It’s better to stay together—even if not really happy–than to split up
Like two partners locked into a less than ideal marriage, but trying to make it work, Hollywood and China have their ups and downs, but yet stick together out of mutual need. It’s a juggling act, balancing box office revenue share, market access, cultural and political sensitivities, control of piracy and artistic integrity.
The China film market, like many areas of the Chinese economy, is still growing. Hollywood wants to continue to have its share of that growing pie, preferably a larger share than in the past. As outlined in a research report released in Beijing by MPAA Chairman Charles Rivkin, the film and television industry contributed USD 86.3 billion to the Chinese economy in 2016, a 25% increase over two years, supporting a total of 4.1 billion jobs. Having a US organization highlight the economic benefits of the Chinese film industry to the Chinese may seem a bit odd but it is part of the MPAA’s strategy to remind the Chinese government of the economic value of the film industry, both in terms of domestic production and the value created from the exhibition of foreign and co-produced films. Traditionally film-making in China has been regarded as one of the panoply of propaganda tools available to the Party. Politically correct content was all important, while economic and artistic considerations came second. This is still a predominant view in China, although the goal is to make politically correct films that are, at the same time, artistic and commercial successes.
How does this affect Hollywood? Under the current quota system, China allows up to 34 foreign films into the country per year on a revenue-sharing basis (most of which end up being US films), and allocates a 25% share of the revenues to the studios (while handling the distribution and marketing itself). There are also other ways to get films into the country from flat fee sales to co-productions. The overall balance of box office share between imported versus domestic films has always been viewed by the Chinese as a zero sum game—if imported films “win”, domestic films “lose”. Import of foreign films is, to all extent and purposes, a monopoly closely regulated by the Chinese government. If foreign films are too popular with Chinese audiences, then viewership of Chinese films may suffer. The trick then, for the Chinese film authorities, is to allow enough foreign content (properly vetted of course) into the Chinese market to satisfy the demand and curiosity of Chinese audiences, while maintaining tight control over the market. At the same time, they also want to turn a respectable profit (some of which of necessity has to be shared with foreign film studios). In striking the balance, China seeks to ensure that foreign producers are provided sufficient financial incentive to want to have their blockbusters screened in China, while protecting the lion’s share of the revenues for Chinese distributors and exhibitors.
In terms of combatting piracy, there has to be enough available legitimate content to satisfy consumer demand and dampen the quest for pirated material, while still maintaining the overriding political (and economic) imperative–from the Chinese point of view–of maintaining market dominance. Given the built-in restrictions on imported content there will always be a piracy pull fuelled by the unavailability of some product. This then spills over into the marketplace by reinforcing bad habits and keeping a pirate ecosystem going. Despite the state’s stake in promotion of legal content, piracy is still tolerated in China, although this is changing as Chinese rights-holders become more active.
Finding the balance between giving foreign producers enough revenue and enough protection to remain interested in China, while still preserving the ability of the Chinese film authorities to manipulate and control the market, has been a carefully orchestrated dance over many years involving a series of negotiations between China Film and the MPAA. The current quota and revenue-sharing agreement struck in 2012 is due for revision and negotiations have been underway for some time. Needless to say, Hollywood would like to increase its share of revenues and relax the quota. Chairman Rivkin’s reminder of the economic importance of the film industry to China is part of this ongoing process.
If the film industry is important to China’s economy, it is also very important to Hollywood. Forbes reported that US studios grossed over 3.25 billion USD in 2017 in China, about 40% of China’s total box office take. Rivkin announced that in 2017 seven US films earned more in China than in the US. In past years, Hollywood’s revenue share in China typically approached 50% (but was kept below the magical half-way mark through active manipulation by the Chinese authorities, using such devices as delayed releases, blackout periods and premature closings). However Chinese films, often on patriotic themes, are rapidly improving and winning audience share. The Chinese made Wolf Warrior 2 was 2017’s top grossing film, explaining in part the larger Chinese share of revenues. The growth of the Chinese box office took a pause in 2016 but has resumed strong growth. The MPAA estimated China’s total film market at $6.6 billion in its annual report issued in early 2017, and by year end the China Film Bureau was reporting that figure as $7.5 billion.
If all this sounds like it is good news for Hollywood, and by extension the whole ecosystem of Hollywood production from artists and workers on the lots in Burbank to film related work in North America (for Canada that means Vancouver and Toronto) and around the world (UK, Australia), it is. However it is far from smooth sailing as the push and pull of US-China politics plays a role, not to mention the ever-evolving political situation within China, all of which affects the distribution of content.
Even the willingness of the Chinese authorities to enforce laws against copyright infringement and piracy plays a role. As noted above, if China has been typically known as a country where IP enforcement is more honoured in the breach than in the observance, the situation is changing rapidly. China Film Insider ran an article last year titled, “Copyright Protection in China: It’s Real and It’s Spectacular”. The thrust of the report was that things have changed because Chinese companies have become stakeholders by becoming rights-holders whose interests are negatively impacted by piracy. This is true, but it still doesn’t stop the Chinese proclivity to look after their own interests in the Chinese marketplace first and foremost, rather than making the marketplace a more attractive place for all. This was brought home graphically by another article in China Film Insider that reported;
“China’s National Copyright Administration published a brand new list of 23 films, 4 TV shows, and 4 animation and comic works whose copyrights will be strongly enforced. Those entertainment works are to be better protected against copyright infringement with measures to prevent unauthorized reproduction both by platforms and users.”
While that might sound like a positive development, what strikes me is that once again we have an example of selective enforcement. It reminds me of the days back in the early 2000s when CD piracy was rampant in China. Under pressure, local authorities would round up the “usual suspects”, street level dealers in pirated discs, and then stage a media event where a steam roller would crush thousands of discs. Two weeks later, when the campaign was over, it would be “business as usual” for the sellers of pirate product, whose inventories had been miraculously replenished. If copyright is to be really respected in China, there has to be a systemic shift in both awareness and enforcement, not an episodic, time or subject-limited campaign. That said, China is a very big place so the effort has to start somewhere.
While anti-piracy efforts are certainly improving, it remains to be seen if the tilted distribution playing field in China will improve. The Hollywood studios are making money, certainly, but not only are they being shortchanged by unscrupulous theatre operators,–this cheating on box office returns by cinema operators is not limited to US films however, and China film regulators last year punished more than 300 cinemas for box office fraud– but new methods are being employed to ensure that Chinese films dominate the market. China Film is rolling out incentives to encourage cinemas to show more Chinese films; the higher the percentage of box office that comes from showing Chinese films, the higher the payment to cinema operators.
This all leads to the afore-mentioned phenomenon of two partners locked into a difficult relationship, but both realizing that they are better together than apart, with the only answer being to work out the differences and find a way to make it work. For China and for Hollywood, it’s not a marriage made in heaven, but instead of sticking it out for the sake of the children, they will stay together for the sake of the revenues. And who knows, maybe a degree of affection will be the result in the long term.
© Hugh Stephens, 2018. All Rights Reserved.