Two people operating film projector
Guo Guoquan / China Foto Press

Special Report: Entertainment

Reeling in China's Movie Fans

Removing market access barriers and improving intellectual property protection would go a long way toward helping foreign film studios reach Chinese consumers

by Paula M. Miller

Hollywood film studios have experienced tough times in US and other markets over the last few years. With gradually declining box office sales, rising filmmaking and advertising costs, and rampant piracy, these studios are finding it increasingly difficult to earn profits. According to the Motion Picture Association (MPA), only one in ten MPA members' films recovers its investment from theatrical releases in the United States, and only four out of ten recover the initial investment after all releases.

To spread investment risk, parent companies of the major US film studios have expanded their businesses over the years to include other markets—such as network television, subscription cable, print publications, online video games, and even amusement parks. They have also reconsidered their overseas strategies. In the past, Hollywood's main aim was to attract US audiences, and studios made films in other countries primarily to cut costs. Today, US film studios increasingly target overseas audiences. And China, with a population of 1.3 billion and a growing middle class, has become a coveted market (see Box).

Foreign films: Knocking on China's door

Though the PRC government has fulfilled its limited World Trade Organization (WTO) commitments in the entertainment sector, the market openings that have occurred have come with restrictions and with the goal of attracting new skills and technology to strengthen China's domestic film and TV industry. Before its WTO entry, China permitted 10 foreign films for theatrical release on a revenue-sharing basis annually and prohibited foreign investment in cinemas. Fulfilling its WTO commitments, China now allows 20 foreign films for theatrical release on a revenue-sharing basis each year, and foreign investors may own up to 49 percent of cinema joint ventures (JVs) (see the CBR, November-December 2003, p.42). But several challenges still exist. In recent interviews with the CBR, many film industry insiders described the following as top investment issues.

Obstacles

Film quotas

Of the 20 foreign films released in Chinese theaters on a revenue-sharing basis per year, 14-16 of those films are usually Hollywood releases. Nevertheless, the limit is a huge constraint for Hollywood studios, which produce hundreds of films each year. Foreign distributors can release films on a flat-sales basis without quota limits in China, but studios find the marketing information gathered by box office ticket sales, which they can obtain only through revenue sharing, invaluable. Because the films of qualified Sino-foreign coproductions can bypass film quotas, many foreign studios are exploring coproductions (see below).

Intellectual property (IP) violations

A 2006 report that MPA commissioned from LEK Consulting singles out piracy as the "biggest threat to the US motion picture industry." The report states that major US motion picture studios lost $6.1 billion in 2005 to piracy worldwide; 80 percent of those losses were from overseas piracy, and 20 percent were from piracy in the United States. According to the report, China has the highest piracy rate of all surveyed countries: 90 percent of the potential China market was lost to piracy in 2005, resulting in a $244 million loss for MPA companies alone. MPA estimates that the film industry in China (including all foreign and Chinese companies) loses $2.7 billion per year in potential consumer spending to piracy.

China's film quotas fuel piracy because such restrictions enable pirates, not industry, to fill demand.

The film industry argues that China's film quotas fuel piracy because such restrictions enable pirates, not industry, to fill demand. Anecdotal evidence indicates that Chinese consumers seem increasingly willing to pay more for higher quality fakes, however, and movies that are pirated using handheld camcorders are losing their appeal. Perhaps more consumers will soon be willing to pay for legitimate products.

Lack of regulatory transparency and consistency

Many foreign film studios cannot predict when industry rules will change or whether local film officials will interpret rules the same way as officials at the State Administration of Radio, Film, and Television (SARFT) in Beijing do.

Because of unexpected regulatory changes, Time Warner Inc. announced in November 2006 that it would pull out of its cinema JVs in China. After the PRC government released temporary rules in 2003 that permitted foreign enterprises to own up to 75 percent of cinema ventures—instead of 49 percent—in select Chinese cities, Warner Brothers International Cinemas raised its investment from 49 percent to 51 percent in some theaters. The government retracted the right to foreign majority ownership in 2005, however, and the company pulled out of the business after its JV contracts ended. Other foreign cinema operators are scheduled to open movie theaters in early 2007; time will tell whether they experience greater regulatory stability or will be granted majority control over their investment.

Few theaters

Despite the construction of 82 new movie theaters last year, China now has only 1,325 theaters with 3,034 screens—about 1 screen per 428,477 people. (In contrast, the United States has roughly 6,100 cinemas and 37,700 screens—about 1 screen per 8,100 people.) Because of the dearth of cinemas, competition for theatrical release is intense. Independent films and films with small and medium-sized budgets have little chance of theatrical release.

