Gregory Bergman

Editor-in-chief, CapitalWatch

The above is just a working title. I was also thinking “Red Fawn: How Hollywood Sold Its Soul to China.” Or what about “Big Like Xi”, a pun on my documentary Big Like Me. Or the equally self-serving: “Watch Obamaland Free on Prime as You Buy Amazon Stock.” No, this: “Buy Roku as Hollywood Sells Out to China.”

Two great stocks, (Amazon: AMZN and Roku: ROKU are buys) five not-so-great titles. Yet any one of those titles beats A Boy’s Life, which was the working title for the iconic film now known as E.T.

Speaking of titles: Schindler’s List, The Pianist, Europa Europa—there’s a reason why there are more movies on the Holocaust than there are on the Rwandan genocide. Turns out, Jews are slightly more involved in the film industry than are the Tutsis. It’s okay to say; they built Hollywood, after all. Lamenting over a disproportionate number of Jewish filmmakers is like kvetching over a disproportionate number of African-American jazz musicians. As journalists used to say when there were journalists: “Consider the source.”

All that said, ultimately the consumer, not the creator, theoretically controls the market. Hollywood makes films people want to see. And people apparently want to see good guys donning capes saving the world from bad guys donning capes.

The tastemakers of the world have lost their taste for good art, at least in theaters. With a small movie screen in nearly every American home, the silver screen has been largely reserved for big comic-book spawned inane blockbusters over the last few years.

But you know what is worse than American audiences determining what movies we see? Chinese audiences filtered through an image-obsessed totalitarian government. As the world’s largest movie market as of this year, China has become the world’s tastemaker for film. That means you can kiss that long-awaited sequel to Kundun goodbye. Too bad, Kundun: Part Deux has such a good ring to it.

Regarding the 1997 Scorsese masterpiece, then Disney CEO Michael Eisner later apologized to Beijing. “We made a stupid mistake in releasing Kundun,” he told Premier Zhu Rongji. “…and in the future we should prevent this sort of thing, which insults our friends, from happening.” The Dalai Lama may be a great guy, but Tibetans aren’t exactly flush with cash. Remember all those “Free Tibet” concerts celebrities used to sponsor? I do.

Even post-Eisner, Disney (NYSE: DIS) has stayed true to its word, recently offering up a live-action remake of Mulan, complete with thanks in the closing credits to a bureau of public security in Xinjiang, the province where it is believed that over a million Uighurs toil in camps. Despite, or, rather, because of Disney’s lack of integrity, I am long on Disney’s stock. Between its Disney+, its ownership in Hulu, and its willingness to bow to Beijing, Disney is a buy even as its parks—and its soul—remain barren.

Red Rambo and the Sino-sychophantic Blockbuster

As a child of the 80s, I am no stranger to movies fetishizing American power and so-called exceptionalism. Rambo, Top Gun, Rocky IV—these flag-flaunting-themed movies were a Reaganian wet dream. However, these were popular because they reflected—and to some extent helped create—the zeitgeist of their time.

Reagan may have liked War Games but he didn’t write it. Nor did he sit in consequential judgement as to which movies played in theaters and which not. (Interestingly, after screening War Games at Camp David, a nervous President Reagan brought it up with his national security team, eventually leading to anti-hacking laws and a total revamping of cyber-security at the Defense Department).

Now if we can only get Trump to stop re-watching Idiocracy.

But in China, the zeitgeist doesn’t have the final say on which movies play—the government does. And Hollywood has been bending over backwards to serve their new authoritarian tastemakers. The only “thumbs-up” review that matters now is one that comes from the hand of Secretary Xi.

To wit, Hollywood’s shameful placation of the PRC has long been on full display. Mostly, it comes in the form of forced cuts like the removal of the Japanese and Taiwanese flags on Tom Cruise’s flight jacket in Top Gun: Maverick or an omitted scene shot in Shanghai for Mission Impossible: III because, get this: Images of clothes hanging from clotheslines painted too poor a picture of the city.

