China Trade Deal Won’t Be a Quick Hit for Hollywood

For Hollywood, the aftermath of last week’s landmark China trade victory in the House of Representatives brings the sobering reality that China is a $20 million annual market--about as important as Peru--and it will be years before it gets better.

The problems: a tiny number of theaters, rampant video piracy, government censorship and such a heavy layer of taxes, fees and bureaucracy that foreign studios can’t make money in China anyway.

And when it comes to China, Hollywood’s problems, while different in detail, are a mirror for just about all U.S. industries, from agriculture to high tech.

Yes, China is the largest, potentially most lucrative market in the world, and normalizing trade relations is critical to developing it. But political, economic and cultural barriers still make China an extraordinarily difficult market to crack.

“It’s a necessary step, a historical step along a protracted, tortuous path that will have many setbacks,” said Stanford University China scholar Michel Oksenberg. “But it’s better to be on this path than not be on it.”

Hollywood studio executives and their chief lobbyist, Motion Picture Assn. of America President Jack Valenti, were especially active in pushing for trade normalization. It paves the way for expanding the number of Hollywood films potentially available in China as well as encouraging ventures to build movie theaters. The bill now goes to the Senate, where passage is virtually assured.

But a closer look at what Hollywood actually gets shows that for every opportunity there are myriad questions and concerns about how it will work. Problems from financing to control issues make it clear that the hype about the entertainment industry’s potential in China far outstrips reality.

Take the most important gain: the doubling of the number of films China will allow to be imported--to a minimum of 20 from 10 now--in which China will share box-office revenues. (China allows additional films if the studio accepts a flat fee, but few are willing to take those terms.)

The 20 films cover movies from all countries outside China, not just ones from Hollywood studios. To put that number in perspective, the total number of films China will allow in annually is less than the 24 movies a single studio, Warner Bros., will release this year. It’s also just a fraction of the 500 or so released altogether into theaters each year in the U.S. by studios and independent film companies.

“This is not a huge number, said J. Edward Shugrue, president of Sony Corp.’s Loews Cineplex International. “One multiplex here would have difficulty surviving with 20 movies a year. You’d be hard pressed to justify the millions of dollars it costs to build theaters in China if you’re looking at 20 pictures a year and, gosh, maybe up to 22 next year.”

Hollywood lobbyists frequently note that China has 1.3 billion potential customers for its films. But right now, there is one movie theater for every 122,000 Chinese, compared with one for every 8,600 Americans. Most Hollywood executives believe that building additional cinemas eventually will create more pressure on China to let in more foreign films. To encourage the building of cinemas, China has agreed to allow foreign companies to own 49% of cinema ventures, with government agencies the majority partners.

But executives are skeptical about those potential partnerships where the interests of companies will be secondary to the Chinese government’s. In addition, they note, politics and abrupt government decisions can affect the showing of films in China. Last year, for example, China didn’t want U.S. films shown after the accidental bombing of the Chinese Embassy in Belgrade by NATO forces.

Disney’s animated hit “Mulan” was based on a Chinese folk legend, but it performed poorly at the box office in China--in part because Chinese rules prohibited its release until children had returned to school so the movie wouldn’t compete with Chinese films the children could see.

After the success of “Titanic,” China imposed four blackout periods for Hollywood films because they were seen as a threat to Chinese films. Films also can be arbitrarily yanked from theaters in favor of Chinese films.

“It does take some courage to make an investment when you’re a minority interest in a country that is susceptible to changes in the political winds,” said James N. Gianopulos, head of international film distribution for 20th Century Fox.

Loews Cineplex’s Shugrue adds that there are few reasons to develop cinemas in China when companies can invest their capital in areas such as Southern Europe and South Korea, where the demand for new movie theaters is strong.

“I’ve been to China twice to look at opportunities and I keep coming up with more questions than I do satisfactory answers,” Shugrue said. “This is a step, but the reality is there are so many hurdles to jump over. It makes a good headline for a company to announce a plan or venture, but it doesn’t make for a good business plan.”

Even a successful film in China doesn’t mean big profits because China layers on taxes and fees.

“Titanic” was considered a major hit for generating $47 million at the box office, especially impressive given that movie admission prices range from $4 to less than a dollar.

But out of that amount, distributor 20th Century Fox ended up with less than $10 million in revenue, a fraction of what it could expect in the U.S. and other countries. All told, studios annually receive about $20 million a year in revenue from China, according to the Motion Picture Assn. of America--less than a studio takes in on a single modest film in the U.S.

Recent American studio films shown in China have ranged from “The Matrix” to “Enemy of the State” and “Tarzan.” But Chinese officials also have long been wary of Western movies, closely scrutinizing them for violence, sex and sensitive political content before allowing them to be shown.

Meanwhile, piracy is so rampant that video compact discs of a film such as “M:I-2,” the “Mission: Impossible” sequel, are reportedly circulating already in China even though the movie just opened in U.S. theaters.

During a conference last week on China and entertainment hosted by media mogul Rupert Murdoch at his 20th Century Fox studios, Chinese officials gave only the vaguest guidelines as to what kind of films they welcome.

Yang Buting, a top China film official, would say only that China’s criterion was to accept “high quality” films and that, in addition to sex and violence, “solidarity” and “security” were factors in evaluating films.

Yang also said that China’s moviegoers aren’t that enamored of Hollywood films anyway. After “Titanic” did well in China, Yang said, moviegoers began to feel that Hollywood films “all seemed about the same, so they started losing interest.”

Virtually every Chinese official at the conference also made it clear that if they open their market wider to Hollywood films, they expect as a quid pro quo that studios will in return distribute and market more Chinese films in the U.S.

Another problem for studios is that China insists on tightly controlling the marketing and distribution, channeling each movie through the China Film Corp. and using its own officials to sell and distribute the films. So far, China has been inflexible on this issue.

“None of these agencies have any expertise in marketing, and yet they do all the marketing,” said Jean M. Prewitt, president of the American Film Marketing Assn. trade association. “Step one would be to move as many segments of film distribution as possible into private economic hands.”