Blackout dates

Foreign film studios increasingly find that during key PRC holidays when crowds and box office profits are largest, such as Chinese New Year and PRC National Day, foreign films are excluded from theaters for "Chinese film festivals." In 2006, The Da Vinci Code was pulled from Chinese theaters short of its scheduled three-week run, allegedly to make room for domestic Chinese films during peak summer viewing days. Before the film was pulled, it had already made more than $13 million in China. SARFT may just want to give Chinese films the best chance to make money by allowing them full access to theaters during peak viewing periods, but some foreign industry representatives wonder whether PRC regulators also pull foreign films that do "too well" at the box office.

High ticket prices

Since the early 1980s, movie ticket prices in China have risen 300 fold, and box office revenues have dropped by roughly 30 percent, according to Entertainment Asia Network (EAN), a market research company. Depending on the city and theater, movie ticket prices in China currently range from ¥30 to ¥80 ($3.90-$10). In 2006, China's annual urban per capita disposable income hit $1,517, and the annual rural per capita net income reached only $463, making a $10 ticket an expensive outing for most Chinese. In contrast, DVDs usually range from ¥5 to ¥35 ($0.64- $4.50), depending on their features and whether they are legitimate, which makes them much more affordable.

Content guidelines and censorship

Though the PRC government has issued content guidelines—for example, films and TV programs cannot contain explicit sex or violence—the guidelines remain fairly open to interpretation. To avoid delays and additional production costs related to the censorship process, some studios self-censor their materials. Nonetheless, films still encounter unexpected delays. Last year, the distributors of Mission Impossible III planned to release the film simultaneously in the United States and China. Because of censorship delays, however, it was released several weeks late in China, giving pirates a head start.

For years, producers have urged China to implement a film rating system; currently state censors cut films so that they are suitable for viewers of any age. Perhaps because Zhang Yimou's 2006 film Curse of the Golden Flower received criticism for gratuitously showing actresses' busts—to the embarrassment of parents who brought their children to see the film—SARFT may reconsider the establishment of a rating system.

Distribution and segmented markets

Quota limits placed on theatrical releases do not apply to home entertainment, but distributing DVDs and video compact discs (VCDs) in China poses other challenges. For example, instead of using a handful of large chain stores to distribute DVDs, as many distributors do in the United States, companies in China must coordinate with tens of thousands of distribution points. And whereas film distributors promote nationwide in the US market, China's market is so segmented that films must be promoted separately in each city.

Foreign film distributors generally need more time to release DVDs and VCDs for international home distribution than for distribution in their home countries because they must add subtitles, change the product's cover and design for the new market, and provide tailored extras—such as downloadable content in the target language. Films for home distribution in China must also face China's censors and make necessary edits before release. In contrast, pirates can release whatever material they want—uncensored—immediately after or sometimes even before a film's theatrical release, undermining the market for licensed products.

Meager revenue-sharing deal

China's box office revenue-sharing deal is reportedly one of the worst in the world for film studios. As set by SARFT, foreign films earn about 13 percent of ticket sales in China. In contrast, film distributors in the United States earn, on average, 50 percent of ticket sales.

Problem solving

Instead of simply lobbying for regulatory change, film distributors are doing what they can to tackle pirates or even convert them into legitimate retailers.

Industry regulators and players can make many changes to further open China's film sector. In an ideal world, the PRC government would remove market access restrictions, such as film quotas, and prevent blackout dates. It would also strictly enforce IP laws, implement harsher penalties for IP violations, and consistently conduct more criminal prosecutions—instead of short-term antipiracy campaigns. Meanwhile, instead of simply lobbying for regulatory change, film distributors are doing what they can to tackle pirates or even convert them into legitimate retailers.

Legal action

Hollywood won a string of court cases, filed by the MPA, in December 2006. A Beijing court ordered Sohu Internet Information Service Co., a subsidiary of the Chinese Internet portal Sohu.com, Inc., to pay about $140,000 in damages to Hollywood studios and publicly apologize for making more than 100 movies available for illegal download. A Beijing court also ordered two Beijing shops accused of selling pirated movies of six Hollywood film studios to pay a total of $20,964 in costs and damages. But winning court cases is only the first step because enforcing awards from a case can be difficult in China. As the CBR went to press, the courts were unable to locate the store owners, and the fine may never be paid.

Experimenting with cheap DVDs

Some players in the market—such as Time Warner and, more recently, Twentieth Century Fox Film Corp.—have been experimenting with DVD release dates and pricing to beat the pirates.

