Can Hollywood Afford to Make Films China Doesn’t Like?

China’s growing influence is reaching Hollywood.  American filmmakers are now factoring in the China market when making movies. This move may have long-term consequences with regard to the content of movies, especially since American films must make it past Chinese government censors to be allowed into Chinese theaters.   From Time:

The global box office plays an ever larger role in Hollywood’s yearly revenues, and China has become a crucial player in that mix. China is now the fifth largest international box office, with earnings that have surged nearly tenfold since 2003. Last year alone, China’s box-office earnings grew by 65%, raking in over $1.5 billion. American studio executives are paying attention: China was the second highest earnings market for Avatar, just behind the U.S., according to Artisan Gateway, a Chinese entertainment-business consultant firm. At CinemaCon in March, Warner Bros. International president Millard Ochs said he believed the country’s box office would overtake the U.S. market within a decade.

Interestingly, China’s audience for international films has grown despite myriad restrictions. China currently only allows 20 foreign titles to be screened domestically each year. While studios can lobby for their films to be included in that quota, there is no magic formula that guarantees distribution. China does not have a film-rating system, and all movies must secure government approval from government censors before being shown commercially. Still, there are some sure bets for a film not to make it past the censors. Controversial films or ones that contain questionable thematic elements, like horror films, are much less likely to make their way to China’s screens, while films containing sensitive sociopolitical subjects like Tibet or Tiananmen Square are strictly taboo.
China’s influence over Hollywood may increase drastically within the next few years. A World Trade Organization ruling recently found that China’s 20-film quota violates international trade laws. China has agreed to lift the limit, and when it does, it has the potential to become an even bigger force than it already is. “How quickly China becomes the number two global market, and eventually number one, is strictly up to the government,” says Ochs. But even when the quota is gone, China’s policy on censorship is not likely to change — a fact that will encourage Hollywood to continue catering to its policies. As China makes its own movie market more open, the space for making films critical of the Asian powerhouse may continue to shrink.
There may be more and more Chinese movie-goers, but pirated DVDs are still rampant in China. DVD piracy in China is estimated to bring in about $6 billion a year in revenues. From AZ Central:

With no outlets akin to Netflix, Blockbuster or iTunes legitimately selling or renting a broad selection of titles, Chinese movie buffs opt for illegal Internet downloads or pirated DVDs. More and more piracy has migrated to the Web in China, though reliable estimates of its magnitude are hard to find. Still, bootleg DVDs – slickly produced and packaged, some with “extras” even better than those found on legitimate discs – remain a huge business and give an indication of the scale of the problem: According to a report in state-run media, the country’s pirate DVD industry raked in $6 billion in 2010. By comparison, China’s box-office receipts totaled $1.5 billion last year.

Authorities say they are taking robust action to thwart copyright infringement of items such as films, music and clothing and claim a crackdown has netted 3,000 people since October. But the fundamental problem, Hollywood studios and many Chinese consumers agree, is that China’s censorship policies and restrictions on home entertainment products make it nearly impossible for consumers here to buy legal copies of American films. The Motion Picture Assn. of America has estimated that nine out of 10 DVDs sold in China are bootlegged, and piracy rates for downloaded films are almost certainly as high or higher.

“We will not make serious inroads on piracy in China until we can get into that market and offer a legitimate and legal alternative,” said Greg Frazier, chief policy officer of the MPAA. The trade group, which represents the six major Hollywood studios, is hopeful that a pending World Trade Organization dispute will force China to liberalize not only the theatrical distribution of movies but also the import and sale of home entertainment products and the licensing process retailers must go through. China is expected to respond sometime this month.

The World Trade Organization had ruled that the Chinese government cannot place restrictions on foreign film import and film distribution rights. The Chinese government has yet to act to comply with the ruling. From Wall Street Journal:
A recent WTO decision is supposed to result in the removal of several barriers to the importation of American movies that have collectively been a sore point in Hollywood for years. It’s been exactly a month since a deadline imposed by the WTO’s Dispute Settlement Body (DSB) passed and China has yet to make any substantive move to comply with the trade body’s decision.

The crux of the issue was a GATT requirement that imported “goods” receive the same basic treatment as domestic goods. China argued that requirement didn’t apply in the case of foreign films because the import and projection of movies are “services” rather than goods.

After two years of deliberation, the WTO panel published its conclusions (PDF), rejecting the Chinese argument on the GATT requirement but essentially accepting China’s contention that it had a legitimate interest in protecting the Chinese people from products “the content of which could have a negative effect on public morals, especially those that depict or vindicate violence or pornography.” Observing that the concept of “public morals” reflects a broad range of social and cultural values prevailing in the states that are members of the GATT, the panel conceded that China had the right to regulate the goods.

The panel also decided, however, that limiting the right to import foreign films to two state-controlled enterprises was inconsistent with WTO standards because there were “reasonably available alternatives,” namely “in-house” content reviews of domestic products, which could be conducted before the goods pass through customs. China had asserted that the import monopoly was necessary for the review process, but in the background there is also the likely effect on competition among distributors if the monopoly is lifted.

However, currently the Motion Pictures Association of America and U.S. Trade Representatives are in talks with the Chinese government to come up with new schemes to increase Hollywood’s access to China. From the Los Angeles Times:

China allows only about 20 foreign films into the country each year under a revenue sharing agreement in which studios collect less than 20% of box-office revenue, compared with more than twice that in the U.S. and other international markets. Under one scenario being discussed, China would expand the revenue sharing quota to as much as 40 foreign films per year, said three people familiar with the matter who asked not to be identified because the talks are confidential.

In addition, under the proposed plan China would agree to provide greater market access to Hollywood by allowing an additional company to distribute foreign films. Currently, government-controlled China Film Group dominates the import of foreign movies into China.

It’s unclear, however, when or whether a deal will be reached with the Chinese government. Officials with the U.S. Trade Representative and the MPAA declined to comment.

Newly minted MPAA Chief Executive Christopher J. Dodd, the former U.S. Senator (D-Conn.) who is seeking to elevate the association’s profile in Washington, has made opening doors in China one of his top priorities since assuming the job two months ago. He plans a trip to the Shanghai International Film Festival in June in an effort to build relations with film officials there.

May 26, 2011 10:07 PM
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