The breathlessly awaited Mar-a-Lago, Florida summit between Chinese President Xi Jinping and Donald Trump turned out to be much less dramatic than many expected. It was more about establishing a tone and a personal relationship than dealing with the many problems that the two countries face. These range from threatened US tariffs to offset Chinese trade surpluses, to Chinese bases in the South China Sea, to North Korean missile tests to human rights concerns, and so on. The timing of the US missile strike against Syria, coming as it did in the middle of Xi’s visit, also took away some of the media attention the visit would otherwise have had. The meeting was portrayed as almost a “love-in” between Trump and Xi although serious issues remain on the agenda. President Trump accepted Xi’s invitation to visit China later this year so there will be plenty of opportunity to discuss troublesome issues later.
Given the range of economic and political challenges the two countries face, you would be right to wonder whether copyright issues and copyright industries are of any real significance in the grand scheme of US-China relations—but they are. Did Presidents Xi and Trump discuss copyright issues? Not that we know of, any more than they appear to have come to grips with many of the other issues on the bilateral political or trade menu. However, although there is plenty to talk about including concerns about Chinese “islands” popping up in maritime sea lanes, Chinese cyber-snooping on US defence industries, China’s dumping of steel on global markets, allegations of currency manipulation—all very serious challenges— there are still longstanding copyright-related issues that are part of the bilateral mix, and sooner or later they will be on the China-US agenda.
The need for action by the Trump Administration to address some of the many trade issues between the US and China was underlined by this year’s National Trade Estimates (NTE). The NTE is an annual report prepared by the US Trade Representative’s Office (USTR) for the President and for Congress, outlining barriers to US exports across a range of countries. This year’s report covers more than 60 countries and targets a range of measures maintained by countries under review. The section on China is long and detailed but among the issues discussed there are specific sections dealing with online piracy and theatrical films.
The online piracy section states that;
“Online piracy continues on a large scale in China, affecting a wide range of industries, including those involved in distributing legitimate music, motion pictures, books and journals, software and video games. While increased enforcement activities have helped stem the flow of online sales of some pirated offerings, much more sustained action and attention is needed to make a more meaningful difference for content creators and rights holders, particularly small and medium-sized enterprises.
At the same time, the United States has urged China to consider ways to create a broader policy environment that helps foster the growth of healthy markets for licensed and legitimate content. The United States also has urged China to revise existing rules that have proven to be counterproductive. For example, new rules on the review of foreign television content present a serious concern for the continued viability of licensed streaming of foreign television content via online platforms, as these rules are disrupting legitimate commerce while inadvertently creating conditions that allow for pirated content to displace legitimate content online. Similarly, quotas on foreign video content available on online platforms (limited, per platform, to 30 percent of the previous year’s expenditure on content) limit distribution options and drive consumers to illegitimate sites to access popular content.”
With regard to theatrical films, the report starts by providing some history of the issue (for more, see my blog on this topic last July), and goes on to outline where China has not been living up to commitments that it made as a result of losing a WTO case over market access for films several years ago.
“In February 2012, the United States and China reached an alternative solution with regard to certain rulings relating to the importation and distribution of theatrical films in a WTO case that the United States had won. The two sides signed a memorandum of understanding (MOU) providing for substantial increases in the number of foreign films imported and distributed in China each year, along with substantial additional revenue for foreign film producers. Significantly more U.S. films have been imported and distributed in China since the signing of the MOU, and the revenue received by U.S. film producers has increased significantly. However, China has not yet fully implemented its MOU commitments, including with regard to critical commitments to open up film distribution opportunities for imported films.
As a result, the United States has been pressing China for full implementation of the MOU, particularly with regard to films that are distributed in China on a flat-fee basis rather than a revenue-sharing basis. At the June 2015 S&ED (Strategic and Economic Dialogue) meeting, China committed to ensure that any Chinese enterprise licensed to distribute films in China can distribute imported flat-fee films on their own and without having to contract with or otherwise partner with China Film Group or any other state-owned enterprise. China further committed that the State Administration of Press, Publication, Radio, Film and Television (SAPPRFT), China Film Group or any other state-owned enterprise would not directly or indirectly influence the negotiation, terms, amount of compensation or execution of any distribution contract between a licensed Chinese distributor and a U.S. flat-fee film producer. In 2017, under the terms of the MOU, the two sides are scheduled to hold discussions regarding the provision of further meaningful compensation to the United States.”
