Fast Times At AMC High

Here is a simple fact, Hollywood does not play with it’s own money. It uses hedge funds, foreign tax shelters etc. All all costs will always look to spend someone else’s money to make their own profit. The most famous example is the Lord Of the Rings Trilogy. Before one frame of film was shot the movie was in profit due to the fact that New Line had packaged it as a German tax shelter. Lord Zweite Productions Deutschland, paid $150 million to New Line Cinema for the movie’s copyright, which it simultaneously leased back to a New Line affiliate. It also entered into agreements for New Line to produce and distribute the movie. The German’s got a tax break and New Line got a movie for no charge….actually three

There is a supposed Chinese proverb which says “May You Live In Interesting Times”. Many have referenced it as a Chinese curse but in reality it probably emanates from a speech given by British politician Sir Austin Chamberlain.

“It is not so long ago that a member of the Diplomatic Body in London, who had spent some years of his service in China, told me that there was a Chinese curse which took the form of saying, ‘May you live in interesting times.’ There is no doubt that the curse has fallen on us.”“We move from one crisis to another. We suffer one disturbance and shock after another.”

I am now positive that Sir Austin made it up to make a point; never let facts get in the way of a good story, but the quote certainly be applied to this business of motion picture exhibition. It is indeed moving from one crisis to another, primarily caused by the abandonment of Hollywood.

Hollywood is no longer the business of showmen, the movie moguls are long dead and have been replaced by a gradual parade of ill equipped CPA’snd MBA gra aduates. They judge movies in formulaic fashion and within their world view there is little or no humanity. They do analysis, they check their charts and attempt to predict in actuarial fashion where this business is going.

They are a herd of soulless men who have no love of the business or the art, but are solely motivated in serving their master on Wall Street. These people are not the friend of movie going.

For almost two decades now Chinese officials and academics expressed the importance of exporting their cultural influence. This is known in the diplomatic and economic circles as exerting soft power. Soft power is a concept developed by Joseph Nye of Harvard University to describe the ability to attract and co-opt rather than by coercion (hard power), using force or giving money as a means of persuasion. Soft power is the ability to shape the preferences of others through appeal and attraction. A defining feature of soft power is that it is non-coercive; the currency of soft power is culture, political values, and foreign policies.

Soft power was explicitly referenced in national government policy for the first time at the Seventeenth National Congress of the Chinese Communist Party in 2007. Former Chinese President Hu Jintao said, “The great rejuvenation of the Chinese nation will definitely be accompanied by the thriving of Chinese culture.” This formulation, tying culture to the country’s place on the world’s stage, echoed other core principles from Chinese leadership, such as China’s “peaceful rise” and its vision of a “harmonious society.”

But before they could really exert their cultural influence they had to work towards diminishing another cultural influence, America. What better way to do so than to dilute the message and the tone of the American movie. The studios heads easily seduced by tapping into that new found Chinese wealth became a system of diluting American cultural influence in movie by insist that all title, if they were to get Chinese distribution would now have to have more of a Chinese message. The studios fell into that trap ….hook line and sinker.

Enter AMC.

Dalian Wanda, the $16 billion private Chinese conglomerate that operates in the commercial real estate, culture & entertainment, and retail industries, decided that it wanted to go into the movie business, So it decided to purchase AMC Entertainment and its 5,048 screen North American theater chain for the sum of $2.6 billion. Wanda has indicated that it will also spend an additional $500 million on theater renovations and technology upgrades. Frankly as a business transaction it did no make much business sense. The reason for buying AMC put forward by Wanda’s billionaire chairman Wang Jianlin are many, but it comes down to the statement “We want to be really big.”

The acquisition after being reflected on offers no benefit nor any strategic advantages in a business whose customers’ movie-going choices are all based on local decision making. Wanda paid a peak price for a chain that at best could be called wobbly.

The opportunity costs for Wanda were huge. The 31 billion smacker they spent on AMC could have bought tons of cinemas in India or China. I personally think there is one reason and one reason only that Wanda bought AMC, soft power. Wanda provided a major beachhead in the world’s most important media market. I believe the intent was to greatly enhance Wang Jianlin’s standing with the Communist Party. The party leadership has repeatedly emphasized the critical importance of soft power initiatives, especially in the West, and with AMC . Wanda will now have China’s largest mouthpiece in the U.S. I believe the intent was to position Wanda as leading the charge in spreading Chinese values to the West. It was in the best interest of Wanda Chairman Wang Jailin to insulate himself against political upheaval at home.

Wang Jianlin had undergone some major scrutiny due to his alliance with disgraced politician Bo Xilai. Bo, a former party boss was convicted of embezzlement, bribery and abuse of power and sentenced to life in prison. A lot of Wanda’s business success can be traced back to his dealings with the now disgraced Bo. Becoming a large vehicle for Chinese soft power in the West might get him back in the Communist Party’s good books. So Wang bought AMC, a bunch of other Chinese companies dipped their toe in Hollywood waters, many dropping oodles of cash in the process. It was a good time. Unfortunately it was not to last.

This summer Chinese financial regulators ordered the country’s biggest banks to stop making loans to Wanda to finance foreign entertainment acquisition. It turns out that Beijing’s banking honchos had met with all the executives of China’s state-owned lenders on June 20 and had advised them that six of Wanda’s foreign acquisitions, including the acquisition of Legendary Entertainment for $3.5 billion last year and the buyout of AMC Entertainment, were “subject to government capital restrictions. Other Wanda deals included in the order were U.S. exhibitor Carmike Cinemas, European cinema chain Odeon & UCI Cinemas Group, Nordic Cinema Group and probably not the most wise purchase the UK yacht maker Sunseeker International.

On August 7th, after announcing $178 million dollar loss, AMC lost 27% of it’s value.

By blocking Wanda’s access to money, it would appear to signal that Beijing’s romance with Hollywood might be coming to an end. The damage has been done, American movies have been dumbed down, and the exhibition business awaits as the next shoe to drop with AMC.

By using boat holds of Chinese money, Hollywood might just have finally sold itself down the river.