Hollywood, China in a Chilly Embrace

Like modern-day Marco Polos with cellular phones, Hollywood executives are venturing to China seeking the same kind of profits they reaped exporting fantasy to the rest of the world.

But despite China’s promise of 1.3 billion potential customers, a burgeoning middle class enamored of entertainment, a flourishing creative community and a growing, less shackled economy, the largest untapped market for American movies and TV shows remains maddeningly out of reach.

The industry that successfully exported Sly, Arnold and Spielberg to Kuala Lumpur and Amsterdam can barely crack a Chinese entertainment market strictly controlled by the government and overseen by officials wary of the violence, sex and politics in Hollywood films. Potential profits are also lost to piracy so rampant that buying an illegal videodisc of the new “Star Wars” film in Shanghai is as easy as buying a Ricky Martin compact disc at a Wal-Mart in the U.S.

Despite its size, China generated just $18 million in revenue for major Hollywood studios last year, equal to the business studios did in Peru, according to the Motion Picture Assn. of America. Even when the appetite is strong for a U.S. film, the results may be negligible.

The most successful American film ever in China, “Titanic,” last year took in $40 million at the box office there. For China, where theater tickets cost about one-fifth of U.S. charges, that was a major hit, grossing 10 times what the typical Chinese film does.

But by U.S. standards, $40 million for a major film is peanuts. Once China took its cut of the box office and levied fees and taxes, distributor 20th Century Fox was left with only about $5 million of the take.

“The biggest mistake is to go, ‘Wow! It’s 1.3 billion people--we can make a killing there,’ ” said MTV Networks Chief Executive Tom Freston, whose company offers an MTV channel in China. “By any means it’s large, but there’s a lot of money being lost chasing those macro numbers. You can’t really make a short-term hit in China.”

China is likely to remain out of reach as a mass market for years for several reasons. Its layers of rules and regulations, often imposed on a moment’s notice, are designed in part to make sure Hollywood isn’t too successful. “Titanic’s” box-office performance prompted China to enact four blackout periods when foreign films can’t be shown in Chinese theaters, including the lucrative vacation weeks when people have time to go to the movies, to protect its home-grown films.

“I think they are afraid of the unknown,” said MPAA President Jack Valenti, who estimates that China’s barriers cost the industry $80 million annually. “They believe that if they have American pictures in large numbers, Chinese films will suffocate and die.”

Disney’s animated movie “Mulan,” based on a folk tale as familiar to a Chinese child as the story of Little Red Riding Hood is in America, seemed like a sure hit to the studio. Instead, it flopped, the victim in part of rules prohibiting its release until Chinese children had returned to school in February.

China also has shown a willingness to punish Hollywood when it crosses the line politically or when relations with the U.S. and China turn sour. Walt Disney Co. and Sony Pictures Entertainment were temporarily banned from China’s film market after releasing films about the Dalai Lama, China’s Tibetan nemesis. The accidental NATO bombing of the Chinese Embassy in Belgrade, Yugoslavia, on May 8 resulted in American films’ being dropped from cinemas. This week’s Entertainment and Media conference, sponsored by the Asia Society in Los Angeles, was canceled after China’s film officials pulled out due to the bombing.

Hollywood Missteps All Too Common

For consumers, the moviegoing experience in China is something altogether different than it is in the U.S., Europe and most of the rest of Asia, where new, modern multiplexes have boosted Hollywood’s box-office take. Although China’s cities do have some new, modern cinemas, going to the movies can involve watching a film on giant canvas screens perched on top of a truck, or sitting on a wooden bench in a small cinema.

But Chinese restrictions and antiquated theaters aren’t the whole story. Hollywood has tripped up trying to tap China’s market as well. Some Chinese film experts argue that Disney miscalculated on how accepting the country would be of a Western version of “Mulan” where key characters looked American and everyone lived happily ever after.

“Every child in China grows up with the legend of Fa Mulan, but they couldn’t identify with the movie and they couldn’t recognize the characters because they were drawn for an international audience,” said Thomas Leong, chief executive of International Pacific Artists, one of Hong Kong’s top talent agencies. “Mulan looked more like Pocahontas than the average Chinese face.”

Too often, critics say, Hollywood views China as merely an export market for its films and TV shows, rather than as a place to develop long-term partnerships that one day will pay off. Actor and producer Fred Dryer, who became a star in China when his television series “Hunter” was one of the few U.S. shows airing there in the late 1980s, is hooking up with the Chinese government to fund a “Hunter in China” feature film.

“Here we develop projects based on a pitch or a conversation at lunch,” Dryer said. “With China, you have to get up and go there. You can’t develop the market from Beverly Hills.”

Even when they do go to China, entertainment companies often fumble. “They hire some graduate student who speaks Chinese, then send him to China. The poor guy has no fundamental knowledge of the business,” said Gareth C.C. Chang, executive chairman of Rupert Murdoch’s StarTV. “That’s an error American companies make, and they get laughed at.”

Hollywood remains fixated on China, and understandably so. Costs to produce movies and TV shows have been soaring, while many sources of revenue have reached a plateau or are still years away as new technologies evolve. As such, many entertainment companies would willingly work in China on China’s terms, save for the stringent regulations and the proliferation of piracy.

China’s virgin market for U.S. entertainment promises a ready-made audience of unprecedented size. Even considering that a good chunk of China’s population lives in poor, rural areas, its growing urban middle class of 300 million or so is larger than the U.S. population.

In a development that gets to the heart of China’s importance, and also dramatizes just how much experts disagree on when its potential will be realized, China has emerged as a central issue in the bitter breach-of-contract lawsuit continuing between former Walt Disney Studios chief Jeffrey Katzenberg and the entertainment giant.

