Why a Chinese Company Wants to Own Your Local Movie Theater

By Jordan Weissmann

By purchasing America's second largest cinema chain, Dalian Wanda Group is hoping to launch a global entertainment takeover

615_AMC_Merger.jpgA model stands in front of a video presentation before the start of an official signing ceremony between Wanda Group and AMC Entertainment in Beijing (Reuters)

Assuming the deal gets a pass from government regulators, there's good chance that your local movie theater will soon be owned by a large, Chinese conglomerate. This weekend, Dalian Wanda Group announced that it would pay $2.6 billion to purchase AMC Entertainment, America's second largest cinema chain. It would be the most expensive foreign takeover yet by a private Chinese company, a summer blockbuster for the M&A world.  

For those prone to anti-China hysteria, this all might sound vaguely menacing (First they came for our factories, then they came for our Kevin James vehicles...). To others, it might simply sound a bit backwards. After all, China's domestic box office earnings are on the upswing, growing faster than Hollywood's catalog of comic book sequels. In the United States, theater revenues have essentially been stagnant for a decade as attendance has steadily dropped. From a strictly financial point of view, there isn't much reason for a Chinese company to start snapping up American multiplexes.  

But Dalian Wanda isn't buying itself higher profits, at least in the short run. Rather, it's buying an education. China plans to massively expand its own film industry in the coming years. But even more importantly, it would like to expand its cultural influence by becoming as good at producing and exporting entertainment as it is computers and phones. Much as the country's manufacturers evolved by co-opting technology and techniques from abroad, its movie business is apparently looking to leap forward with some aid from America. 

A PREVIEW OF MOVIES' FUTURE

In some ways, American and Chinese box office stats are near perfect distillation of their places in the global economy -- the idling giant, and the surging upstart. Last year, U.S. and Canadian ticket sales totaled $10.2 billion, making it by far the largest movie market in the world. Unfortunately, growth is flat. As shown in the graph below from an annual report by the Motion Picture Association of America, box office receipts were $9.1 billion a decade ago. Adjusted for inflation, the industry's domestic revenue has actually fallen. Overall ticket sales are down 4 percent since 2002. Per person, they've fallen 5 percent.     

Box_Office_Detailed.PNG

That doesn't mean that the movie business is necessarily dying in the U.S. It just isn't naturally growing, which makes it a tough time to run a theater chain. For the big operators, turning a profit means convincing fewer customers to pay higher ticket prices, ideally for expensive 3D and Imax showings. They also have to pray for Hollywood to churn out a decent product. So far this year, box office receipts are up 17 percent, powered in part by hits like "The Avengers." Where they'll be in 2013, nobody knows.

Some theater chains have fared better in this environment than others. Regal Entertainment Group, the nation's largest operator, has turned an operating profit for several years running. AMC hasn't been so lucky. The company posted losses in two of the last three full fiscal years, as well as from 1998 to 2006. 

The situation in China couldn't be more different. In 2011, the country's box office grew 35 percent to $2 billion, making it the second largest international market behind Japan, according to the MPAA. The country's central planners have even grander ambitions for down the line. As the Wall Street Journal reports, the government wants to more than triple the number of domestic movie screens, from 6,300 to 20,000. It's also backing native production companies with the hopes that, one day, their films will be able to compete globally with Hollywood's wares. Meanwhile, according to the New York Times, Dalian Wanda's chief executive says his company intends to control 20 percent of the global theater market by 2020

LEARNING BY IMITATION

Owning a company like AMC is most obviously useful when it comes to that last goal. Although Dalian Wanda is a large corporation -- its range of businesses include department stores, hotels, and a theme park in China -- it's still a minnow in the world of theater operations. It currently owns 86 theaters with 730 screens. AMC, by comparison, owns 6,614 screens and 347 theaters. Through buying AMC, Dalian gets a huge foreign beach head and a store of institutional knowledge that will help as it navigate other consumer markets. It gives them a base of executives who actually understand how to run a large chain and an international perspective on customer service -- experience that might also help the company compete better at home as it fights for its share of a rapidly expanding market. 

But AMC may have additional uses, particularly when it comes to another one of Dalian Wanda's businesses: producing and distributing movies. According to the Times, the company denies that it plans to start distributing films through AMC. But that hasn't stopped others within the industry from speculating that they might. After all, what better way to learn how to sell a Chinese picture in America than to actually go ahead and do it? 

Chinese companies often learn by imitating, then they grow. The process may turn out to be trickier in the entertainment world, where so much boils down to a sixth sense for taste. Buying up American know-how outright is a first step over that hurdle. That's why Chinese ownership is coming to a theater near you. 

This article available online at:

http://www.theatlantic.com/business/archive/2012/05/why-a-chinese-company-wants-to-own-your-local-movie-theater/257464/