I believe that many people still remember "the Young you" which was released in the cinema some time ago. It can be said that it has a good reputation and good box office.

The co-producer behind the film is BABA Pictures, which grossed 590 million at the box office four days after its release. BABA Pictures shares rose 7.56 percent on Oct. 28, thanks to the good performance of "you as a Young Man."

The films invested or produced by BABA Pictures in the past two years are indeed remarkable. In fiscal year 2019, six companies took part in films with more than 1 billion yuan at the box office, including wandering the Earth, I am not the God of Medicine, and the richest man in Xihong City.

I. the past and present lives of Ali Pictures

In 2014, BABA Group completed the acquisition of Hong Kong listed company Culture China (1060HK) for 6.2 billion yuan, becoming the controlling shareholder and renaming the company "BABA Pictures" as the integration platform of BABA Group's film and television business.

At that time, the market hyped the concept of BABA, and the market capitalization of BABA Film reached hundreds of billions at its peak.

In 2015, BABA Film raised HK $12.1 billion by issuing new shares to acquire Yueke Software Engineering Co., Ltd., a domestic film ticketing system supplier certified by the special investment office.

In December 2015, the company bought Taobao film and entertainment business from BABA Group at a cost of 3.1 billion yuan, and established an all-industry chain entertainment platform driven by the Internet, which integrates investment and financing, entertainment content production, publicity and distribution, fan operation and cinema service platform.

In 2016, BABA formally renamed its Taobao films to Taobaopiao, expanding its business from films to performances, sports and other pan-entertainment industries, transforming Internet promotion.

In 2018, BABA Pictures launched Lighthouse, a service platform, and merged its IP derivatives business with Aliyu of BABA Group to develop film and television derivatives business.

In March 2019, BABA subscribed for HK $1.25 billion of newly issued shares in Ali Pictures, increasing its shareholding from 49 per cent to 51 per cent. BABA Pictures once again became a merger subsidiary of BABA.

At present, BABA's business includes e-commerce, Aliyun, big entertainment, and innovation. BABA Entertainment includes Youku, UC browser, BABA Pictures, Barley Network, BABA Music and BABA Literature. BABA Pictures is the only listed company.

BABA's revenue from entertainment (digital media entertainment business) in 2019 was 24.1 billion yuan, an increase of 23.1% over the same period last year.

II. Ali Pictures' whole film and television industry chain

From the specific business of BABA Film Industry, it can be divided into three parts: Internet ticketing and publicity distribution, content production, comprehensive development. In the 2016-19 fiscal year, the company's revenue increased from 263 million yuan to 3.03 billion yuan, with an average annual compound growth rate of 125.7% for three years. Internet publicity, content production and comprehensive development accounted for 81.2% / 15.1% / 3.7% of the revenue, respectively.

1. Internet ticketing and publicity

Internet ticketing refers to the process of using the Internet platform to sell and buy entertainment tickets. statistics include movie tickets, performance tickets, sports tickets and tourist attractions tickets.

From the perspective of ticket purchase, the current rate of online ticket purchase has reached 86%, and online ticket purchase has become the main way of ticket purchase. From the point of view of the whole market, after the early price war and the stage of seizing users through ticket subsidy at low prices, a duopoly competition pattern has been formed. In the first quarter of 2019, Cat's Eye occupied 42.6% of the film ticket market share ahead of other platforms, while Amoy ranked second with a market share of 31.5%.

Publicity and distribution refers to the process of shaping the image of the film, while film distribution refers to the sale and rental of films. Both are the businesses of film distribution companies. The main purpose of film publicity is to achieve five purposes: to arouse interest, to take the initiative to pay attention to film information, to generate consumer desire, to enter the market and to spread word of mouth.

BABA Pictures' Internet ticketing services include Taobao tickets and Phoenix Yunzhi.

Taobaopiao covers more than 9500 cinemas across the country, providing a wealth of information about popular and upcoming films, including trailers, high-definition posters and stills, plot introductions, and netizens' comments, as well as live entertainment tickets. Phoenix Yunzhi is a digital operation and management platform for cinemas.

On the other hand, BABA Pictures launched a lighthouse as an one-stop marketing platform for movies in the Internet era. Lighthouse Professional App can provide real-time box office, movie layout, attendance and other information, and can adjust the promotion strategy according to market feedback during the release process.

Since the launch of Lighthouse, it has served 171st film projects, 295 related film companies, 82 access advertising partners, 810000 new media accounts, 650 million user capacity and 75 million users.

2. Content production

Content production business has always been the key target for BABA Film to focus on the Internet.

In November 2018, BABA Pictures released the Golden Orange Co-production Plan, announcing that it would work with a first-class production team to launch a number of high-quality films in the next five years. As for TV series, the company currently has a wealth of TV series projects, and the TV series produced will be purchased by Youku video "capital preservation". On the production side, the company uses technical means to reduce self-control risk and improve management and operation efficiency. In terms of terminal realization, the digital announcement platform helps to realize the realization of value once, and the whole industry chain of IP realizes many times of value realization.

Judging from the results, BABA Film's investment ability is still good.

BABA has jointly produced a number of excellent films with both box office and word of mouth, and the films produced / co-produced have grossed more than 20 billion yuan at the box office. This achievement is obviously beyond the reach of traditional film and television production companies. Among them, six domestic films grossed more than 1 billion yuan at the box office (including service fees), including "wandering the Earth", the box office champion of the 2019 Spring Festival, "I am not the God of Medicine" and "unparalleled" in the 2018 summer and National Day box office. In addition to domestic films, BABA Pictures has also participated in the co-production of popular imported films such as Green Book and Mission impossible 6.

