Seminar on Current Business and Management Issues

Seminar on Current Business and Management Issues

MBA6061

Hong Kong Movie Industry

----How to resuscitate the industry ----

Prepared by

EMBA 2006

Group 7

Gloria Kwong

Louise Chan

Martin Lam

May Wong

Roger Wong

Tamasa Yip

6th May, 2006

Executive Summary

In the 50s to early 90s, the inflow of hot money from Malaysia, Singapore,Taiwan and Korea, new talents from China and the limited type of entertainment available in the market had created a promising future for Hong Kongmovie industry. The subsequent success of the industry had people within the industry started to look for quick profit, giving up quality for quantity, creating an oversupply of movies in the market. Together with the changes in the environment and advancement of technology, the movie industry experienced a 180 degree change in the business. The emergence of various types of multi-media and entertainment, like television, Internet, Karaoke, computer game, has made movie watching no longer the only activity to enjoy at leisure.The introduction of video, VCD, and DVD, means movie lovers can now enjoy movies in a more relax environment without any restriction. Coupled with the piracy problem and poor quality production, the movie industry in Hong Konghas been in a state of depression for the past decade. From a high of 300 productions in early 90s to a rare of 50 productions in 2005, the industry needs to make innovative changes to resuscitate its position. Furthermore, the open up of China market would mean ample opportunities for Hong Kong movie industry.

This paper aims to provide solution to resolve the current issues in Hong Kong movie industry. In the following section, we will conduct a brief examination on the history of the movie industry, an analysis of its current position (OTSW analysis) and respective customers. In the final part, recommendations are given with the hope that they will be useful to help revive the industry.

Introduction

Hong Kong movie industry has once been the third largest film production base in the world, followed by US and India. In its golden age, over 300 movies were produced per year in Hong Kong and had once won the title “Hollywood of the East”. Nevertheless, its past glory in the 90s soon became history. The industry entered its dark age after 1997 withlocal movie productions down to less than 60 in 2005. With China market more open to the world, light can be seen towards the end of the tunnel. More provinces and regions will be opened for movie distribution from Hong Kong and more co-production with China movie producing companies in the future.

The ups and downs of Hong Kong movie industries had us questioned the reasons for its success and failure and whether it has the ability to resuscitate the industry with the given opportunity in China. Recommendations are then suggested to investors for future development of this unique industry.

The Characteristics of Movies Industry

Movie was launchedas early as 1895 where millions of people devoted their full time and effort to it. Not only is it a creative entertainment but also a business model that can generate billions of turnover, from film premiere, box office receipts, distribution of DVD / VCD , TV, paid TV , computer games, theme parks, copyright on film, related novels , merchandise, etc..

In the 20th Century, movie became part of the globalized industry and was listed as one of the top 5 luxury commodities (the others namely petrol oil, aeroplanes, armed forces and computer chips). However, movie industry is not just a commodity but also a cultural product. It improves the overall image of a society through the creation of economic value and further development of service industries.

The movie industry requireshugeinvestment; the production cost may well be over US$100 million likethose of Harry Potter and Spiderman. Regardless of the size of the capital investment, there is no distinct golden rule to guarantee the good receipt of box office revenue, henceforth, investment in movie is considered to be high risk. Because of the creative nature of the movie industry, it is not easy to develop a risk management model to better monitor the loss on the investment. In fact, the industry requires a matrix of investment and not only in money terms; they include the size of the audience/market, local or international recognition, content, artists, etc.

Movie industry- AComponent of the Creative Industries

Creative industries includes advertising, construction, art & antique, cartoon, design, fashion design, movies, television games software, music, performing arts, publishing, software and information technology.

The proposal of the Financial Secretary to set up two committees, namely Movie Development Council (電影發展委員會) andArt Center of Creativity Development (發展創意藝術中心) in his 05/06 Fiscal Budget signifies that the government begins to devote more attention to support the creative industries as well as the movie industry.

Key Success Factors in Movies Industry

Numerous factors affect the success of each movie, they include:

Market size

Content and style

Environmental factors

Support from government

Funding

Training

Investment in updated technology

Using the recent rise of Korean entertainment or movie industry as an example, its success wasmainly attributed to the strong support from Korean government, the national education of Korean (their wholehearted support to Korean movie as no Korean will own or see pirated DVD/VCD of Korean movies) and strong financial sourcing from US.

