Big screen, big profits

Turns out Charlie Chaplin was wrong: cinema wasn’t “just a fad”. Now, 95 years after the famous silent film actor made that unfortunate prediction, the film industry is bigger, and more ingrained into cultures around the world, than Chaplin could ever have imagined.

Last year, global box office sales hit a record $31.8 billion, up 8 percent on 2009, according to the Motion Picture Association of America. That increase was due entirely to international markets – the most impressive of which was the Asia-Pacific region, where sales grew by 21 percent. And more than 40 percent of that regional growth was driven by China alone.

The Chinese film industry is experiencing exponential growth, thanks to the loosening of film industry regulations and a growing economy – which means greater disposable income for its population of more than 1.3 billion. Last year, box office receipts for the first time surpassed RMB10 billion, or about $1.5 billion, an increase of around 64 percent from the previous year and a 10-fold increase from the RMB900 million total recorded in 2003, according to China’s State Administration of Radio, Film and Television (SART).

Already the third-largest country in terms of movie production, with more than 500 films made last year, Chinese domestic feature film production is expected to grow 70 percent this year. Eventual policy changes, in line with World Trade Organisation rulings, should also allow for wider distribution of foreign films.

Such rapid (and anticipated future) growth has investors of all kinds – from film financiers to property developers – reaching for their cheque books. And that includes many a private investment fund. For example, SAIF Partners and IDG Capital invested in China-focused film distributer Sky Land, which recently released Snow Flower and the Secret Fan. Accel Partners-backed Legendary Pictures (Dark Knight, Inception) now has an Asian joint venture with Shenzhen-listed media company Huayi Brothers. Accel also owns a stake in Hong Kong media distribution company Mei Ah. The list goes on.

But the Carlyle Group seems to have found a foothold that will allow it to capitalise not just on general film industry growth trends, but also on the evolution of cinema technology.

Carlyle recently led a consortium that purchased an 80 percent stake in Hong Kong-based GDC Technology, a global company that is Asia’s largest provider of digital cinema servers. Yunfeng Capital, a private equity firm set up by Jack Ma, chairman of Chinese ecommerce giant Alibaba, and David Yu, founder of former Carlyle portfolio company Target Media, were also among the investors. Figures as to how that 80 percent stake is being divided or how much was paid weren’t disclosed, though a Bloomberg report citing an unnamed source put Carlyle’s investment at $75 million. The firm is investing from its Asia Growth Partners IV fund, which raised just over $1 billion in 2008 and has since made seven investments.

In China, GDC has installed more than 4,500 digital cinema servers, which gives it a 54 percent local market share, according to a statement. That figure is projected to grow as cinema construction continues at the fastest pace of anywhere in the world: China doubled its number of movie screens between 2004 and 2010 to 6,200, according to SART, and that figure is expected to double again in the next four years.
The president of Beijing-based real estate conglomerate Antaeus Group, Zhang Baoquan, told the Financial Times in January he expected cinema construction to proliferate as urbanisation spreads and digital projection becomes more widely available.

“In the US only one-third of all screens are digital so far, but I expect China to be 100 percent digital by the end of 2011,” Zhang told the FT.

Fresh cineplex construction presents a sizeable opportunity for GDC, as does winning contracts to help older theatres convert their technology from 35mm film projection to digital systems. Indeed, Wayne Tsou, head of Carlyle’s Asian growth capital group, noted the firm was “excited to play an enabling role in the global cinema digitalisation”.

That process has already caused GDC’s profits to soar. In 2010 it recorded revenues of nearly $73 million, up from just under $43 million the previous year, according to industry publication Film Business Asia. This figure looks set to climb higher still – given that Asia’s cinematic boom shows no sign of being a passing fad…