Reference no: EM132890635

Hollywood Goes Global

This activity is important because, as a manager, you must be able to evaluate the causes and effects of globalization for your industry and your organization.

The goal of this exercise is to demonstrate your understanding of the forces of globalization by applying relevant concepts to the challenges the Hollywood film industry faces abroad.

Read the case below and answer the questions that follow.

Hollywood movies have always been a quintessentially American product, but globalization has changed the economics of the industry. By 2020, more than 70 percent of total ticket sales for Hollywood blockbusters will come from foreign ticket sales-up from 50 percent in 2000. Some movies (e.g., Transformers: Age of Extinction [2014] and The Fate of the Furious [2017]) grossed 80 percent of total box-office receipts overseas. Of the total $42 billion that Hollywood movies grossed in 2018, more than $30 billion (71 percent) came from outside the United States. Today, Hollywood would be unable to continue producing big-budget movies without foreign revenues. Foreign sales now make or break the success of newly released big-budget movies. In particular, big-budget movies must do well in China, which has become the largest market globally.

The Avengers: Endgame (the Marvel movie that was released in 2019 and grossed over $2.5 billion by that summer) is on track to be the highest-grossing movie of all time. The movie's international performance, which brought in $1.75 billion of total sales (70 percent), testifies to the power of foreign revenue. In India, Endgame has been shown in English and translated to three other Indian languages. In China, it is currently the highest-grossing import movie.

Avatar (2009) remains the highest-grossing movie to date, earning almost $3 billion since its release. Non-U.S. box-office sales account for close to 75 percent of that number.

Avatar was hugely popular in Asia, especially in China, where the government gave permission to increase the number of movie theaters showing the film from 5,000 to 35,000. Another of James Cameron's popular films, Titanic (1997), grossed close to $2 billion, with almost 70 percent of that total coming from overseas box-office sales. Exhibit MC10.1 depicts the lifetime revenues of Hollywood's all-time blockbuster movies, broken down into U.S. and foreign sales by dollars.

EXHIBIT MC10.1 Lifetime Revenues of Top 20 Hollywood Blockbuster Movies by U.S. and Non-U.S. Sales, in $ millions (release year in parentheses)

Source: Author's depiction of data from Box Office Mojo (https://boxofficemojo.com), 2009-2019.

Among the Hollywood studios, Disney-owned Marvel Studios has been the most successful studio in recent years. Exhibit MC10.2 shows the breakdown between U.S. and foreign sales for movies produced by Marvel Studios. This exhibit shows that basically for all of the studio's megahits, the majority of revenues are from foreign sources, with the biggest hit of all-Endgame-grossing more than 70 percent of total revenues overseas.

EXHIBIT MC10.2 Marvel Cinematic Films: Percentage of U.S. Sales vs. Non-U.S. Sales

Source: Author's depiction of data from Box Office Mojo (https://boxofficemojo.com), 2008-2019.

"We Need Movies That Break Out Internationally"

Given the increasing importance of non-U.S. box-office sales, Hollywood studios are changing their business models. Rob Moore, vice chairman of Paramount Pictures, explains: "We need to make movies that have the ability to break out internationally. That's the only way to make the economic puzzle of film production work today."¹ For instance, in 2014, only one film grossed more than $300 million in the U.S. market (Guardians of the Galaxy). Thanks to international releases, how­ever, 2014 ended up being one of the most profitable years for Hollywood. This led movie studios to modify their release tactics. For example, some opted to re­lease installments from their most popular movie fran­chises to their foreign markets first and then to the U.S. market. Disney followed this strategy with its ini­tial release of Monsters University (2013), the prequel to Monsters, Inc. (2001). Avengers: Age of Ultron (2015) set the record for the biggest overseas opening, surpass­ing a record set weeks earlier by Furious 7 (2015), from The Fast and the Furious series. This record was later surpassed by the foreign premiere of the eighth installment of the series, The Fate of the Furious (2017), which brought in $44.3 million during its opening weekend-a whopping 80 percent of which came from foreign box-office sales.

