This year’s Beijing International Film Festival was a star-studded event. In addition to the usual A-list celebrities from the local movie industry, Titanic director James Cameron also made an appearance. Jeremy Renner, currently starring in Avengers, also walked the red carpet. So perhaps it was appropriate that the overarching theme of the evening was how to get Hollywood and China working better together.
As it turns out, that might become a lot more complicated than envisaged, as news emerged from Reuters last week that the Securities and Exchange Commission in the US is investigating whether some of Hollywood’s biggest movie studios have been making illegal payments to officials in China.
Another corruption scandal?
This is the first time that Hollywood has been targeted with the Foreign Corrupt Practices Act. In the last year the SEC has stepped up efforts to go after violators of the legislation, which forbids American companies from making illegal payments to facilitate business overseas. Many of these cases involve China. Just last week a former managing director of a US bank pleaded guilty to paying bribes to a Chinese official.
So far the US studios, including 20th Century Fox, the Walt Disney Company and DreamWorks Animation, have remained tight-lipped about the details of the the investigation. But the SEC seems to be probing studio dealings with the China Film Group, says the LA Times. That is the body that controls film distribution, and is why the media is speculating that the SEC is investigating whether certain movies made it onto Chinese screens because bribes were paid.
Let’s backtrack a little…
Frankly, it’s not hard to see why Hollywood studios might be tempted to break the rules (if dirty dealings did indeed take place).
China’s film market, virtually non-existent less than a generation ago, is now an undeniable force. Last year its box office take rose by more than 30%, to over $2 billion and it is slated to surpass Japan as the second largest market this year (it was ahead on the basis of first quarter numbers).
China now has more than 11,000 screens and is adding them at the astonishing pace of three per day. Despite all the grumbling about DVD piracy and illicit internet downloads, the numbers suggest ever greater numbers of moviegoers willing to fork out for a night at the cinema.
Yet Beijing has largely kept Hollywood at bay in terms of movie titles. Until recently only 20 foreign films could be screened at Chinese cinemas each year. In February, Beijing finally yielded to pressure (a case was lodged with the WTO) and raised the number to 34 (although the additional films need to use either IMAX or 3D technologies).
Beijing’s film regulators have also agreed to let foreign studios keep about 25% of their box office revenues. Currently they get about 15%, a lot less than they retain from sales in North America.
All of that means that each slot in the 34-film quota is worth a great deal of money, given that major Hollywood releases routinely hit the $50 million mark in Chinese ticket sales. Of course, as the market grows, foreign blockbusters will be making much more.
Hence Robert Cain, author of the blog chinafilmbiz, reckons that any bribes would most likely involve kickbacks to Chinese officials in exchange for import quota slots.
Industry observers say this is hardly surprising: “China has a quota for foreign film imports, so securing one of those slots is a very big deal… Combine that with all the investment deals the foreign studios have been doing lately with China Film Group and other local entertainment behemoths, and you can see how this could lead to some dodgy practices,” says Stan Abrams of China Law Blog.
But the quota is only part of the problem…
To be accepted, films must first get the green light from censors, which means that the leading studios are often faced with a dilemma on cutting content that might offend the Chinese authorities. That can apply to international releases, as well to imports to China itself. In the late 1990s Walt Disney Studios, Sony Pictures and MGM all faced temporary halts in their dealings in China after releasing Kundun, Seven Years in Tibet and Red Corner respectively.
Learning its lesson, MGM has digitally altered the invading army in its yet-to-be-released remake of the 1984 Cold War film Red Dawn. The script originally cast the Chinese as the film’s bad guys but commercial logic then kicked in. The aggressors – who invade America – suddenly hailed instead from North Korea, where ticket and merchandising options will be limited to a home viewing for Kim Jong-un.
Just as well: apparently even distributors were nervous about an association with Red Dawn, if China was cast as villain-in-chief.
Still, getting past the censors is the first of many problems that foreign studios encounter in China. Others have seen their films yanked in favour of domestic ones, or look on helplessly as they are granted fewer screens than domestic competitors. This happened to Avatar in 2010 when it had to make way for Confucius. In part that’s because Beijing wants to promote material that matches its own ideological mood. But critics also say it also has a commercial agenda to protect China’s domestic film industry, which often struggles to attract audiences. The two goals are potentially contradictory: five of the 10 top-grossing films in China in 2011 were US imports.
So, Chinese partners to the rescue?
To bypass the quota restrictions and better negotiate the regulatory hurdles, many Hollywood studios are seeking out a Chinese partner. Co-productions can also expect to keep a higher share of China ticket sales: as much as 45%, it has been reported.
Hence WiC’s report last week that Disney has partnered with DMG Entertainment in Beijing to produce Iron Man 3. DreamWorks Animation, the company behind the Shrek and Kung Fu Panda franchises, also announced that it was joint-venturing with two state-owned Chinese media groups in February. And director James Cameron has mentioned that he’s looking for co-production opportunities in China to develop the sequels to Avatar. Cameron said too that he would need to be satisfied in advance that his scripts would meet the approval of censors.
But some are looking for opportunities elsewhere…
Of course, these deals come with a price, as the Chinese partner claims its own share of the box office take. And elsewhere, not everyone thinks that China is worth the hassle. Peter Chernin, chief executive of the Chernin Group, a company that helped produce Rise of the Planet of the Apes for Fox, told the New York Times that he was more inclined to deploy his own capital in India or Indonesia.
The chase for media investments in China had become “overheated” warned Chernin, and heavy regulation has made China less attractive than other Asian markets.
Similarly, Ashok Amritraj, chief executive of Hyde Park Entertainment, said that his own firm was close to launching local production deals in India, South Korea and Japan but that he “could not figure how to do this in China yet”.
Entertainment lawyer Schuyler Moore told Bloomberg BusinessWeek that he has also warned his clients not to be overly optimistic in dealing with Beijing, and that China’s new openness is aimed at boosting its own cultural industries.
“In the long term, it’s no different than China trying to make aircraft and cars and everything else. Their goal is to have the expertise so they can displace Hollywood,” forecasts Moore.
The ultimate goal for such a strategy? Perhaps to learn how to make blockbuster action flicks like Transformers: Dark of Moon. Michael Bay’s film didn’t make the Oscar shortlists but it topped China’s box office last year (earning about $174 million). Forget films about the ancient philosophers or the glorious revolutionary struggle – Chinese movie audiences are more captivated by the sight of robots smashing each other up in 3D…
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.