Then, there are movies that are more actively pro-PRC like Transformers: Age of Extinction in which director Michael Bay spares no expense to Beijing’s bidding—the American government is the bad guy, the Communist Chinese government is the good guy. A Reaganian wet dream truly transformed into a Reaganian nightmare.

One of the most popular franchises in China, the Transformers movies, have consistently topped the viewing charts on iQiyi (Nasdaq: IQ), a video streaming platform known as the “Netflix of China.” American movies are big hits on the platform, and the company just released its first original film Let Life Be Beautiful.

The stock was in the green this week after releasing another denial of fraud allegations levied at the company courtesy of Wolfpack Research back in April. Citing in-person surveys of more than 1,500 people and Chinese credit reports of iQiyi’s VIEs and WFOEs, the short seller claimed that the Chinese entertainment platform overstated its user numbers and inflated its revenues in SEC filings by as much as 261.7% pre-IPO. Further, in 2019, Wolfpack estimated that iQiyi inflated revenue by 27% to 44%. Are they another Luckin Coffee? Maybe. But like Luckin, iQiyi can be both a liar and long-term winner. The SEC launched a probe into iQiyi and its parent company, Baidu (Nasdaq: BIDU).

Now back to beating up on Beijing and more stock picks.

The Hard and Fast Loss of American Soft Power

The consumer may rule the movie market, but the consumer is also influenced by the options he is presented. Film has the power to influence, not just reflect, the zeitgeist. Movies like the Holocaust titles I mentioned, have altered our view of that tragic event, just as movies and shows like Roots, Dances With Wolves, The Joy Luck Club, Transparent, The Cider House Rules—to name only a few—have influenced people’s views about a number of social issues and historical events. While America may have shipped nonsense like Baywatch across the seas, it also shipped Brokeback Mountain, the Ang Lee-directed masterpiece that was summarily banned in China.

More than military might, the use of American soft power—from foreign aid to film—has been integral to spreading American ideals and influence around the world. Yes, Hollywood has exported jingoistic action-packed garbage to the world, but for every Rambo there’s a Platoon.

Blockbuster films have already suffered a critical creative blow due to a combination of home electronics ingenuity and Hollywood laziness. To be beholden to profits is bad enough, but to also be beholden to Beijing is to add a layer of spinelessness to otherwise silly films. Soft power aside, this is just more incentive to make unchallenging films; films that deprive both American and Chinese audiences alike. Ask yourself: Don’t Chinese audiences deserve their country’s version of All the President’s Men?

Far from hyperbole, it’s actually worse than you think. A report by PEN, a non-profit organization that campaigns on free speech and sponsors the Pinter Prize for literature, claimed that American movie studios even invited Chinese government regulators to film sets as advisors on how to avoid censorship in China, which may explain why craft services now include pangolin.

“Our biggest concern is that Hollywood is increasingly normalizing pre-emptive self-censorship in anticipation of what the Beijing censor is looking for,” said the author of the report¸ James Tager, as cited in a BBC.com piece.

More than willing to speak truth to political power to Washington D.C., Hollywood’s golden PRC-placed handcuffs prevent it from doing likewise to Beijing. China would have no problem playing my politically-minded satirical comedy Obamaland (again, free on Amazon Prime), but would never consider exhibiting a film that pokes fun of China’s political culture. (Unlike Barack Obama, Xi already is President-for-Life, which would negate the humor of the premise).

With movie houses outside of China being all but empty until a vaccine, Amazon (Nasdaq: AMZN) is another buy. And so is Netflix (Nasdaq: NFLX). I am aware that Netflix trades at about 10 times forward sales ad has a price-to-earnings ratio (P/E) ratio of 112, but if you plan to hold for a long time, none of that matters; the stock could be worth double in less than five years. Also, unlike the tech companies covered in the streaming platform’s stunning documentary The Social Dilemma, as a subscription-based platform Netflix is comparatively insulated from any market worries over a break-up, however unlikely, of big tech monopolies.