Although Hollywood has long been editing films to satisfy government censors, more recently, it has been dropping in unique scenes to cater specifically to the non-U.S. audiences it is targeting. Studios are also adapting their scripts to better appeal to global audi­ences. For example, although the remake of the movie Red Dawn (2012) was a box-office flop, with proceeds of a mere $51 million on a budget of $65 million, producers revised the script to avoid alienating Chinese moviegoers (and to satisfy Chinese censors). Instead of a Chinese army invading the West Coast of the United States, audiences now saw a North Korean army. Moreover, Hollywood has begun casting foreign actors in leading roles. For example, the film G.I. Joe: The Rise of Cobra prominently featured South Korean movie star Byung-hun Lee and South African actor Arnold Vosloo. Lastly, Hollywood has been known to pull the plug on projects that seem too U.S.-centric. For instance, Disney's Wedding Banned, a romantic com­edy about a divorced couple trying to prevent their daughter from getting married, was axed in the advanced production stage despite several marquee stars (Robin Williams, Anna Faris, and Diane Keaton) because of perceptions that it would not succeed out­side the American market.

Hollywood's Global Challenges

The fact that roughly $7 out of $10 of Hollywood's revenues come from international ticket sales is a bit surprising given the challenges Hollywood faces in some international markets. One challenge is poten­tial government interference with content. For example, in China, before a film import gets seen by the public, it must undergo screening by government censors. The Chinese release of the Oscar-award win­ning film Django Unchained was temporarily can­celed due to "technical reasons," which were interpreted to mean excessive violence and sexual content. By the time the film was recut and released, it performed poorly, in part because many Chinese filmgoers had already seen the unedited version of the film on pirated DVDs.

This brings us to another challenge that Hollywood studios face in their effort to go global: piracy. Responses to piracy can vary, as in the case of the European Union (EU), where, for instance, Britain and France impose fines on producers and buyers of pirated content, but Spain does not-in fact, Spain has long been a safe haven for the distribution of illegal movies (and music). Although Spain did pass a law in 2011 to provide better protection of copyrighted mate­rial, nearly 50 percent of the country's internet users admit to illegally downloading copyrighted con­tent (twice the EU average rate), that makes enforce­ment of the law notoriously difficult. Piracy results in lost revenue, which is one reason movie studios are moving toward simultaneous, worldwide release of anticipated blockbusters-the hope is that this tactic will cut down on those revenues losses.

China is also infamous for rampant infringement of copyright, resulting in a flourishing market for bootleg content. A Chinese government report in 2010 found that the market for pirated DVDs was $6 billion. As a comparison, the total box-office revenues in China in the same year were a mere $1.5 billion. One reason is that ticket prices for movies in China are steep and movies are considered luxury entertainment that few can afford. Another reason that black-market sales in China are so high is that legitimate sales often are not allowed. China allows only a few dozen new non-Chinese movies into its theaters each year. Addition­ally, it has strict licensing rules on the sale of home-entertainment goods. As a result, there is often no legitimate product competing with the bootleg offer­ings available via DVD and the internet in China.

With the move from physical media such as DVDs and Blu-ray discs to online streaming, Chinese stream­ing and video-on-demand services are also growing rap­idly. In 2016, PPTV, a Chinese online streaming website, secured the post-theater rights to Warcraft for $24 million, indicating a potentially new source of rev­enues for Hollywood.

China: Now the Largest Movie Market

That the economics of the movie industry have fundamentally changed is further bolstered by the fact that in 2018 China became the second-largest contributor to Hollywood's top line, comprising close to $9 billion in annual revenues. China's overall box office revenues tripled between 2013 and 2018. China is poised to exceed the United States in terms of total box-office sales by 2020, making it the largest movie market globally. China has already exceeded the United States in terms of the number of movie screens in the country. However, growth in movie attendance is not as profitable in China as traditional releases in the United States. Film distributors typically earn 50 to 55 percent of box-office revenues in the United States. The average in many other countries is closer to 40 percent (the rest goes to the cinema owner). But in China, a typical Hollywood film distributor gets only 15 percent of the box-office ticket revenue. Exhibit MC10.3 depicts overall box office revenues for the United States and China.

