Is Big Bad China Picking on Poor Lil’ Hollywood?


By Robert Cain for China Film Biz

August 16, 2012

If you’ve read my previous columns you know that I’m no fan of the Chinese government’s film production- and distribution-related policies, and I’m certainly not a defender of the country’s tactics with regard to Hollywood. But I feel compelled to take exception to a recent series of articles in the American press that I believe unfairly characterizes China Film Group (CFG) as being single-mindedly devoted to curtailing the theatrical revenue of American studio films in the PRC.

In several recent articles (like this and this and this) the Los Angeles Times has decried China Film Group’s ‘aggressive steps’ to ‘curb the grosses’ of Hollywood tent-pole films by releasing pictures like The Dark Knight Rises and The Amazing Spider-Man against each other on the same weekend.

The Times and Variety also cite CFG’s decision to open Ice Age: Continental Drift on the same date as Dr. Seuss’ The Lorax, and a possible Bourne Legacy versus Total Recall showdown in September as further damning evidence that the Chinese are out to get Hollywood movies and put them in their place.

There’s no denyng that China’s film authorities wish to promote a healthy domestic film industry, and that part of making this possible means allowing room for locally made films to find an audience among Chinese filmgoers. Because few Chinese films this year have proven capable of competing head-to-head with American blockbusters, CFG has taken to coordinating release schedules to protect local films from Hollywood competition during key seasons like the summer school break, the October Golden Week holidays, and the year-end holiday season. As part of this effort, back in late June SARFT initiated a ‘film protection month’ (which will actually last for about two months) during which China will allow only 7 American imports to open at its multiplexes, and only two of these films—both 3D animated features—will be from major studios.

A key effect of this tactic is that it pushes back the releases of a handful of Hollywood tent-poles, squeezing several openings closer together than they might otherwise have occurred. But is China really targeting Hollywood films, as the Times put it, “to depress the box office receipts”? Is there a systematic campaign to punish American movies and drive down their grosses? I’m not seeing it, and on the whole the evidence doesn’t support this assertion.

Through the first 32 weeks of 2012, Chinese theaters released 54 films that were made in foreign territories. Of these, 25 were American films, and 7 more were U.S.-foreign co-productions like Killer Elite and Lockout. That works out to an average of exactly one American film every week, compared to barely one film every other week from the entire rest of the world combined. During this period American films took a 57 percent share of the nearly $1.6 billion in total PRC box office receipts, with the vast majority of that amount going to major studio pictures.

These are big numbers given that China’s obligations under the WTO don’t specifically require it to allow any American films into Chinese theaters. Yes, China must allow 34 imported revenue sharing ‘quota’ films annually under the updated (as of February, 2012) WTO agreement, but there’s no law that says these movies must be from major Hollywood studios.  If the Chinese were really intent on depriving Hollywood of renminbi they would be allocating a lot more of their quota slots to films from places like Iran, India and Brazil, or to indie films from specialty distributors like Magnolia Pictures and Strand Releasing. But they’re not doing that.

If anything, it seems to me that China has been surprisingly permissive with and solicitous of Hollywood’s studios. That such graphic films as The Dark Knight Rises (MPAA: “intense sequences of violence”) and The Hunger Games (MPAA: “intense violent thematic material and disturbing images”) are being allowed to screen at all came as quite a surprise to many Chinese filmmakers who would never be allowed, under China’s strict censorship rules, to indulge in the levels of violence and political commentary that these films enjoy. If China Film Group wants these films to fail, why is it going to so much trouble to bother releasing them, when it could easily and legitimately deny their releases on censorship grounds?

The truth is that China has rolled out a big fat welcome mat for Hollywood movies for most of this year. The average major Hollywood film opens on nearly 50 percent more screens during its opening week than the average major Chinese film, and is allowed to run for an average of 6 more days, or 15 percent longer, than the biggest Chinese movies. And let’s not forget that all these Hollywood movies are squeezing out domestic films; more than three-quarters of the movies made in China never receive a theatrical release.

 

*Chinese and China/Hong Kong co-productions indicated in RED

*Chinese and China/Hong Kong co-productions indicated in RED

Yes, the Times is right that for a few weekends this summer and fall, a handful of U.S. studio tent-poles will be forced to compete with each other for the same audiences. But China Film Group routinely does the same thing with Chinese films. One only has to go back as far as last week to find a comparable example, when four new Chinese animated films were released against each other.

