The Chinese Entertainment Industry: Overcoming Barriers to Entry
This article has been published with the permission of Attentional - www.attentional.com
- The question of China’s openness in the global entertainment industry has often stirred debate and frustration within the media’s executive community. Formats had been copied seemingly without consent, exporting movies had harsh limits on volume and censorship, while setting up any entertainment venture inside China for foreigners appeared fraught with headaches. However, in early 2010 China adopted an important WTO ruling, which means that much of these prior limitations are likely to change. We decided to investigate this further with the help of Chien-Han Huang, an expert in China’s media legislation. As the primary author of this piece, Huang has used his considerable knowledge of the discussions currently going on internally in China to assess what kind of impact the WTO’s ruling might have on the domestic Chinese market.
- One of the key differences in China, compared to say, the U.S., is that watching a movie is an entertainment luxury because the ticket prices are expensive. In 2010, the average ticket price went up to 40.4 RMB (around $6.3), which is close to the standard ($7.8) in the U.S. In fact, the ticket prices in some big cities, such as Beijing and Shanghai, are higher than the average U.S. ticket price. Buying a ticket, however, can be a hard task, because of the limited number of screens. This means a market structure where demand easily outstrips supply – a rarity in western film markets.
- One of the main drivers of cinema-viewing in China is the audio and video qualities found in movie theaters. The alternatives such as TV or monitor screens (where poor-quality pirated content can be consumed) cannot compete in this regard, and the result is a revenue-distribution split that is incredibly uneven.
- For foreign content-owners to really impact this market, they have to deal with the current regulations. In terms of foreign movies in China, these are limited by 4 areas: Production, where filmmakers are required to apply for government licenses; Importing Films, which is a state monopoly business that is exclusively managed by the China Film Group (CFG), the largest and state-owned studio, and are subject to government censorship as well as a quota system (20 movies through box office split deals, and roughly 50 foreign movies areimported through buying outright rights); Distribution, which is exclusively operated by CFG and Huaxia Film Distribution Company; and Exhibition, where the annual screening time of foreign movies at theaters cannot exceed one-third of the total screening time.
- As a result, the industry is operating in a linear way between the production and theatrical exhibition sectors. To put it another way, the purpose of making movies in China is to supply theatrical markets. This implies that ancillary distribution windows and movie- related products have not been effectively developed. This is, however, set to change. Any relaxing of the regulations will encourage a competitive environment in domestic distribution, which will likely lead to a drastic rise in the number of theater screens – exacerbated by digital projectors that will undoubtedly lower P&A costs.
- With the deregulation in foreign films and the evolution of the market environment, aside from blockbusters, middle-budget and independent movies, as well as made for TV-movies and mini-series could have the chance to be circulated in the Chinese theatrical market. For instance, consider the six-part British comedy series, The Trip, which aired on BBC2 in the UK. A cut-down 90 minute version of this was later edited for cinemas and released theatrically in the US, Australia, Belgium, France, Netherlands, New Zealand, Sweden and many other markets. There are clearly certain types of TV shows that can be re-purposed for the cinema in China. International distributors willing to employ a more creative strategy could find this a lucrative market in future.
- Chinese media institutions have started to treat intellectual property rights seriously. This transformation was embodied in online video websites competitively bidding for the copyright of television drama series. In addition, more Chinese television stations have been willing to acquire and localize foreign TV formats. For example, broadcasted by Shanghai Dragon Television, China’s Got Talent, the most popular program on Sundays in 2010, was adapted from Britain’s Got Talent. These trends reveal that China’s entertainment industries are slowly becoming more intellectual property friendly.
- It is worth paying close attention to the development of online distribution in China because the Internet is one of the major video consumption platforms for younger generations. Many video sites such as tv.sohu.com establish Hulu-like business models, incorporating paid and advertising-supported platforms. These websites circulate Chinese and foreign copyrighted TV drama series and movies. They may well represent a way in future to circumvent domestic TV broadcasters, who are subject to extremely strict government regulations. More and more international TV series may end up being available legally to the Chinese market via these video streaming sites.
On February 18, 2010, China adopted an important World Trade Organization’s (WTO) resolution. It said that the Chinese monopoly system in the importation and distribution of foreign films breached China’s trading rights commitments. As a result, China must amend related regulations in accordance with the WTO’s rulings. This result was considered “a significant victory” for the U.S. entertainment industry.1
With China at the forefront of many strategic decisions regarding media and entertainment, we decided to assess the current situation in the market regarding this restrictive legislative framework. This paper also addresses potential changes in law and how that might impact foreign content owners and distributors seeking to capitalize on this enormous media market.
Although the gaming sector and animation/comics are a large component of the media industry’s revenues, we will concentrate primarily on Film (20%) and TV (7%), as any potential legal changes are likeliest to impact those sectors.
- Production: Filmmakers are required to apply for government licenses, and co- production with Chinese partners is encouraged.
- Importation: Importing films is a state monopoly business which is exclusively managed by China Film Group (Hereafter CFG), the largest and state-owned studio. In addition, before being imported, foreign movies are subject to the government censorship system and import quota system. The quota system annually allows around 20 movies through the box office split deals. In addition, about 50 foreign movies are imported through buying outright rights.
- Distribution: The distribution of foreign films is exclusively operated by CFG and Huaxia Film Distribution Company.
- Exhibition: The annual screening time of foreign movies at theaters cannot exceed one-third of the total screening time. Foreign capital, apart from specific cities, is not allowed to have a major theatrical ownership. The regulation on theatrical ownership means foreign investors cannot control screening titles and schedules.
Potential for Change
The Market is Blockbuster Driven
Distribution: Prints & Advertising Costs are High
The Distribution Windows
Film piracy in China not only deeply affects the market interests of Hollywood studios, but also harms the healthy development of China’s film industry. Furthermore, film piracy destroys the traditional window system, making theaters the most important window for generating revenues (over 50% of total per title revenue). Therefore, making and enforcing the regulation on intellectual property rights protection become a vital issue for the government.
Narrow Supply Chains
How can Content Owners Take Advantage of any Legislation Change?