Katzenberg’s eventual contract settlement--involving potentially hundreds of millions of dollars--will be heavily influenced by a court referee’s estimates of the potential future profits in China from movies and TV shows Katzenberg launched, such as “The Lion King,” “Aladdin” and “Beauty and the Beast.”

Big Strides Against Piracy Are Expected

Katzenberg’s experts in court filings portray China as a “rapidly developing country [that] will become an enormous market.” They also note that “the Chinese adore entertainment, and a larger percentage of their annual expenditures goes to entertainment-related items than in other countries.”

Katzenberg’s side also argues that China will soon make big strides against pirates because China realizes it must contain piracy to be accepted into the world economic community and be allowed to buy the computer technology and software it wants.

In its court papers, Disney counters that China’s growth is limited by “legal, ideological, cultural and economic constraints.” The company also argues that piracy is rampant, with no sign of abating. (The MPAA estimates that piracy cost U.S. film companies $120 million last year alone.)

Disney’s skepticism belies Chairman Michael Eisner’s personal efforts at economic diplomacy with China, including a visit last fall. In April, Eisner met privately with Chinese Premier Zhu Rongji when he visited Los Angeles, one of only a handful of executives given access. Eisner’s conversations remain private, but presumably discussions included Disney’s hopes to build a theme park there.

Disney only recently has been back in China’s good graces after releasing director Martin Scorsese’s “Kundun” about the Dalai Lama in 1996. To make amends, Disney bought two Chinese films and agreed to sponsor the Shandong Province Acrobatic Troupe in a trip to Europe.

Disney’s China presence already includes 157 “Mickey’s Corners” stores that sell merchandise based on Disney characters. The Chinese are familiar with Mickey Mouse and Donald Duck because the old cartoons have been shown on Chinese television for years. Last year, Disney’s animated TV shows “Winnie the Pooh,” “Goof Troop” and “Aladdin” began airing.

Recalling his trip to China last year, Eisner in his annual letter to Disney shareholders told of how he was struck by the number of McDonald’s golden arches he saw.

“I am completely confident that the Chinese people love Mickey no less than Big Mac,” Eisner wrote.

But the growth of Disney culture in China triggers anxiety in some quarters.

“Led by smiling Disney characters, the American [audiovisual] maker takes aim at Chinese children,” Shanghai’s Wenhui newspaper wrote recently, lamenting the domination of store shelves by tapes and CDs featuring “Mickey Mouse,” “Cinderella” and “Beauty and the Beast.”

If Hollywood is ever to develop China as a market, the country’s movie theaters will have to come a long way. According to the MPAA, there is one movie screen for every 8,600 people in the United States. That compares to one movie screen for every 122,000 people in China.

“People don’t have a lot of pocket money to watch movies and eat popcorn,” said StarTV’s Chang. “China is at a point where people also don’t have that kind of leisure time. With theaters, it’s a matter of getting in early enough and waiting for the boom.”

Hollywood executives also say the archaic, red-tape-filled Chinese system of movie marketing and distribution will have to change. Although China buys the rights to a number of smaller foreign films each year, the government allows only a handful of major, first-run Hollywood films annually--typically 10 or even fewer--on a “revenue-sharing basis” that splits receipts with studios.

“If we’re lucky, we get one or two” films bought, said Ken Lemberger, president of the Columbia TriStar Motion Picture Group, part of Sony Pictures Entertainment.

Lemberger notes that films also can be abruptly yanked from theaters in favor of Chinese films after a couple of weeks, even if they are performing well.

“Mulan’s” debut in China says a lot about Hollywood’s difficulties. The film’s premiere was postponed; then the venue was changed. For protectionist reasons, the movie wasn’t allowed into Chinese theaters until after the end of the lucrative Spring Festival period--the time when schoolchildren and their families are on vacation and traditionally go to movies.

In the court documents filed in the Katzenberg case, Disney bemoaned that the film “was not permitted to be released by the government until all the children had gone back to school, thereby impacting the results, as the government knew it would. Moreover, the fact that the film had been widely pirated meant it would suffer, as it did, at the box office.”

Fearful of Hollywood’s influence from movies they consider morally offensive, Chinese officials are likely to keep a firm grip on the market.

“The government is like a concerned parent when it comes to the entertainment business,” said Leong, who also is a consultant to U.S. and Chinese companies.

But some entertainment companies are finding ways to make money in China, particularly in television. Nearly every Chinese household now has a TV, and piracy isn’t the issue it is with films or music. StarTV’s Chang said that the Phoenix network, a channel 45% owned by Star that is beamed into China and makes money on advertising sales, will break even for the first time this quarter.

Chinese Courting Hollywood Investment

Despite an often icy relationship, China is making overtures. Chinese film officials are eager to tap Hollywood’s expertise and creativity, and see Hollywood investments as a way to bring China’s entertainment business up to par with the rest of the world.

So the government is actively recruiting U.S. partners for film joint ventures, offering a better cut of the box-office gross and the prospect of wide distribution in China.

Another carrot being held out to Hollywood is the possibility of expanding the number of U.S. films in China in return for greater distribution of Chinese films in the U.S., where Chinese officials hope they might prove popular with the nation’s large Asian-American population.

Skeptics, however, doubt that Chinese films will have more than limited appeal here.

“China wants to sell its films overseas on a quid pro quo basis,” said Peter Dekom, a former top entertainment lawyer who now consults with media companies on China and other matters. “They don’t understand people don’t want to see Chinese movies on a mass scale.”

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Bates reported from Los Angeles, Farley from Shanghai. Times staff writer Evelyn Iritani contributed to this report.