And back in December, two hotly anticipated Chinese language tent-poles, The Flowers of War and Flying Swords of Dragon Gate, opened on the very same day. Both films did just fine, becoming respectively the 2nd and 4th highest grossing films released in China in 2011.

As much as China’s government authorities would like to see local films dominate the PRC’s multiplexes, they know that Hollywood movies are good business all around. Ticket sales from U.S. films help to build the country’s exhibition industry, which is still one of the most under-screened in the world. CFG makes far more money on each American film they release than they do on Chinese films, and that pays a lot of salaries and helps CFG build a war chest to fund domestic production. And tax revenues from ticket sales of American movies contribute to SARFT’s operating budget. In short, there are plenty of good reasons for CFG to maximize the revenues of Hollywood films.

SARFT and CFG do want to keep up appearances, and part of keeping up appearances is to help domestic films maintain a respectable share of China’s box office, ideally around 50 to 55 percent. When Hollywood movies squeezed Chinese films’ share down below 20 percent during the first half of this year, CFG was forced to take action, with the result that the major studio films will get a little less leeway for themselves for the rest of this year. Describing this shift as an attempt to ‘depress’ the grosses of American films overstates the situation and improperly encourages the impression of a hostile Chinese attitude.

The Dark Knight Rises and The Amazing Spider-Man will be just fine. Each of these pictures will release on several thousand screens in China, and each will earn at least $50 million in box office receipts there, which will be more than they earn just about anywhere else outside North America. The time to raise the alarm will be when China starts rejecting studio films that it should allow, or ghettoizing them to small numbers of screens in lower-grossing secondary markets. None of that has happened yet, and so long as the studios are respectful and play fair with the Chinese authorities, China’s welcome will remain wide open.

Robert Cain is a producer and entertainment industry consultant who has been doing business in China since 1987. He can be reached at rob@pacificbridgepics.com and at www.pacificbridgepics.com

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Hands In the Cookie Jar: Chinese Box Office Skimming Said to Reach 40 Percent


By Robert Cain for China Film Biz

February 26, 2012

Back in the mid-2000’s when I spent three years in Russia setting up and running movie production companies, I often heard stories about exhibitors skimming revenues from the box office and reporting considerably shrunken figures to distributors. One audacious Moscow theater operator actually told me he’d decided that weekend revenues were his alone to keep, and that he shared only in the weekday receipts.

Having observed numerous similarities in the ethics (or occasional lack thereof) between the Russian and Chinese film industries, I’ve often wondered whether a similar phenomenon exists in China.

So when I traveled to the People’s Republic in mid-February I made a point of visiting several people who are in a position to know, and I asked them. Their unanimous consensus was that extensive exhibitor cheating exists in China, and those who are closest to the source assured me that under-reporting runs as high as 40 percent of total box office takings.

My interviewees included a theater owner/operator, a distributor, several entertainment attorneys, and most significantly, two box office reporting software company executives. Because box office skimming is a crime punishable by severe penalties, these individuals spoke with me with the understanding that they would remain anonymous.

Although I have no access to the underlying data, enough experts independently confirmed the 40 percent figure that I can publish it with some confidence, as outlandish as it may seem. Only the distributor thought this figure was too high—they were convinced that skimming runs no higher than 20 percent—but they admitted to having no real basis for backing up that assertion.

The parties closest to the data, the box office reporting software company executives, claimed to have deep knowledge of cinema sales and operations. They told me they have direct access to actual ticket sales figures and also to the numbers reported to distributors. They said that, although SARFT requires cinemas to install sophisticated point-of-sale reporting systems at all box office locations, there are several ways in which exhibitors can short-change distributors on rental revenues.

One software executive said that his company, which has a significant share of the market, actively helps theater operators to cheat. He builds ‘back-door’ mechanisms into his tracking software that allow monies to be diverted out of the officially reported revenue figures. He said that SARFT officials hate the cheating because it robs them of tax revenues and also, presumably, of the ability to funnel more money into their own accounts.