3. Comprehensive development

Comprehensive development mainly includes two products: Arifish and Entertainment Bao. Aliyu is an IP trading platform that connects IP owners and users to promote the realization of IP value. Yulebao is a fan interactive marketing platform on which users can participate in crowdfunding activities such as popular film and television derivatives.

Although BABA Film's revenue from comprehensive development is 111 million yuan, accounting for only 4%, it is the fastest growing business. In fiscal year 2019, revenue from Internet ticketing and publicity and distribution increased by only 13.1% year-on-year, content production revenue decreased by 17.4% year-on-year, and comprehensive development revenue increased by 171%.

This is because the derivatives business is in a stage of rapid development in China. The box office of Chinese films is larger than that of the United States, but the derivatives business is still in its infancy. In 2017, the mainland derivatives market was only $8.9 billion (3.28 per cent of the world); the most mature North American derivatives market was $157.7 billion (58.05 per cent of Prida globally). Thus it can be seen that the development of China's film derivatives market has considerable potential.

Generally speaking, IP derivatives in mature film markets contribute more than 70% of revenue. Take Walt Disney Company's Toy Story 3 as an example. The film brought $1.1 billion to Disney at the box office, but games, books, DVD, copyright and licensing brought Walt Disney Company $8.7 billion.

III. Ali Pictures has a long way to go to make money

At first glance, BABA Pictures is good at everything, with strategy, resources and platform, and its revenue is growing rapidly, but it is a big problem to keep losing money.

In the 2016-19 fiscal year, the company's revenue increased from 263 million yuan to 3.03 billion yuan, with an average annual compound growth rate of 125.7% for three years.

However, for BABA Pictures, which has a market capitalization of nearly HK $35 billion, the shadow of loss has been hanging over it since its inception.

From 2016 to 2017, BABA Pictures made a cumulative net loss of nearly 2 billion yuan due to its focus on the development of Taobao tickets, causing the industry to shout "too much money". However, BABA Pictures does not seem to want to give up. In 2018, the company continued to sell tickets, coupled with exchange rate fluctuations, resulting in a net loss of 1.659 billion yuan. BABA Pictures has a cumulative loss of nearly 4 billion yuan.

The film and television industry is destined to be an industry that burns money and looks at the sky to eat. In the past two years, facing the cold winter of film and television, BABA Film Industry is also having a hard time.

The financial data for the first three months of 2019 released by BABA Pictures at the end of May actually brought some hope to investors-the net loss for the period was reduced from 1.245 billion yuan to 254 million yuan, a year-on-year reduction of 1 billion yuan.

The narrowing of losses is a good sign, mainly because the Internet ticketing and publicity distribution business achieved an operating profit margin of 16% excluding company-level fees and made a profit for the first time since 2015. The business operating profit margins of content production and comprehensive development are-48% and 60% respectively, of which integrated development has made profits at the business level for two consecutive years. Improvements in ticketing and distribution eventually narrowed the net loss rate by 34 percentage points from a year earlier to-10 per cent.

I thought BABA Pictures would continue to improve its profitability from then on, but BABA Pictures issued a profit warning recently and its losses expanded again. According to the announcement, BABA Pictures will record a net loss of between 3.7 yuan and 400 million yuan for the six months ended September 30, 2019, while similar losses for the six months ended September 30, 2018 will be about 126 million yuan, indicating that its losses are being further magnified.

Although BABA Pictures explained that the loss was mainly due to an impairment provision of about 105 million yuan for some early historical equity investment projects and a substantial reduction in exchange gains of about 110 million yuan, it was still difficult for the market to accept such losses.

Why is it difficult to accept such a loss?

Because for the online ticketing platform, if there is still ticket compensation in the same period last year, and the loss is understandable, then the ticket subsidy in the second and third quarters of this year has cooled significantly, but BABA Film's loss has not cooled down.

In fact, most of BABA Pictures' income comes from ticketing and publicity business. At present, the market penetration of China's online ticketing platform has exceeded 86%. For the platform, under the stock competition, how to improve its competitiveness and obtain users and market share is an urgent issue to consider.

In other words, whether Taobao tickets make money has become a key factor, but it is not easy to make money, and there is a strong competition from cat's eyes in front of BABA Film.

According to statistics, the penetration rate of online movie ticketing reached 86% by the end of 2018, while the market share of Maoyan online was close to 60%, ranking first. The high market share ensures Maoyan's advantage in big data's analysis.

The share of cat's eyes rose 9 percentage points to 61% in 2018.

According to Maoyan's financial results for the first half of 2019, driven by a number of drivers, such as the increase in gross profit margin brought about by economies of scale and the expected reduction in ticket replacement, the group's net loss narrowed year by year, and made a profit of 257.4 million yuan for the first time in the first half of 2019.

Online ticketing has entered a duopoly era, profitability has become the most important factor in the capital market, from this point of view, the development of cat's eye has taken the lead.

Conclusion

The ticket subsidy fades, the content is the king, and the layout of the whole industry chain becomes the consistent choice of the platform.

Under the duopoly pattern of the online ticketing market, Maoyan Entertainment is temporarily better in market share and profitability. Perhaps the opportunity facing BABA Film is the realization of IP and the derivatives market, which, combined with BABA's strong business ecology, may bring the next wave of growth.

Taken together, BABA Pictures has a long and difficult way to make money. By contrast, its BABA father, who has a market capitalization of nearly $480 billion, is still sexy enough.