes will be difficult.

Micro-channels are keen on winning customers not just for cinemas but for all types of e-commerce or O2O (online-to-offline) activities, whether this is Groupon style deals or cashless payments in retail stores. Movie tickets are simply the most notable activity to draw consumers in as a loss leader. They also hope to effectively establish themselves as cinematic resources, meaning that people will rely on them to get all the information about films, thus bypassing both distributors and cinema chains.

There can also be no doubting of the growing importance of mobile cinema ticketing in China (again from Beijing Daily):

Online ticketing is the trend now, so much so that in 2013 in terms of film distribution, Guevara, the Us group, Cat’s Eye and other online ticket sales have been about the size of 4 billion yuan [USD $638 million], accounting for about 20% of the total market share. Gu Ying, vice president of Guevara estimates that online ticket sales will see rapid development over the next three years, and is expected to reach more than 50% market share. This means that sales of traditional theaters will soon be overtaken by online ticketing, and may no longer be located next to the theater box office window. Cultural Industry Research Institute of Peking University, Chen Shaofeng saus that the current mobile self-service appeals are still seats selection and choice of cinema. It does not appear that a single micro-channel will overtake the others, meaning that the cash burn will continue for some time.

At some point micro-channels like Cat, Taobao, BaiduMovies will have to raise their prices because they cannot afford to subsidise cinema tickets forever. But it is important to remember that with the headwind created by Alibaba’s recent IPO and China set to be the world’s largest online market, there is considerable resources still being poured into what can only be described as a land grab for e-commerce consumers.

Investors are willing to bet big on e-commerce in China, even if it means a significant cash burn for years. As Hangzhou News observed,  for the micro-channels, “the film will be a fulcrum of leveraging other business. According to their statistics, half of the users on the platform will be watching movies and eating, singing and doing other entertainment activities combined together.”

Various media sources in China have estimated that movie ticket subsidies by one micro-channel alone may have effectivaly amounted to 5% of total box office during the Chinese Lunar New Year holiday. As Sina Technology observed under the sub-heading ‘Price war and Industrial Distribution‘:

“First Financial Daily” reporters from a reliable industry source that in order to win this year’s Spring Festival, the price of a movie ticket market share win tactics, the actual amount Public Comment spent on the user’s movie ticket amounted to about 200 million yuan [USD $32 million] in subsidies and Cat’s Eye cinema strategy is barely different, with the introduction of a number of 9.9 yuan, 19.9 yuan movie tickets (Chinese New Year offer from Public Comment said that more than half the country can enjoy movie screenings as cheaply as 9.9 yuan). In addition to these two, other micro-channel platforms also joined the New Year offers of movie tickets subsidized price war…

But industry analysts believe that, as everything from taxi to software has undergone a similar crazy subsidy wars before calling a truce, the online movie ticket price war is not a permanent solution for service providers. Simply relying on cheap tickets is not a sustainable model of of a healthy business, but effort to grab market share means that  subsidised online movie ticket market is expected to continue in 2015, but will eventually seek other outlets.

It is thus unlikely that we will see a end to the micro-channel cinema ticket price wars any time soon. Cat’s Eye and Public Comment are the market leaders at this point, with Sina Technology estimating that they carved out a 40% market share during the Lunar New Year holiday.

For the hit “Las Vegas to Macau 2” Public Comment is estimated to have contributed one-third of the movie’s CNY ¥540 million (USD $86.2 million) box office takings. Last year in a special partnership Cat’s Eye and the distributors of “Heart Flower Road” teamed up with the micro-channel spent CNY ¥20 million (USD $3.2 million) to subsidise just this one film. Cat’s Eye has also done similar deals for “Single Men and Women 2” and “Dragon Blade”.

However, these two majors are being challenged by Gewara, Time Network, Network Ticket Network, Watercress movie, Baidu Movies, other micro-channel and Paypal-like mobile wallet platforms (Taobao movies), with for example Gewara’s influence particularly strong in regions such as Shanghai and Eastern China. Meanwhile US Group is getting involved in financing and distributing films such as “Elated” and “Heavenly Lion”.

These operators argue that micro-channels will ultimately allow cinema to more effectively manage booking and programming of films – but not without surrendering a large degree of autonomy to these third-party platforms.

While cinema goers are the main winners in this battle for market share and it is hoped that increased cinema going will lead to a ‘golden age’ of film produced, there is also a very real danger. Once the subsidised ticket prices are phased out, there is no guarantee that that Chinese consumers will continue to flock to cinemas in equally great numbers. There is a distinct possibility that the Chinese micro-channel cinema land grab could end in a scorched earth.

[1] (In other countries there can be a very small difference between box office spending and earnings where there are ‘”unlimited” movie passes for a fixed monthly price, such as Cineworld’s in UK or UGC’s in France. In these cases the cinemas pay the distributor their full share of each cinema ticket and usually try to make up the difference with concession sales, advertising and other ancillary revenues.)

Patrick von Sychowski
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