On July 26, 2018, GHJ’ (GHJ’s) Motion Picture and Television Participations Services team hosted the second edition of its 2018-2019 Happy Hour series, with the goal of connecting Entertainment Industry professionals with one another in a casual setting. During this event, Ben Sheppard, GHJ principal, held a Q&A session with Tom Ara, partner at Greenberg Traurig, who has deep experience with the Chinese film industry as well as independent films. Tom also serves as the chief outside entertainment counsel for a leading theatrical subscription service, which is disrupting how consumers purchase domestic theatrical tickets. The following represents some of the key takeaways from their discussion.

Chinese Film Industry Update

Any previously anticipated loosening in the foreign film annual quotas or the 25-percent producer share limitations have been set aside, at least until the trade tariff dispute between China and the U.S. can be resolved. Tom noted that Indian-produced films perform quite well in China and are taking additional market share from U.S.-produced films. Chinese-produced films are also increasing their theatrical market share, now up to 50 percent. Lastly, Tom noted that cross-border investments between the U.S. and China have slowed considerably, for reasons separate and apart from the trade tariff dispute

News in the Independent Film Market

The most significant disruptions have been from streaming services like Netflix and Amazon Prime Video, which have been acquiring more and more independent film content for exclusive streaming windows. However, despite the advent of the streaming services, an overwhelming number of newly produced independent films still do not receive any sort of distribution deals.

Popularity of Domestic Theatrical Subscription Plans

Domestic theatrical subscription plans like MoviePass provide value to consumers in that these subscription plans allow consumers to see more movies at less than full prices. In turn, these additional consumers provide value to theatre owners, as the subscription plan pays full price for the consumer tickets; theatre owners receive incremental sharing of these tickets, plus 100 percent of the related concessions revenue. These additional customers also provide value to film producers, in part by the incremental box office revenue share, in part by the incremental box office increasing contractually contingent revenue from other exploitation windows, and in part by mitigating potentially negative word-of-mouth reviews due to effectively reduced ticket prices.

According to the MPAA, as of 2017, roughly 12 percent of the U.S./Canada population, or about 43 million people, are considered frequent moviegoers (i.e., at least one film per month), accounting for 49 percent of theatrical tickets sold. Tom noted that as these subscription plans gain traction, the subscriber bases will become increasingly valuable to films producers and theatre owners in that they can directly and more efficiently advertise to frequent movie-goers.

Using the recent news of negative cash flows for MoviePass as a backdrop, Tom believes that Wall Street analysts may lack a certain degree of entertainment industry understanding, as they are mainly focusing on the negative cash-flow trends, which is common amongst disruptor startups (e.g., Uber), and focusing less on the incremental value that theatrical subscription plans can provide. Nevertheless, the industry has already reached a tipping point, in that theatrical subscription plans are not going away, and may become at some point the de facto standard in how consumers purchase their theatrical tickets. Even if MoviePass falters, other recent and future entrants (e.g., AMC Stubs A-List, Cinemark Movie Club, etc.) will continue to provide value to the entertainment industry.

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Overall, Tom’s knowledge provided event attendees some deep insights into where the industry is going. While big changes are ahead, entertainment companies will continue to need strong accountants and business advisors with substantial industry experience to help them navigate the road ahead. If your own company is in need of an accounting firm that can help you #BeMore, please reach out to us at 310.873.1600.