China and Hollywood and Big DataThis past Saturday I attended the USC Entertainment Institute on Entertainment Law and Business. In past years the Institute has had entire panels on China, but this year things were pretty low-key, with just one panelist having a China connection (Chia-Chi Li, Director of Tencent’s Content and Technology Transactions Groups).

Why the shift? Undoubtedly one reason is the high-profile collapse of several deals involving Chinese money and Hollywood. Who wants to see a discussion about all the money that’s not being invested? Another possible reason is that the giddiness of the past few years – during which many people in Hollywood viewed Chinese investors as the new “dumb money” – is over and the Chinese entertainment industry is maturing, with most of the remaining players being relatively well-run, competent outfits. Or perhaps it’s that the annual US-China Film Summit is taking place in two weeks, and there are only so many times you can have a “What’s The Deal With China?” panel.

But China nonetheless kept creeping into the discussions. The morning panel on music (“Where the Money is in Music These Days”) broke down the ways in which artists and record labels actually generate revenue today, with particular attention to YouTube and streaming services. The panelists all complained about the revenue stream from YouTube (currently the biggest single medium by which consumers listen to music), but almost as an aside noted that the revenue model for music in China was even worse. Meanwhile, multiple panels referenced the social media/DIY music video phenomenon that is Musical.ly, albeit without a word about the app being Chinese. As I wrote a few months ago, this is exactly the kind of soft power the Chinese government has been hoping for.

Professor Jeffrey Cole, Director of USC’s Center for the Digital Future, started off the institute, as he has done for the past few years, with a fascinating speech about the future of the entertainment industry (“The Industry: Trends, Fads and Transformation”). Although most of his talk centered on domestic concerns, he closed with an intimation that there was a failure of comprehension (and imagination) about the size, wealth, and power of the BAT companies (Baidu, Alibaba, and Tencent), and what it meant for Hollywood.

In determining the future of the US entertainment industry, Prof. Cole noted that two of the most basic concerns are how people spend their time and how they spend their money. In the US, numerous companies are competing for either or both. In China, the competition exists in name only; Alibaba controls the majority of consumer purchases, and Tencent’s WeChat is so dominant and so comprehensive in terms of user base and “stickiness” that – and this is a direct quote from Prof. Cole – it is in many ways like the commercials from the 80s for the Roach Motel: “Roaches check in, but they don’t check out.” Despite the negative connotations, Cole meant it as a compliment of the highest order: a recognition that a substantial majority of the Chinese population uses WeChat all day, every day and for almost everything. We have written about this before – if you are doing business of any kind in China, you need a WeChat strategy. Indeed, we have been approached multiple times by companies interested in forming a WFOE for the sole purpose of opening up an official WeChat account.

Meanwhile, Tencent’s representative, Mr. Li, was one of the best panelists of the institute and with by far the highest degree of difficulty, because whether he wanted to or not, he had to represent the views of himself, his employer, the Chinese entertainment industry, and China as a whole. That’s a lot of water to carry.

Mr. Li made several points worth repeating, but I’d like to focus on two. First, he acknowledged that though some Chinese companies had payment problems because the RMB is not freely convertible, Tencent (and other successful Chinese companies) had access to funds outside China and if they want to make an overseas investment they can. This is true enough, but it somewhat sidesteps the issue: the Chinese government may not be able to control what Tencent does with money in its US bank accounts, but it can certainly control what Tencent does in China, and thereby exert indirect control. Still, the point remains that for large Chinese companies already in the media and entertainment business, not having to secure government approval for every wire transfer is a big advantage.

Second, according to Mr. Li, any foreign film that hopes to do well at the Chinese box office needs a Chinese partner. His specific examples: Warcraft ($47M domestic box office, $386M foreign box office with $213M of that in China) and A Dog’s Purpose ($64M domestic, $136M foreign with $88M of that in China) had major Chinese partners (Tencent and Alibaba, respectively). The LEGO Batman Movie ($175M domestic, $136M foreign with $6M of that in China) did not.

On a certain level, this argument sounds familiar.China is too big to understand without local help, so don’t even try. But Mr. Li was actually making a more subtle point. In his telling, the reason Warcraft was successful in China (and nowhere else) is because Tencent had so much data about its users that it could identify nearly every single Warcraft player in China and could push targeted ads and marketing material to them. Similarly, the reason A Dog’s Purpose did so well in China is because Alibaba had so much data about its users that they already knew the identity of every dog-owning household in China.

It’s a compelling argument if you can get past the Big Brother-ness. I’m not sure it entirely holds up under scrutiny; why wouldn’t this strategy work for every movie released in China? Still, it’s hard to explain the success of Warcraft in China in any other way, because the movie was a critical and popular bomb everywhere else in the world. Maybe it only works for movies with a clearly defined affinity group.

Either way, China will only become more sophisticated in its collection and use of big data and companies going into China will need to keep pace — which probably means partnering with one of the BAT companies — or else they’ll just be rolling the dice. At least in the film business, the stakes are too high to accept those odds.