By Robert Cain for China Film Biz

December 7, 2011

Here in the West we share a fundamental, almost genetic conviction that our democratic free market approach to business is superior to the East’s planned economy model (for thoughtful counterpoint to this Western notion, see Andy Stern’s excellent Wall Street Journal article from December 1st).

But sometimes having a Big Brother calling the shots can be an advantage. With a single, authoritarian party making major policy decisions, you get to avoid the perils of deadlocked senates, of do-nothing super committees, and even, sometimes, of the wrenching, blood-spattered forces of supply and demand.

And if you’re an enterprising Chinese producer with an axe to grind, having all-powerful government decision makers to settle a score can be a very good thing indeed.

The SARFT hammer of justice

The talk of the industry last week was the David vs. Goliath style battle between producer Zhang Weiping and the entire Chinese theatrical exhibition establishment. Zhang had demanded that theater owners across China raise their minimum ticket price from 35 yuan ($5.50) to 40 yuan ($6.29), and that they lower their after-tax share of ticket sales from 57 percent to 55.

Zhang was looking to protect the nearly $100 million that’s been invested in The Flowers of War, his latest collaboration with his mega-director partner Zhang Yimou. The film, which stars Christian Bale, is the costliest in Chinese history, and is set to open wide next week. Under the existing structure distributors receive only 39 percent of each dollar, or yuan, of ticket sales, and after the distributors’ cut producers get substantially less than that.

As Zhang Weiping put it, “For producers in China, the only way to get a return on investment is through ticket sales. Ancillary products do not sell well. Raising ticket rates could help keep movies from being fast food and junk food.”

An increasingly disproportionate share of revenues has gone to theater owners, who have been steadily increasing their slice of the box office pie, along with the rents they charge to the companies that operate their theaters.

But in swift and stunning fashion last week, China’s State Administration of Radio Film and Television (SARFT) ended the brewing battle by hammering out a decree with far-reaching effects for the industry.  With its jazzily titled document “On Promoting the Coordinated Development of Movie Making, Publishing and Releasing,” SARFT shoved aside free market economics and proclaimed these new rules:

• “In order to balance the benefits of distribution between production companies, distributors and exhibitors, referring to international conventions, cinemas can get no more than 50% of the box-office revenue in the first run in the future.”

• “In order to promote the sustainable development of cinema construction, we suggest the annual property rent for cinemas should be less than 15% of the annual box-office revenue.”

The first rule was obviously a major victory for film producers and distributors. As Zhang Weiping rightly pointed out, theatrical revenue is the lifeblood of Chinese producers. The 7 point bump in their share will spell the difference between profit and loss for many Chinese films.

The second rule was aimed squarely at the real estate developers and theater chain owners who lease their cinemas to third-party operators. Rents had been on a steady climb, with rising profitability fueling an exuberant binge of cinema building; China’s total screen count has nearly doubled since 2009 to around 8,900. With this second ruling SARFT’s intent seems to be to tamp down investment and cool off the rate of new construction.

No mention was made of ticket prices, which will presumably be left to the discretion of theater operators.

Theoretically this new set of rules should benefit non-Chinese producers and distributors too, but at this point it’s unclear—and perhaps unlikely—that any of the 7 extra points will be passed along to them.

The long-term effects of these rules remain to be seen, but it seems a safe bet that curtailed theater profits will result in a diminished rate of new theater openings, and that China’s blazing domestic box office growth will slow as well.

Given these dramatic recent developments, now may be a good time for Hollywood to amp up its own campaign for an increased share of the revenues its movies generate in China.  After all, if a single producer can motivate China’s movie czars to make dramatic changes for the better, then certainly the world’s most powerful media companies can do the same.

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.