China and the Content Industry: Friend or Foe? (Part Two)

Chinesefilmaudience
Source: ibtimes.com

In my blog last week, I talked about the growing role of China as an essential revenue generator for foreign content producers. The most recent projections indicate that China will become the world’s largest film market by revenue as early as next year. This offers great opportunity for foreign content producers, notably the Hollywood studios, but throws into relief the range of market access restrictions imposed by China, despite its membership in the World Trade Organization (WTO). Foreign content producers, particularly in the area of films, would dearly love to remove or at least whittle away at these barriers. There will be an opportunity to do so in 2017 when a US-China agreement on films comes up for renewal.

China in the WTO: Market Access Restrictions

When China entered the WTO in 2001, it maintained a reservation on imported films, initially imposing a limit of just 10 (subsequently revised to 20) foreign films that could be imported annually into China and distributed on a revenue-sharing basis. More problematic for Hollywood and others is the distribution network in China, which is controlled by a government entity, the China Film Group. China Film ultimately decides not only what films get shown, but where, for how long and how much will be spent on advertising. While one of China Film’s mandates is to turn a profit, which it does on those Hollywood blockbusters that it allows to be shown in China, it has other considerations in mind as well– dictated by political considerations. These include ensuring that Chinese audiences get a steady diet of Chinese films and that any foreign films that are distributed meet “Chinese tastes” (and political considerations). For years after China’s entry into the WTO there was discussion about whether China’s film distribution restrictions were WTO-consistent and whether Beijing was meeting its WTO commitments in terms of copyright enforcement and market access for books, sound recordings and films. Finally, in April 2007, the US Government launched two WTO cases against China, the first dealing with failure to adequately enforce copyright laws to protect US intellectual property in China and the second dealing with trading rights and distribution services. China lost both cases although not on all counts.

In the copyright enforcement case (discussed in last week’s blog), China ultimately took the necessary measures to address the limited findings of the WTO panel. The outcome of the trading rights and distribution case however was quite different. The panel found that China discriminated against both foreign reading materials and film and audiovisual products in terms of distribution within China in a manner that was inconsistent with the obligations it had accepted when it joined the WTO. While China eventually addressed the book and printed materials restrictions, it was unwilling to open up film distribution. However, it was willing to cut a deal with the US industry. This deal is directly relevant to China’s potential emergence as the world’s largest film market and its role as a critical source of revenue for US studios, notwithstanding the distribution barriers that China Film puts in the way of maximizing revenue.

US-China Film Agreement

Given that it was unwilling to open up film distribution, under WTO rules China basically had two choices. It could stonewall and let the US impose retaliatory measures which would have penalized Chinese exports to the United States, or it could try to work out an arrangement that would be satisfactory to the complainant, the US government. Since the US government was effectively acting on behalf of the film industry, if Hollywood reached an accommodation with China, and if the US government accepted this agreement, the WTO would consider the case resolved. That is exactly what happened. A five year agreement was struck in February 2012 between China and the US that increased the quota of foreign films allowed into China on a revenue-sharing basis (from 20 to 34) and also upped the percentage of the box office revenues that China Film would share with the producing studio from 13 to 25 percent. It was a win-win conclusion. Hollywood increased its revenues; China got to maintain control of distribution.

But that was then, and this is now. With the agreement coming up for renewal next year, there is concern among US industry players that not only is rampant piracy undermining the legitimate market for audiovisual (and music products) in China, but the existing distribution restrictions are not moving in the direction of greater openness. In this year’s Section 301 submission to USTR, IIPA laid out its wish list for improvements in the 2017 agreement (that technically will be negotiated between the US and Chinese governments) as follows;

  • further relax the quota for revenue sharing films so filmmakers and audiovisual companies may enjoy the rapidly growing marketplace for films in China;
  • increase U.S. producers’ share of revenues from the current 25%;
  • allow U.S. producers more control over release dates to address the problem of the Chinese locking out U.S. films from the prime release dates and to end the practice of “double booking” theatrical releases; and
  • ensure U.S. producers have access to ticketing system information to ensure proper reporting of revenues.

What Happens Next?

Will all this happen? It is hard to say at this point. The stakes are high as the Chinese film market continues its astounding growth. Foreign content producers, notably the Hollywood studios, have been happy to see the growth of their fixed portion of a rapidly growing pie, but understandably would like that share to increase further by growing the number of imported films and increasing the revenue split. This also has a bearing on piracy. While China can control distribution tightly, it has been far less successful in controlling copyright piracy. Thus the more it restricts the ability of Chinese consumers to have legitimate access to foreign content, the more it indirectly encourages the growth of piracy and illicit access, resulting in loss of potential revenues for China Film. This provides an economic incentive for China to loosen the restrictions on distribution somewhat–but in China economics is often the handmaiden of politics. Recent tightening of restrictions on foreign content and a political campaign to combat “hostile western forces” that are trying to “westernize and divide China”, (according to a recent editorial in the Peoples’ Daily), are not auspicious omens for a relaxation of content controls any time soon.

While foreign content producers would like to see China become more like a “normal” distribution market, they will also not want to kill the golden goose—namely, their share of the ever-increasing Chinese box office. Moreover, China is unlikely to blink when it comes to retaining final control of domestic distribution. Yet there is too much at stake for the two sides not to find common ground, and a new 2017 distribution agreement is likely both to retain ultimate Chinese control over content distribution and further increase the revenue share for offshore content producers. Just how much each side will concede or gain remains to be seen.

China has carved out its own unique distribution model that is hardly friendly to foreign content producers, but at the same time its box office and related revenues are just too big to ignore. Thus China is the classic “frenemy” of the foreign content industries; both a nemesis and a potential saviour. “Sometimes friend; sometimes foe”. And that is unlikely to change in the foreseeable future. We had better get used to it.

© Hugh Stephens, 2016; All Rights Reserved.

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