AVOD Is a Buy

Not the Turkey-trading A.V.O.D. Kurutulmus Gida for all you Robinhood traders who do not read the articles but skim for symbols. I am talking about Advertising-based Video on Demand (AVOD), which is beginning to bite in to the video streaming services market. The longer Covid-19 lasts and until Hollywood gives the Middle Kingdom the middle finger, AVOD market players like Tubi, PlutoTV, Peacock, and, of course, Roku have begun to chip away at the audiences relegated to Subscription Video on Demand (SVOD) services like Netflix and its peers.

While the data don’t suggest Tubi and the like will take over the space, AVOD usage is growing exponentially. To wit, Fox Corp. acquired Tubi back in April when it had around 25 million monthly users. Fast forward to the end of August, it had 10 million more. Around the same time, the streaming Vudu was sold by Walmart (NYSE: WMT) to the privately-held movie-ticketing company, Fandango. Fox Corp. (Nasdaq: FOXA) is a buy for the patient investor, having not fully recovered from its pre-virus lows.

Avoid AT&T (NYSE:T), owner of WarnerMedia (which owns HBO and DirecTV) for now. While its decision to offload DirecTV will clear debt off its books, the loss signals the company has thrown in the towel on content. In 2014, AT&T spent $67.1 billion in total, including absorbing DirecTV's net debt load in the acquisition. It hasn’t panned out, and the company is now looking to sell the DirecTV for around $15 billion to private equity investors, an embarrassing loss in a booming video streaming marketplace. AT&T-owned HBO Max currently has 36 million subscribers, while rival Disney+ boasts 60 million.

The Show Must Go On... in China

Movie theaters are not dead in America; they are resting. Soon enough, the curtains will go up and there will be plenty of caped superheroes fighting for truth, justice, and the Communist Chinese Way. As for movie theater stocks, British-owned Cineworld Group (OTC: CNNWF) is trading so low after suspending U.S. and U.K. operations it might be worth betting a tiny part of your portfolio on. But beware; this cinema stock is one of the most shorted stocks in the market for a reason. Saddled with debt, there is no guarantee this company will make it.

AMC Entertainment Holdings (NYSE: AMC) is a safer bet but is still a mess. AMC is owned, in part, by Chinese multinational Dalian Wanda Group, which also owns Wanda Film Holding Co. Ltd (SSE: 002739), another movie stock I wouldn’t jump on quite yet, despite China’s coronavirus-free movie theaters beginning to boom.

Texas-based Cinemark Holdings (NYSE: CNK), the third-largest movie chain in America is yet another mess. However, trading at under a third of what it was pre-virus, upside here could be bigger than AMC if the movie house survives.

IMAX Is the Movie Stock BUY

Like a Kung Fu Movie, it has been a long journey to get here (props to Quentin Tarantino who refused to cut the Bruce Lee bit in Once Upon a Time in Hollywood despite pressure from Beijing).

While the company has received recent analyst downgrades on furloughs and ugly forecasts, IMAX (NYSE: IMAX) is the kind of company created to thrive in a theater business devoted to spectacle over substance. As good as your flat screen is, it’s no IMAX. Also, the company’s growing presence in China will help. IMAX grossed $53.2 million at the box office in China since theaters began to reopen in late July. Last week, the company collected a record-breaking $13 million during the first two days of the National Day Golden Week holiday in China with the release of Jiang Ziya: Legend of Deification. Earning $11.5 million, it was the biggest weekend box office for an animated film in China.

If you are not yet sold on the movie or the stock consider this: I think the hero Jiang Ziya wears some sort of cape.

And so these are the new tastemakers of the world, are they? I say we fire the Chinese and the Americans, both. I say give the job to the more sophisitcated British, instead. After Brexit and Covid-19, they will need the work.

Gregory Bergman

Editor-in-chief, CapitalWatch

(The opinions expressed in this article do not reflect the position of CapitalWatch or its journalists. The analyst has no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only and does not constitute financial, legal, or investment advice)