China Streaming or China Dreaming? The Outlook for Foreign VOD

The numbers coming out of China continue to amaze. There are 855 million digital consumers in China and they have more than twice as many internet users as the US has people. The Chinese are spending an average of 358 minutes per day online. They spend 8% of their online time streaming video content. A further 11% of online time is spent watching short videos, something that 800 million Chinese now do regularly.

Despite these big numbers, China’s internet penetration rate is still only 60%, online video growth has plateaued, and regulatory control is tightening.  Things have changed a bit since we last touched on streaming trends, so let’s look at the outlook for 2020

1. Production has slowed down. Contributing factors include a crackdown on entertainment industry taxation in the wake of the Fan Bingbing tax evasion scandal and subdued economic conditions generally — China’s economic growth is at a 27 year low and, according to some reports, nearly 2,000 Chinese film and TV companies have gone bust this year. The trade war is also contributing to reducing cooperation between Hollywood and Chinese production companies. All of this means fewer co-productions and collaborations, replaced by a lot of reviewing, reconsidering and waiting to see.

2.  Production has become more difficult. More and more subjects are off-limits, for both domestic Chinese and foreign content owners. Look what happened with The Eight Hundred. Even a reputable, major Chinese company like H Bros. couldn’t read the tea leaves. On the foreign side, several leading TV production companies have recently pulled out of China, giving local production difficulties as a reason.

3.  There’s no longer any market for foreign formats. China is no longer the biggest international market for foreign format owners. For many foreign companies, China is now one of the smallest markets for their formats. This is the result of 2016 regulations targeting foreign TV formats and specious co-productions. Challenges for foreign formats have been cited by UK trade body PACT in connection with its suspending its activities in China.

4.  There’s less foreign content but Chinese viewers don’t care. Recent regulatory intervention has resulted in less foreign content being bought for streaming in China. While the changes were working their way through the system there was conjecture about the impact. It’s now clear that China streamers and audiences seem quite comfortable with fewer foreign TV series. iQiyi, which has the second highest number of subscribers,  estimates that only 10% of its subscribers prefer US TV series, although the proportion is higher for foreign films

5.  Production focus has shifted to original content. Most content is now original as opposed to acquired or licensed. This original content is mostly local-language Chinese. There is now far less demand for production of foreign or foreign-invested content.

6.  Adaptations and remakes of foreign programs are out. This has put scripted foreign content under pressure. Foreign content libraries can no longer be mined so easily for Chinese adaptations. Adaptations and remakes are subject to a de facto ban.

7.  Foreign animation is now caught by the quota. In the past, foreign animation was exempt but, as part of changes introduced in 2018, it now comes within the 30% streaming quota applicable to foreign content.

8.  US streamers are not getting in. Despite frequent rumors and reports to the contrary, there is no reason to expect US streamers will be allowed to operate their own channels or do anything other than license their content for China within the 30% streaming quota.

9.  AVOD is down. Ad-supported revenue is shrinking. Tencent, which has the highest number of subscribers in China, disclosed in its Q3 filing a 28% decrease in advertising revenues. Unpredictability and uncertainty in scheduling releases were cited as the reasons. iQyi has also been hit by decreasing advertising revenue.

10.  SVOD is up. Subscription revenue is up relative to AVOD. It is now nearly the same as, if not more than, ad-supported revenue. The Chinese are now willing and able to pay for premium content or pay to avoid ads. This, together with improvements in IPR enforcement in China, has driven online piracy down to the point that it is no longer a major problem. But as indicated above, growth has slowed.

11.  China streamers are paying less and buying non-exclusively. This applies to both foreign and domestic content owners. Co-operation among streamers is up as they share quota spots and help each other with content license fees.

12.  No, China’s film “market” won’t eclipse North America’s in the near term. Despite the growth in digital distribution, ancillaries are mostly VOD and they still only account for about 25% of the market. Box office is still the biggest revenue source. It makes up around 75% of the market. Note that in North America the opposite applies — ancillaries are the greater part of that market. Reports predicting China’s “market” will soon eclipse North America’s can be misleading if they compare box office takings without considering the more substantial ancillaries in North America.

13.  Caution and uncertainty will continue during these “red” years. This year was the 70th anniversary of the founding of the People’s Republic. 2021 will be the 100th anniversary of the establishment of the Party. Regulatory caution and industry uncertainty will likely continue in the near term. Whether you’re a Chinese regulator, a Chinese producer, or a foreign studio executive, it won’t be a good time to be taking risks or pushing boundaries.

Here’s the thing: China may be getting harder for foreign business but it’s just too big to ignore. Foreign companies with a serious commitment and a realistic business model can still make it in these conditions and we are working with some that are. Generally, in the current climate, licensing-led approaches will be more advantageous than focusing on local production.