MEDIA: Fox, Warner Eye New China Film Tie-Ups

Bottom line: Rupert Murdoch could soon announce a new China film tie-up after meeting with President Xi Jinping, while Warner Bros’ new China production venture could see mixed results due to the market’s challenging nature.

Warner, Murdoch salivate at China film market

Media heavyweights Rupert Murdoch and Warner Bros are both in the headlines, each snooping around the fringes of China’s film market in search of ways to exploit the nation’s booming box office. In the latest sign that Murdoch may be set to re-enter the market after an earlier withdrawal, the aging head of Twenty-First Century Fox (Nasdaq: FOX) was in Beijing late last week where he got a rare private meeting with Chinese President Xi Jinping. That meeting was chronicled in an upbeat report by the People’s Daily, the official newspaper of the Communist Party.

Meantime, Warner Bros was doing its own dance with China’s state establishment, announcing a film-making joint venture with a private equity fund owned by the nation’s second largest traditional media company. That deal saw Warner and China Media Capital (CMC) announce the formation of Flagship Entertainment Group, which will produce films in China for both the domestic box office and also overseas markets.

This sudden burst of headlines between US movie giants and China is no accident, as it comes the same week that President Xi is set to visit Washington for a major summit with US President Barack Obama. In a nod to that fact, both the People’s Daily report and Warner Bros’ announcement both make specific reference to Xi’s trip. Both developments extend a broader recent series of tie-ups between Hollywood and China, as global media companies look enviously at a box office likely to overtake the US to become the world’s largest in the next decade.

Let’s begin with the Murdoch meeting, as that’s the most intriguing of this pair of developments and hints of a major new tie-up in the offing. Murdoch was the earliest big fan of China’s media market, singing its praises more than a decade ago even as others criticized Beijing for its heavy-handed censorship policies.

That same heavy hand ultimately thwarted most of Murdoch’s efforts, and in 2010 he sold a controlling stake in his main China TV operation to the same CMC that is now partnering with Warner Bros. That sale was followed 3 years later by Murdoch’s high-profile divorce from China native Wendi Deng, hinting that Murdoch might be done with China completely. (previous post)

Tip-Toeing Back to China

But lately Murdoch has come tip-toeing back to China, paying visits on CMC and also reportedly planning to build a theme park in the country. (previous post) In the latest move of his slow march back to China, the media mogul met with Xi Jinping late last week in Beijing, in the highly symbolic Great Hall of the People reserved for the highest VIPs. (English article) The actual People’s Daily article on the meeting is short on substance, and mostly cites the 2 men emphasizing the importance of the Sino-US relationship. Murdoch’s roots are in Australia, but he later became a US citizen.

It’s a bit unclear if Murdoch had official business in Beijing during this trip, but I would expect he probably discussed one or more projects that would need central government approval due to their size and the nature of investment in China’s sensitive media sector. One of those projects was probably the theme park, which could cost $1 billion or more. But I would expect that Twenty-First Century Fox could also be working on its own film production tie-up, similar to earlier ones formed by Disney (NYSE: DIS), DreamWorks Animation (NYSE: DWA) and now Warner Bros.

Three-Way Joint Venture

That Warner Bros pairing was also in the headlines over the weekend, and will see the film division of media giant Time Warner (NYSE: TWX) form a joint venture based in Hong Kong, with offices in Beijing and Los Angeles. (company announcement; Chinese article) CMC will hold 51 percent of the venture, with 10 percent of that going to CMC’s Hong Kong partner TVB (HKEx: 511), the leading broadcaster in the former British colony.  Time Warner will hold the remaining 49 percent.

There’s not much more detail, except to say the venture will both produce and acquire films, and could release its first productions as early as next year. It’s clear from the tone of the announcement that CMC, the investment arm of Shanghai Media Group (SMG), hopes to benefit from Warner’s production expertise and also the US company’s huge global film distribution network.

CMC has an impressive list of foreign media partners, including DreamWorks Animation and British media giant WPP (London: WPP), as well as an earlier relationship with Warner itself. I’m not completely convinced that SMG and CMC are the best partners for Warner or any other media company due to their state-run background. But CMC’s strong government connections and the complex nature of China’s media market could be valuable resources, and Warner may not have many other options anyhow.

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