EXHIBIT MC10.3 Box Office Revenue in the United States and China, 2000-2020

Source: Author's depiction data from IHS Markit (with projections for 2019 and 2020).

Given China's importance as a movie market, it is no wonder that Hollywood executives are willing to do what they can to enter that market, which is difficult, given the Chinese government's stringent screening regulations. Only a select few Hollywood movies actually make it into China's theaters. As of 2018, the number of foreign movie imports allowed per year was 41. During national holidays, the state-backed distributor China Film Group restricts most Chinese theaters to Chinese films, further impacting revenue for Hollywood studios.

To get on that list of 41 film imports, studios will produce multiple versions of the same film. For instance, Disney's Marvel Studios produced two versions of the box-office hit Iron Man 3. One version of the film was produced for general release, and the other version was produced specifically for the Chinese market. This version included bonus footage of scenes shot in Beijing and guest appearances by Chinese movie stars. Producers edited Mission Impossible III and Skyfall for the Chinese market as well, cutting scenes that Chinese censors believed portrayed China in a negative light.

Some critics assert that Hollywood's accommodating of Chinese preferences amounts to pandering. For instance, in The Martian, NASA is depicted as seemingly pleading with its counterpart, the China National Space Administration, to supply a classified booster rocket that would carry payload to Mars and thus allow NASA (which did not have such an advanced rocket at its disposal) to rescue one of its stranded astronauts. Although this pleading scene is included in the name­sake book by Andy Weir, on which the movie is based, critics still saw it as pandering.

The Great Wall (released in China in 2016 and the United States in 2017) marked a new level of U.S.-China collaboration in movie production. The Great Wall marked a distinct change in strategy for Hollywood stud­ios as the movie was co-produced by both Hollywood and Chinese studios. The movie is directed by Zhang Yimou, a well-known Chinese filmmaker who garnered international recognition for choreographing the open­ing and closing ceremonies of the 2008 Beijing Summer Olympic Games. The Great Wall co-stars Matt Damon and Jing Tian. Damon plays a European mercenary who joins forces with a Chinese commander (played by Jing Tian) to fight mysterious invaders at the Great Wall. With a mega-budget of $150 million, The Great Wall is the most ambitious co-production between Hollywood and Chinese film studios to date. It is also the most expensive movie ever shot exclusively in China.

The hope was that The Great Wall as a transnational movie would be a blockbuster in both China and the United States. Although the movie grossed $335 mil­lion, it flopped in the United States where it made only $35 million. But in the Chinese market, it grossed $300 million. While not Avatar or Avengers territory, the movie achieved respectable commercial success, further underscoring the importance of the Chinese market for big-budget movies. In the meantime, Hollywood movie executives continue to highlight the huge market oppor­tunities in China and emphasize that they will soon find the right formula to make movies that are attractive to both American and Chinese audiences alike.

Q1 The increase in Hollywood revenues outside North America reflects which business trend?

• cultural distance
• globalization
• strategic alliance
• local responsiveness
• cost reduction

Q2 What represents a primary goal behind modifying films to appeal to global audiences?

• access to low-cost input factors
• access to larger markets
• new competencies
• geographic distance
• economic distance

Q3 After the U.S. film DjangoUnchained was recut and released in China, it performed poorly, partly because Chinese filmgoers had already seen the unedited film on DVD. What disadvantage of competing globally does this situation reflect?

• economic distance
• liability of foreignness
• high intensity of local competition
• localization
• loss of intellectual property

Q4 Tailoring movies slightly to appeal to different markets, such as editing Iron Man 3 for China, best reflects which kind of international strategy?

• multinational enterprise
• global-standardization
• transnational
• international
• joint venture