The potential financial return from movies through multiple channels is one of the biggest attractions towards the movie industry. It is also the “dream factory” for a numberof directors. The process of putting those famous stories onto the screen generates huge amount of satisfaction. Hollywood is always the dream place for many youngsters to involve in movie industries.

Difficulties in the Industry

Film financing and funding:

Movie productions in general incur quite a considerable amount of budget so that it can achieve the ‘wow’ effect. However, up to the current moment, there is no distinct financing model which can guarantee the ‘expected’ return. There are many ‘unknown’ factors which can affect the box office receipt and popularity of movies. Of course, there are some productions which could go on a smaller scale with a lower budget but still be able to hit the right target audience. But such case is limited. Financing always remain the greatest challenge as to explore other sources of capital or financing arrangement. Obtain funding outside the industry is usually much more difficult, typically they are within the industry, for example the film production company, distributors and individual investors.

Video / VCD / DVD Piracy

Piracy is a very powerful ‘disruptive technology’ that severely affects the movie industry. VCD / DVD could be available right after the movie launchedor can be download from computer through BT ( Bit Torrent ) software.

Insufficient Support from Government

No policy or system available to provide comprehensive support to the movie industry. There is continuous pressure from film professionals that government did not exertadequate control on piracy problem and that no proactive support had been rendered to the industry.

Changing Taste of Customers

The constant and rapid change in tastes makes it very difficult to gauge the interests of customers and directors may not know what is popular for the ‘story board’ of the movie. Furthermore, there is a saying that movie is now “going without cinema”. People can enjoy movies in places other than the cinema. Apart from that, television, as a free channel of entertainment has drawn people away from movies.

Competition in Leisure Time and Disposable Money of Consumers

People nowadays face a more hectic life and have less available free time for leisure and entertainment. On the other hand, with various types of leisure activities such as Karaoke, computer games available, people are facing with more choices than ever to spend their leisure time. Going to the cinema is no longer the prime choice.

Analysis of Success and Failure of HK movie industry 1950-90s

Success of the industry 1950 – early 90s

The prosperity of the movie industry in Hong Kongcan be said to be started by South East Asian entrepreneurs. During the 1950s, the political environment of Hong Kong was relatively stable and more liberal than countries like Malaysia and Singapore, andthere were not much competition in the geographical region during that time, thus, creating a good opportunity for movie developers and producers. At that time, the movie industrywas dominated by Shaw Brothers who have a strong Malaysian background.

In the 1970s, film production in Hong Kong was dominated by 2 major Malaysian players: the Shaw Brothers and Dian Mao (电懋) production. Typically, not only was the film producer the investor of his own production but also the owner the production house, hence, making it relatively easy for the him/her to produce a film.

Raymond Chow left the Shaw Brothers in early 1970s and started his own company “Golden Harvest”. His business model had made a revolutionary impact in the film industry. Raymond set up its cinema chain and outsourced the film production process by working closely with movie stars like Bruce Lee and Jackie Chan. This revolutionary change had lower the barrier to movie production and increased the number of movies made in Hong Kong, pushing the industry to new heights in the 80s and 90s.

Raymond Chow’s consolidated outsourcing system became the mainstream in the market in the 1980s. The new outsource system had indirectly encouraged more investors outside the entertainment industry to invest in movie making as it signified that huge capital outlay no longer required. The investor neededonly to identify a suitable partner who was usually a professional in the movie industry, for example, a producer, to help him make the movie whilst heacted as the financier and then negotiatedwith this partner on the commercial terms like royalty sharing percentages, turnover split, and distribution rights (in Hong Kong and overseas markets). This lower investmentattracted many non-movie industry professionals to invest in the industry, leading to a proliferation of movie making activities in Hong Kong in the 1980s, thereby growing the business.

These outsource trend had created a bi-product called “themanagers” in the business. These ‘managers’ persuaded movie stars to take on more film productions, and attracted investors to have more film productions – leading to even more films in Hong Kong.

The wide acceptance and use of television in the 1980s and 1990s helped the propaganda of movies and movie stars. News on movements of movie stars attracted a lot of readers and audiences. The attention capturing episodes widely reported in television programs (and newspapers) and fans clubs helped increasing the publicity of the movies.

In the 1980s and 1990s, the opening of China to the world created an entirely new market to film producers and investors. A potential market with more than one billion viewers as compared to a million viewers at most in Hong Kong. Thislargely untapped market encouraged investors. In addition,the natural sceneries and rich history of Chinahad become another attraction for movie productions, thus further contributing to the growth and success of the movie industry in the 1980s.