Warner Home Video As the first US studio to establish an in-country DVD/VCD distribution and marketing operation in China, Warner Home Video formed a JV with China Audio Video in 2005. The JV, CAV Warner Home Entertainment Co., soon became known for its experimental DVD pricing and release dates—set to compete with film pirates. Tony Vaughan, managing director of the JV, explained: "To stop people from buying cheap fakes, companies can't only appeal to people's morals. Companies have to give consumers a better alternative. For example, genuine DVDs have a clear quality advantage over counterfeit DVDs, which usually jump, wear out faster, and lack surround sound, and the dubbing and subtitles are off."

Vaughan noted that pirates entered China's market because legitimate DVDs were too expensive for the average Chinese consumer, the release dates were too late, and the demand for films was higher than the available supply. Treating pirates as competitors, CAV Warner Home Video has lowered its prices, shortened the window between the theatrical release and DVD release, and offers bonus features. "Initial research told us consumers in first-tier cities would be willing to pay ¥20-¥22 [$2.6-$2.8] for legitimate DVDs," he said. "So we developed different products and pricing for second-tier cities. Depending on the release date and bonus features, our DVDs range from ¥15 to ¥35 [$1.9-$4.5]. We released the DVD for Crazy Stone, which was priced at ¥10-¥15 [$1.3-$1.9], two weeks after the theatrical release. Crazy Stone did very well at the box office and on DVD, and because of its quick release date and low price, we were able to outplay the pirates."

Vaughan mentioned other IP protection strategies the company uses, such as promoting IP protection at film events, arranging for movie audiences to receive coupons for discounts on DVDs, and attempting to convert stores that sell counterfeit goods into sellers of licensed DVDs.
Twentieth Century Fox Home Entertainment News Corp.'s Twentieth Century Fox Home Entertainment, LLC formed a distribution agreement with Zoke Culture Group, China's largest video distributor, in November 2006 and is establishing a representative office in Guangzhou. To provide consumers licensed films at low prices, the Fox-Zoke team will also collaborate on ways to reduce DVD and VCD piracy.

In January 2007, Keith Feldman, general manager and executive vice president of Twentieth Century Fox Home Entertainment, told the CBR, "We're not limiting ourselves to a strict pricing and release policy; we just want to be accessible to consumers and competitive with pirates. We know we have to experiment and try many methods to combat pirates. Fortunately, our partner, Zoke Culture Group, has a great distribution network and an active antipiracy enforcement arm." Feldman continued, "Because we have only released three films so far in China...it is too soon to evaluate the strategy's success. We know that Chinese consumers have a very strong appetite for film entertainment, however, and this makes us feel bullish about the market. We're hopeful and confident that Chinese consumers have a desire for quality and legitimate products."

Coproductions

Many companies are also engaged in film coproductions—especially since the success of the 2000 film Crouching Tiger, Hidden Dragon, which was coproduced by companies from mainland China, Hong Kong, Taiwan, and the United States.

In 2004, Warner Brothers Pictures, China Film Group, and Hengdian Group formed the first Sino-foreign JV film-entertainment company in mainland China. The JV—Warner China Film HG Corp.—develops, finances, produces, markets, and distributes feature films, made-for-TV films, and animation. The JV released four films in 2006: Crazy Stone, which became one of the highest-grossing, low-budget domestic films in 2006; Phone Number 601; Jade Warrior; and The Painted Veil, which reached North America in December.

The Walt Disney Co. plans to release its first coproduced film in China in 2007. The Secret of the Magic Gourd, Disney's first film made in China for Chinese viewers, in Mandarin, is a coproduction among Buena Vista International, Inc., the international theatrical distribution arm of the Walt Disney Studios; Centro Digital Pictures Ltd., a visual effects production company in Hong Kong; and the China Film Group Corp. The film is an adaptation of a children's novel written by the late Chinese author Zhang Tianyi in the 1950s.

New media take up the slack

China must either allow its domestic industry to produce better films and TV programming—or allow more imports.

Many observers agree that China must either allow its domestic industry to produce better films and TV programming—or allow more imports (see Mixed Signals). Because official supply cannot meet demand, consumers are already turning to alternative, legal media, namely the Internet. For example, China Internet Café Cinema Line, operated by Beijing Netmovie Co., Ltd., served up to 2 million Internet café users a day on its personal computer terminals in 2006, according to EAN. Also, in late 2006, six Hollywood studios were negotiating with BestTV, an arm of Shanghai Media Group, to distribute their movies to China's Internet protocol TV market in 2007. If launched, the video-on-demand service would create a new channel for film distribution in China.

