A new deal reported by Reuters last week sees a Chinese service that would offer American movies on a streaming basis. Run by the Chinese government, The China Movie Channel will bring American movies to a streaming service in the most populous country. The service will essentially create the Netflix of China, and appear in front of the largest population in the world.
With the second largest economy, China could become a huge source of revenue for movie companies in the United States. As less people buy physical DVDs in stores, movies studios need to make sure they get as much revenue in theaters and online through streaming as possible. Services like Netflix (NASDAQ:NFLX) and Redbox (NASDAQ:CSTR) have been a source of upfront payments to studios, but death for the DVD. Previously, China had limited the number of imports into its country, including movies.
Additionally, Jiaflix and China Movie Channel subsidiary, M1905.com, are partnering to form an unnamed Chinese streaming site. The site will show Chinese movies and movies from the United States. The site, which will open in the fourth quarter, has already signed up a partnership with Paramount, owned by Viacom (NYSE:VIA). Open talks are going on with several studios, including MGM.
The current M1905.com site already has 6,000 movies in Chinese. The site, which has been on the web for five years, already has 3 million registered users, and commands 16 million views daily. The company's involvement in the partnership will bring in a pre-installed base of Chinese customers interested in movies. The new streaming service is expected to cost less than $10 per month, and will also offer several new releases at pre-set prices. The new releases could especially be valuable for the American companies, as piracy runs rampant in China. Vendors sell pirated copies of DVDs for $1 or $2, rather than the $20 retail price they command in the US.
The deal won't move the needle for larger media conglomerates like Viacom or Disney (NYSE:DIS), but could, however, have an impact on a smaller company like Lions Gate Entertainment (NYSE:LGF) or Dreamworks Animation (NASDAQ:DWA). Dreamworks entered into an agreement with Netflix recently, and would welcome a deal to license out its small library of 24 films. Dreamworks currently puts out two to three animated movies a year, which limits its box office revenue. Any streaming revenue and licensing of previous movies to television stations has a huge impact on quarterly and annual earnings.
Perhaps the company that could benefit the most from a deal is Bona Film Group (NASDAQ:BONA). The company, which recently went public in the United States, has a 16.5% market share in the Chinese box office. Bona is also increasing its US presence through a partnership with News Corporation (NASDAQ:NWS). The company has made some of the biggest movies in China, which could become key properties for the new streaming site. Bona also has acquired some of the international rights to movies, which could be a benefit as well.
The Chinese market is huge for American-made movies and is now becoming just as important for Chinese companies, as proved by this new venture. In 2011, six of the top 10 grossing movies for China were American-made. The full list is below and comes from Shanghaiist.com:
1. Transformers: Dark of the Moon $174.4 million
2. Kung Fu Panda 2 $97.8 million
3. Pirates of the Caribbean: On Stranger Tides $75.5 million
4. Flowers of War (NASDAQ:CHINA) $72.9 million
5. Harry Potter and the Deathly Hallows Part 2 $66.4 million
6. Beginning of the Great Revival $65.3 million
7. Flying Swords of Dragon Gate (China-Bona) $64.7 million
8. Love is Not Blind $55.8 million
9. The Smurfs $41.7 million
10. Fast Five $41.7 million
Movie theater operator AMC was also recently purchased by a Chinese movie theater operator. The deal shows that China is expanding its presence in the American cinematic experience and making sure Chinese people back home can experience American movies as well.
Disclosure: I am long LGF.