However, the most significant fact that contributed to the success of the industry wasthat during this period, technology wasnot as advanced and choices of entertainment were limited, and going to cinema was considered to be the most common and popular source of recreation.

Failure of the industry – mid-90s onwards

In the late 1980s and early 1990s, film production became so popular that a lot of film investors began to sacrifice quality of film production for quick profit. Some investors or producers started to make movies that has a very low production cost. Others made movies with a very poor (or even without a) storyline. These adverse productions created a bad impression on movie-goers. This started the momentum of decline in the movie industry.

The lack of professional and proper formal training for movie producers and actors also affected the quality of movie productions. Producers could not catch up with the passage of time and the change of moviegoers tastes.

The inflation in Hong Kong in the 1980s meant heightened wages for production crew and huge increase in advertising and promotion costs. The sales turnover generated was not sufficient to compensate the significant increase in production cost and led many film investments in a deficit position, deterring future entrants to the movie industry.

At the same time, the quality of television programs kept improving in the past two decades. TVB and to some extent ATV, became more mature in their program production which attracted more viewers. The free television programs meant that people no longer had to go to cinemas to enjoy themselves. Rather, they could sit comfortably at home and still enjoyed a good TV program.

The gaining popularity of video, the introduction and advancement of VCD and DVD in the late 1990s also created a setback for the movie industry. Movies could be cheaply produced and watched using video, VCD and DVD. Fewer cinema goers meant lower profits for moviemakers; this has a spiral effect leading to less creativity that leads to the failure and decline of the movies industry.

Meanwhile, cinemas are no longer the only places to go, various types ofconvenience and inexpensive entertainment has emerged in the market then. For example, the growth and success of Karaoke has drawn away a lot of people from cinemas. The fact that video can be freely copied also meant fewer people going to cinemas. The convenience of borrowing a video, VCD or DVD from friends also had the same effect.

The legal regard for patents and copyrights, especially in the PRC, also had a profound impact on the movie industry. Pirated products intruded the market and haveseverelyaffected movie production and creativity. Fake copy of movies that could be easily found in the PRC had eroded the profits of movie makers. The Customs and Excise Departments in PRC and in HK were not vigilant enough to deter video, VCD and DVD smuggling or pirating. Furthermore, there had been little civic education on copyrights. Respect for copyrights was not enshrined in the minds of the population at large.

Despite the fact that the economy of Hong Kong has grown substantially in the 1980s and 1990s, service and set up in cinemas did not really improve until the recent few years. The poor service did not help the movie industry at all. In fact, the number of movies being made in Hong Kong from a high of 300 in 1992 to only about 50 in 2005 demonstrated the gravity of the situation.

Since the late 1990s, the focus of the movie industry no longer only on the movie itself, but on how the movie has to be sold and distributed as well. Gone were the days when movies must be watched in cinemas. The focus has shifted to disc and video production which have become a very important part of the revenue.

The hot money from Taiwan that rolled in during the 90s also caused the rise and fall of the industry. In the late 1980s, the hot money that rolled in helped created many movies. Since 1997, after the handover of Hong Kong back to Chinese government, Taiwan President Chen set new laws to protect the local entertainment industry.The laws restricted HK movies exporting to the Taiwan markethad the hot money drifting away.There were no longer that many movies made in Hong Kong from Taiwan hot money.

Although CEPA arrangement did facilitate and encourage movies to be produced and/or shown in thevast market of China, the fact remained that many Hong Kong producers do not share the same passion of the culture as the mainlanders. The latter made it difficult for many movies to be genuinely accepted by the mainland Chinese, as these movies might not be able to arouse feelings and passion of the mainland Chinese.

To sum up, a myriad of reasons caused the decline of the film industry in Hong Kong during the past two decades. No single reason led to its downfall, but a large part of the downfall could be attributable to the quality of local films being made, the impact caused bytechnological advancements like video, VCD and DVD into the market and the severe piracy problem.

OTSW Analysis

The downturn of the Hong Kongmovie industry had resulted in a significant decrease in the number of movies released locally and the total box office revenues in the past decade as compared to the booming years. Foreign films as a whole grossed more than Hong Kong films in local cinemas, this phenomenon was unheard of during the glory days of local movie making. In view of the problems the Hong Kong movie industry is facing, an OTSW analysis will help to have a better understanding of the current situation of the industry.