Why Chinese Tech & US Film Production Need Each Other

Thursday’s (January 25th) announcement that Tencent was acquiring 10% of movie and TV production company Skydance Media, revealed the latest front in the content war being fought between tech and media, and increasingly between US companies and their Chinese competitors.

Skydance Media, now valued at $1.5 billion following the Tencent equity acquisition, was launched in 2010 by Oracle Founder Larry Ellison’s son David Ellison. (Larry Ellison’s daughter Megan is also the founder of production company Annapurna Pictures). Skydance specialises in action and sci-fi franchises, such as Mission Impossible, Star Trek, and Terminator—all titles that appeal to audiences outside of the US.

US movie audiences are eroding while Chinese audiences continue to grow

From a US film production point of view, an approach by a significant Chinese content player is to be welcomed. In 2017, US box office receipts were down 9% on 2016 numbers. At the same time, Chinese box office receipts were up 13% on the back of a 4% increase in ticket sales. This suggests that Chinese audiences still have considerable room for increased pricing, generating higher average revenue per user (a tactic US theatres have spent the last decade using to conceal declining ticket sales.) China’s $8.5 billion box office is now only 18% below the US, which means that if the current trend continues, then 2018 is the year when China becomes a more important box office market for the US movie industry than the US.

Crucially, the most successful format for Chinese audiences are action and sci-fi. Add to this the fact that China imposes a quota cap of 34 foreign films per year in the country, and partnering with a significant Chinese partner makes even more sense.

Tencent brings monetisable audiences as well as cash to the equation

Aside from being part of the world’s fastest growing box office market with increased revenues, Tencent had another huge selling point for US audiences: Tencent Video—a service it deploys via its QQ messaging platform ecosystem. Tencent video is a rare example of a successful monetisation strategy for messaging apps which now serve more than 7.2 billion monthly active users. Monetising these highly-engaged users is notoriously difficult as struggling US messaging app owner Snap attests to in its public filings.

So, not only does Tencent bring cash and partnership opportunities, it also brings a next-generation audience monetisation channel for a US film production company looking to future proof itself against changing consumer behaviours.

For Tencent the opportunity to lock in on-demand Hollywood content for its domestic audiences is hugely appealing and helps it build a content moat against streaming video app competitors in the Chinese market. And, of course, buying a minority stake allows cash generative Tencent to invest in non-Chinese assets without inciting displeasure from the Chinese regulatory authorities, i.e. the National Development and Reform Commission, which is currently closely scrutinising and vetoing international acquisitions by Chinese conglomerates.

Last week’s deal, while a significant milestone for both Skydance and Tencent, it also represents the future proofing of the film industry in general.