Another executive told me that online ticket selling, which accounts for a considerable share of movie ticket sales, also offers opportunities for mis-reporting. His company provides a platform for marketing, sales facilitation, tracking and delivery of tickets to end users, so he sees every aspect of the transactions. He said that theater owners offer bundled combos where a moviegoer can buy two tickets, two popcorns, and two drinks for say, 200 renminbi (RMB) (around US $32). The tickets would be worth 120 RMB if purchased separately, but the theater operator allocates 140 RMB in revenue to the popcorn and drinks, leaving just 60 RMB to the value of the tickets, thus cheating the distributor of 50 percent of their rightful revenue.

Sometimes the under-reporting is highly transparent and official. A theater operator told me that China Film Group collected 1.1 billion RMB from ticket sales for Transformers 3. But, as the story goes, when it came time to pay Paramount its share, CFG told the studio that because it had already made more than enough money on the movie, its revenue share would be limited to the first 900 million RMB in receipts. CFG would be keeping all the revenue on the last 200 million, and there was nothing Paramount could do about it.

Apparently China’s film industry officials have a strong sense of fairness about their business. But oddly enough, it only runs one way. I’ve yet to hear a story about a Chinese official saying they’d made too much money on a picture and consequently feeling compelled by a sense of fairness to give some back.

Robert Cain is a producer and entertainment industry consultant who has been doing business in China since 1987. He can be reached at rob@pacificbridgepics.com and at www.pacificbridgepics.com.

Lionsgate to Receive Chinese Co-Financing on 10 Films– Or Maybe Not


By Robert Cain for China Film Biz

February 23, 2012 from Tokyo, Japan

(Note: In order to protect the interests of a business partner I have modified this article to remove all references to the name of an investor and his fund.)

I have word directly from a Chinese investor that his fund struck a deal on Wednesday morning with Lionsgate to co-produce a slate of 10 films over the next three years. The fund says it will invest 50 percent of the total production costs in a ‘portfolio’ of Lionsgate movies, primarily in the action genre, with a wide range of budgets.

The investor, who wishes to maintain anonymity for himself and for his fund, told me the news in person in a meeting on Wednesday afternoon in Beijing.

He also told me that his fund will invest in a low-budget movie to be directed by Michael Bay, for which the director and crew will be paid not in cash but in equity participation in the project. And he said he’s planning to invest in the Avatar sequel together with China Film Group and Fox.

However, Lionsgate has yet to confirm the news of their supposed deal, and I am inclined to take the investor’s pronouncements with a grain of salt.

As we’ve seen in recent weeks and months, numerous claims and pronouncements have been made by Chinese investors regarding their intended partnerships with American film producers. And although I’m glad to know of their interest in Hollywood, I must caution readers that many of these purported deals will fall well short of expectations.

Exaggeration and mis-represenation are not uncommon in Hollywood and elsewhere, but they are unfortunately endemic in China. With so much naïve exuberance in the U.S. about potential fresh sources of capital from China, and with so many Chinese individuals and institutions flush with cash and opportunity, there are high hopes on both sides. With few long-term relationships or experienced guides to shepherd deals, many hopeful fundraisers in Hollywood will be burned with false promises, and many eager investors in China will be bilked of their renminbi.

As a producer, fundraiser and consultant who has for many years been in the middle of the U.S.-China film trade, I believe it is important to root out dishonesty and inefficiency wherever it occurs. The main reason that I started writing China Film Biz was to bring a clear and sober perspective to the cross-Pacific dialogue and to help others benefit from the mistakes I’ve made. I see it as very much in everyone’s interest to help elevate the level of integrity and accountability in U.S.-China entertainment dealings.

It is in this very spirit that my friends at TransAsia Lawyers, a prominent entertainment and media law firm based in Beijing, have launched ChinaGoAbroad, a web-based information and transaction platform dedicated to bringing new standards of transparency to inbound and outbound investments in and from China. They do so with the full blessing of SARFT, China’s state administration that oversees all media investments.

ChinaGoAbroad’s mission is to serve as a resource and matchmaker to facilitate business and to help honest dealmakers find one another. In this age of instant communications, of internet blogs, of Twitter and Sina Weibo, the posers and charlatans had better watch out.

Robert Cain is a producer and entertainment industry consultant who has been doing business in China since 1987. He can be reached at rob@pacificbridgepics.com and at www.pacificbridgepics.com.