Let’s try to unpack all this verbiage and figure out what is really going on in content markets in China. China tilts the playing field in its favour—severely. Some of this is done for ideological reasons, to be able to control the amount of “western” content; some of it is done for commercial advantage. Never discount the role of politics in China. Korean drama, one of the most popular genres in China, and Korean K-pop stars, have been blocked because the Chinese government is angry with the government of South Korea over that government’s agreement to the installation of US THAAD missiles, an action taken in response to provocations from North Korea. If that seems like tortured logic, it is– but that is how China operates. China likes linkage—you do something I don’t like over here; I will retaliate over there. So how will the copyright irritants in US-China relations affect the overall bilateral relationship, and vice versa?
Combatting online piracy is a big challenge in China. Not only is it a very big country, making enforcement difficult, but the existence of various controls on foreign content designed to make it more difficult to license foreign content to Chinese streaming sites ends up providing added incentive for the distribution of pirated western content. The distribution of foreign films in China is an even more complicated issue.
Essentially China controls the release of foreign films by exercising a gateway function, deciding which imported films Chinese audiences will be allowed to see, (with an annual cap on the number of revenue-sharing films imported from all sources, currently 34). After a film has been approved for import, China further manipulates the probability of success by controlling distribution, determining the number of screens a film will be allocated, the amount of promotional budget, the release dates and length of time it will be in theatres.
In theory, more films than the quota of 34 can be imported into China on a “flat-fee” basis (a Hollywood studio, for example, would negotiate the distribution of a film in China with a Chinese distributor on the basis of an agreed payment, regardless of how much or how little money the film actually earned in China). This is in contrast to the films under quota which are distributed on a revenue-sharing basis with the content owners retaining on average 25% of the revenues (and having no distribution costs), although this share is under negotiation. The problem with the flat-fee business is that the government owned China Film Group (CFG), which is not supposed to interfere with the operations of private Chinese distributors, constantly interferes. Thus it is difficult to license a film in China without getting CFG on board. The situation is made even worse by the cheating that goes on whereby Chinese cinema operators routinely under-report their revenues, thus depriving both CFG and foreign film producers of their rightful revenues. Chinese officials are cracking down and over 300 cinemas have been fined for box office fraud as a result of enforcement of a new, more stringent film law.
One might think that this is a lot of trouble for US film producers to go to, but clearly the potential rewards must be worth the pain. China is building new screens (27 a day in 2016, soon to surpass the total number of screens in the US) at a breakneck pace. According to Forbes, China continues to be a highly significant player in global box office totals, accounting for $983 million of the $2.02 billion in receipts from the top 7 films so far in 2017, or 48.6% of global receipts (as of March). This is despite the fact that the rapid growth of the box office over the past five years is slowing, as is much in China in terms of growth. The role of China is actually more important than the 48.6% number would suggest since of the top 7 films, one (Shades of Darker) was not released in China. If this film is subtracted from the total, China’s box office comprises 58% of the $1.69 billion global total in 2017 for the top six grossing films (as of March).
If that all sounds pretty good, the real issue is how big a slice of this pie is the US industry getting, and how important overall is China box office revenue to the studios? The excellent blog China Film Insider (if you want to know what is happening in the film scene in China, this is the blog to read) reports that net box office revenue from China is still a “drop in the bucket” for the studios overall compared to revenues from North America and international markets ex China. Based on data from Box Office Mojo, the blog reports that “China accounted for $500 million or just 7.7 percent of the $6.5 billion worldwide net revenue” from the thirty-two films that Hollywood got into China last year on a revenue-sharing basis. With just under eight percent of global revenues coming from China, there is still plenty of upside for Hollywood, even factoring in the slowing growth of the Chinese box office.
However, there is also downside. Prior to the recent Xi-Trump love-in, China Film Insider ran a piece titled “Why Hollywood should be worried about the US-China Summit”. The thesis was that if China-US relations go south and a trade war develops, China could retaliate and the targets would be US industries that are hoping to retain or gain market share in China (such as aerospace, soybeans, and Hollywood movies). US films could end up being collateral damage, as happened to the Korean K-pop stars. Nonetheless, while there is lots of bilateral kindling lying around, a conflagration is by no means a foregone conclusion. If self-interest and common sense is allowed to prevail on both sides, the problems could all be managed. Maybe as part of the package to resolve the trade disparity issue, China will agree to ease some of the restrictions that are holding back greater revenue generation for US films. Better copyright protection and greater access for US films would be an area that China could move on with minimal difficulty, unlike some of the other bilateral issues on the agenda.
The film industry is a major stakeholder in the future of US-China relations. It could be a big winner or could end up bearing the brunt of Chinese retaliation. Copyright related issues are not going to be the crux on which China-US relations turn, but the direction of relations overall will definitely affect outcomes for US copyright-based industries, including the film industry.
For many reasons, the US and Chinese governments need to figure out how to work cooperatively with each other. The US copyright industries are a relatively small part of that equation but if the two countries get it right, there could be long-term benefits for US films and for Hollywood.
© Hugh Stephens 2017. All Rights Reserved.