China Film: Paramount Wins, Bona Bombs
New headlines from top Hollywood studio Paramount (NYSE: VIAb) and publicly listed China filmmaker Bona Film (Nasdaq: BONA) are showing both the huge potential of the China box office, and also the fickle nature of the broader film industry. In the more typical Hollywood style, Paramount has splashed across the headlines with word that it will join with 2 Chinese partners to co-produce the next installment of its blockbuster “Transformers” franchise. Meantime, Bona was decidedly lower key in announcing its latest quarterly results, highlighted by a slide into the red due to lack of hit movies.Let’s begin with the Paramount news, as that’s certainly the most exciting for China’s fast-growing box office that is now second in the world after only the US. Paramount said it will produce the fourth move in its popular “Transformers” series in partnership with the state-owned China Movie Channel and its online movie services partner Jiaflix, which hopes to become the Netflix of China with a service to be launched later this year. (English article)
Paramount said the new “Transformers” film will be shot in China, and will be released in the summer of 2014. No financial terms were disclosed for the tie-up. But the previous installment of the franchise, the 3D, special effects-laden “Transformers 3: Dark of the Moon” reportedly had a budget of more than $300 million, with some media reporting the amount may have even exceed $400 million. I would expect this next movie to have a similar budget, meaning that China Movie Channel and Jiaflix may have to fork over big bucks to be part of the project.
Chinese firms do seem somewhat star struck these days, and don’t mind paying big money for ventures that might seem quite risky to more mature western investors. We saw one example of such investment last year, when Beijing-based Galloping Horse Film purchased the bankrupt Los Angeles-based Digital Domain, even though I suspect the Chinese company has little or no experience running such a major digital effects studio. (previous post)
In this case, I would expect this newest “Transformers” film should be at least relatively successful, since the previous titles in the series have all done quite well at the box office. “Transformers 3” was one of the biggest hits at the China box office in 2011, generating $165 million in the country alone, or about 15 percent of its worldwide total. China’s box office was the world’s second largest last year, growing 36 percent to $2.7 billion.
While things look exciting for Paramount and its new China partners, the outlook was a bit more glum for Bona. The Chinese filmmaker made headlines last year when it sold 20 percent of itself to Rupert Murdoch’s News Corp (Nasdaq: NWS). (previous post) Bona’s Nasdaq-listed shares spiked after that deal was announced in May, but are now down nearly 40 percent from that brief high as the company quickly discovers just how volatile the movie business can be.
Bona’s share skid included a 4 percent drop on the latest trading day in New York, when it announced it fell into the red in last year’s fourth quarter with a $4.2 million loss from a $6.2 million profit a year earlier. (earnings announcement) The numbers in the report were quite ugly all around, with Bona saying that revenues were flat for the quarter, and margins tumbled by about half. At the same time, the company’s cash reserves looked decidedly low at just $28 million.
A lack of major hit films during the quarter looked largely to blame for the big decline in Bona’s fortunes. The company said it is working to diversify its revenues by opening theaters and making TV shows, which are both more stable businesses. Still, we can probably expect more volatility in Bona’s stock for the next year or so until the company finds a steadier, more reliable formula for success.
Bottom line: Paramount’s decision to make its next “Transformers” film in China and Bona’s quarterly loss highlight the draws and drawbacks of China’s fickle film market.
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