China: Friend or Foe of the Content Industry? (Part One)

Chinese Box Office: Global No. 1?

In the 2015 edition of its global media and entertainment outlook for 2016-2020, PwC reported that China’s box office growth will “see it pull ever nearer to the US”. PwC estimated that China’s box office revenue would rise at a 15.5% cumulative annual growth rate (CAGR), moving from US$4.31bn in 2014 to US$8.86bn in 2019 as its cinema-building boom continues and rising disposable incomes make the cinema more affordable. Fast forward to June of this year, and PwC is predicting that China’s box office will replace the US as the world’s largest film market measured by box office revenue as early as next year, reaching revenues of US$10.3 billion in 2017, moving to revenues of $US15.08 billion by 2020.

This significant revision to the estimated numbers for the Chinese market is a reflection of just how fast things are changing in China. PwC’s most recent study estimates that on average 15 new screens a day are opening in China in a market that, by US standards, is still “underscreened”. While approximately 60% of total revenues in China are earned by domestic films, a proportion that is unlikely to change given the increasing quantity and production quality of local films along with the restrictions that China imposes on the import and distribution of international films, 40% of what will be the world’s largest box office is still a very attractive market for Hollywood and other non-Chinese film producers, (even though they receive only a negotiated portion of this 40 percent). It is not all smooth sailing for the film industry however, as new internet based services such as Video on Demand and other “Over the Top” (OTT) services are increasingly competing with the cinema sector for the time and money of Chinese consumers, much as there is similar growth of such competition in North America and Europe. Not only is there competition from new forms of content delivery, but foreign producers are not able to distribute their films directly or freely in China. Instead, they are required to work through Chinese entities, such as the China Film Group. And then there is piracy….

The Challenges for Foreign Film Producers

To quote from the 2016 submission of the International Intellectual Property Alliance (IIPA) to the USTR’s Special 301 process;

“China’s imposing piracy landscape continues to evolve, and its enforcement regime must keep pace with this challenge, which is exacerbated by the substantial impediments to its market that China maintains against U.S. creative industries.”

China didn’t invent content piracy, (unlike gunpowder, paper and, according to some sources, golf), but Chinese ingenuity has been let loose on the content industry with predictable results. An unlicensed content industry flourishes and new forms of piracy appear regularly. It is not just the domestic Chinese market that is tainted by piracy. China is the source of many exported forms of piracy, such as “black boxes” (set-top boxes pre-loaded with pirated content or software enabling access to pirated content) that enable consumers outside China to decode content without paying fees to rights-holders. IIPA’s 2016 Section 301 submission on China notes that,

“online piracy in China is constantly evolving and takes a variety of forms, including illegal download sites, peer-to-peer (P2P) piracy sites, deep linking sites, cyberlockers, BitTorrent indexes or trackers, forums, streaming sites, and auction sites selling pirated goods…”

That pretty much covers the waterfront! The problems of online piracy, along with the “black box” issue, the manufacture and sale of videogame circumvention devices, pay-TV signal theft, unauthorized camcording and online journal and e-book piracy mean that China is in the big leagues not only for box office receipts but also for just about any means of accessing content without paying license fees. The fact that all this is happening in such a large market with no shortage of local “entrepreneurs” is not particularly surprising; what is disturbing is the inability or unwillingness of the Chinese authorities to take effective steps to tackle the problem.

Enforcement Issues

Enforcement has a chequered history in China. Some parts of the country, notably the large cosmopolitan cities, are much more willing to undertake consistent enforcement action than other less mainstream areas. Penalties and application of the law are inconsistent from jurisdiction to jurisdiction and from court to court. Progress is glacial and as action is eventually taken against one perpetrator or form of piracy, new ones spring up. Despite a growth in domestic copyright industries, and thus greater domestic stakeholder interests, legal reforms and clear and consistent enforcement actions are still very much a “work in progress”. This untenable situation regarding weak protection for copyright industries and other forms of intellectual property is compounded by restrictions on foreign content that China still maintains despite its membership in the World Trade Organization (WTO).

Failing to Protect Copyright: Taking China to the WTO

When China negotiated its entry to the WTO in 2001 it undertook to maintain certain standards of intellectual property protection and to provide this protection on a non-discriminatory basis to both foreign and domestic rights-holders. (It also maintained a reservation on imported films, initially allowing only ten foreign films per year to be imported on a revenue-sharing basis, but I will write about these market access restrictions, and how they are significant in the current context of the spectacular growth of the Chinese market, in a future blog).

The problem with seeking to use the WTO as a means of enforcing copyright protection is the high standard of proof required. Complainants must demonstrate that the offending country is not taking “effective action” against infringements, and/or that it is failing to apply “expeditious remedies” that would act as a deterrent. Moreover, a complainant has to prove that the protection provided–or not provided–is discriminatory, (i.e. less for foreign products and services than it is for similar domestic products). Despite these difficulties, the United States brought a WTO case against China in 2007 charging, among other things, that it failed to protect published works and sound recordings that were undergoing pre-publication or pre-distribution review. In other words, until China had approved these works for domestic distribution, they were not given the protection of Chinese law against unauthorized copying. The US also challenged the monetary thresholds that China applied when deciding whether or not to bring criminal action against commercial scale copyright infringement, arguing that the existence of the thresholds meant that China was not taking effective deterrent action.

Mixed Results

As I noted, the WTO dispute mechanism process is a blunt instrument when it comes to protecting copyright, and while the US had the satisfaction of winning part of its case (China’s failure to protect copyrighted works even before receiving publication and distribution approval for the Chinese market), other elements of the case were either dismissed or were inconclusive. Given this outcome, the US has continued to pursue improvements to the protection afforded copyright and other US intellectual property in China through ongoing high level economic dialogue meetings as well as the annual Section 301 review and other bilateral means of persuasion and pressure.

China still remains a huge problem for foreign content producers and rights-holders, but it also represents a huge opportunity given its growing demand for content and rising levels of wealth. Piracy in China is driven by many factors, including weak government enforcement and inadequate legislation, but it is also fed by restrictions on legitimate content imposed by the Chinese government.

In my next blog I will look at how market access restrictions in China restrict opportunities for foreign content producers, and what the future may hold.

© Hugh Stephens, 2016. All Rights Reserved.

Author: hughstephensblog

I am a former Canadian foreign service officer and a retired executive with Time Warner. In both capacities I worked for many years in Asia. I have been writing this copyright blog since 2016, and recently published a book "In Defence of Copyright" to raise awareness of the importance of good copyright protection in Canada and globally. It is written from and for the layman's perspective (not a legal text or scholarly work), illustrated with some of the unusual copyright stories drawn from the blog. Available on Amazon and local book stores. View all posts by hughstephensblog