There may be less than meets the eye, and certainly less than the hype, to the trade concessions the U.S. has won for Hollywood from Beijing. The deal raises to 34 from 20 the number of non-Chinese films than can be distributed in China each year, by the device of adding 14 3-D or IMAX films to the base quota. As China has only 2,500 3-D movie screens and 48 IMAX theaters the significant concession is that those 14 will also be allowed in in their 2-D formats, which will be able to be seen on China’s 10,500 conventional cinema screens. The U.S. has 40,000 screens. The U.S. also releases 8,000-9,000 new films a year.
Most of the 20 foreign films a year that have been allowed into China for the past 20 years are American. The three top grossing foreign films in China last year were Transformers 3, Kung Fu Panda 2 and Pirates of the Caribbean: On Stranger Tides. They took $170 million, $98 million and $76 million at the box office respectively. Even more pleasing for Hollywood, under the new deal, its cut on box-office takings will rise to 25% from 13%. Hollywood typically expects a 30% fee on foreign distribution, but with 13% and all the other restrictions having been the rule for China for two decades, this feels like the “very big deal” it is being proclaimed to be in Hollywood, at least for the blessed 34 films.
The American movie industry has long complained about its treatment in the world’s fastest growing movie market. The WTO ruled in 2009 that China’s limits on movie distribution fees was a violation of international trade rules. Beijing has not rushed to come into compliance, and promoting China’s own cultural heritage has become a national priority. Yet even as China tightened restrictions on foreign TV imports, Xi Jinping’s visit to the U.S. allowed the logjam in negotiations over movies to be broken. It was something that China would have have to have done at some point anyway, and is far less expensive than settling the outstanding issues with the U.S. over intellectual property. It would be a brave man, though, to this Bystander’s mind, who would bet that the showing of 14 more Hollywood movies in China each year will dampen the demand for pirated DVDs, a main prop of Hollywood’s argument for increasing the distribution fees.
China is expected to double the number of movie screens it has to 16,000 by 2015. The ones it had took in $2.1 billion at the box office last year. The key question is how much of that will the U.S. movie industry actually get its hands on. Hollywood distributors may soon understand why the old saw, there’s many a slip twixt cup and lip, applies so readily to doing business as a foreign firm in China. We’ve heard of one distributor who gets the house photographed each screening to settle arguments of how many tickets have actually been bought. The right for foreign film distributors to audit box-office sales might turn out to be the most important provisions of the new agreement.
The position is even worse for foreign co-producers operating in China. Some 40 independently produced foreign movies are distributed in China each year outside of the quota system. These independent films don’t get a cut of the box office, but a licence fee based on the film’s budget. It is about a third of the standard international fee. Under the new rules, filmmakers and distributors will be able to negotiate license fees closer to international norms. But the fee is just the beginning of what seems regularly to turn into a nightmare. The China Law Blog has had a series of excellent posts on this subject last year that don’t make pretty reading if you are a would-be film producer.
Why is it so hard for foreign co-producers to get paid? There are three main reasons:
1. There are no trusted intermediaries for film in China. Collection agents, escrow account holders, trustees and the like simply do not exist here in China. The foundations of international film finance are not in place. In itself, that makes you wonder how completion guarantors can underwrite Sino-foreign co-productions.
2. You need to rely on your Chinese co-producer to collect the box office and pay your share to you outside of China. Good luck with that.
3. Even if you are lucky and your Chinese co-producer has some vague intention of paying you, they cannot pay you unless they can show the Chinese tax authorities that income tax has been paid on the gross receipts and that the withholding tax on their payment to you will be deducted. Even then, they will still need State Administration of Foreign Exchange (SAFE) approval before being able to send money overseas. The vast majority of Chinese businesses will not want to do business this way.
We hope that DreamWorks Animation, which has just signed a $300 million joint venture to make movies in China, is a reader.