Until legitimate supply can satisfy demand, however, the average consumer will likely support the pirate industry by purchasing bootlegged DVDs and downloading pirated films and TV programs, as MPA statistics suggest. China already has a large Internet base: According to the latest China Internet Network Information Center survey, China boasted 137 million Internet users in 2006, second only to the United States. And a January 2007 survey by the China Youth Daily Research Center and Sina News Center found that, of 2,952 Chinese youth surveyed, 81.4 percent said the Internet was their top entertainment choice; television followed at 65.6 percent. The Internet can be a powerful tool for consumers and companies, as well as for pirates. As a player in the international arena, China is obliged to better protect IP, which will stimulate the flow of creative juices from both domestic and foreign entertainment companies.

Strong Growth in China's Film Industry

In terms of the number of films produced per year, China's film industry is the world's third largest—after India's Bollywood and the United States' Hollywood.

¥2.62 billion ($337 million) China's total 2006 box office revenue, up ¥620 million ($79.8 million) from 2005.
¥5.73 billion ($737 million) Total revenue earned by China's motion picture industry in 2006, up ¥930 million ($119.6 million) from 2005.
55 percent Share of 2006 total box office revenue earned by domestic films.
330 Number of domestic feature films produced in China in 2006, about one-third of which played in cinemas.
270 Number of film production companies in China, of which roughly 75 percent are privately owned.

Source: PRC State Administration of Radio, Film, and Television

Paula M. Miller is associate editor of the CBR.

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	Guo Guoquan / China Foto Press E-Mail \| Print \| License Special Report: Entertainment Reeling in China's Movie Fans Removing market access barriers and improving intellectual property protection would go a long way toward helping foreign film studios reach Chinese consumers by Paula M. Miller Hollywood film studios have experienced tough times in US and other markets over the last few years. With gradually declining box office sales, rising filmmaking and advertising costs, and rampant piracy, these studios are finding it increasingly difficult to earn profits. According to the Motion Picture Association (MPA), only one in ten MPA members' films recovers its investment from theatrical releases in the United States, and only four out of ten recover the initial investment after all releases. To spread investment risk, parent companies of the major US film studios have expanded their businesses over the years to include other markets—such as network television, subscription cable, print publications, online video games, and even amusement parks. They have also reconsidered their overseas strategies. In the past, Hollywood's main aim was to attract US audiences, and studios made films in other countries primarily to cut costs. Today, US film studios increasingly target overseas audiences. And China, with a population of 1.3 billion and a growing middle class, has become a coveted market (see Box). Foreign films: Knocking on China's door Though the PRC government has fulfilled its limited World Trade Organization (WTO) commitments in the entertainment sector, the market openings that have occurred have come with restrictions and with the goal of attracting new skills and technology to strengthen China's domestic film and TV industry. Before its WTO entry, China permitted 10 foreign films for theatrical release on a revenue-sharing basis annually and prohibited foreign investment in cinemas. Fulfilling its WTO commitments, China now allows 20 foreign films for theatrical release on a revenue-sharing basis each year, and foreign investors may own up to 49 percent of cinema joint ventures (JVs) (see the CBR, November-December 2003, p.42). But several challenges still exist. In recent interviews with the CBR, many film industry insiders described the following as top investment issues. Obstacles Film quotas Of the 20 foreign films released in Chinese theaters on a revenue-sharing basis per year, 14-16 of those films are usually Hollywood releases. Nevertheless, the limit is a huge constraint for Hollywood studios, which produce hundreds of films each year. Foreign distributors can release films on a flat-sales basis without quota limits in China, but studios find the marketing information gathered by box office ticket sales, which they can obtain only through revenue sharing, invaluable. Because the films of qualified Sino-foreign coproductions can bypass film quotas, many foreign studios are exploring coproductions (see below). Intellectual property (IP) violations A 2006 report that MPA commissioned from LEK Consulting singles out piracy as the "biggest threat to the US motion picture industry." The report states that major US motion picture studios lost $6.1 billion in 2005 to piracy worldwide; 80 percent of those losses were from overseas piracy, and 20 percent were from piracy in the United States. According to the report, China has the highest piracy rate of all surveyed countries: 90 percent of the potential China market was lost to piracy in 2005, resulting in a $244 million loss for MPA companies alone. MPA estimates that the film industry in China (including all foreign and Chinese companies) loses $2.7 billion per year in potential consumer spending to piracy. China's film quotas fuel piracy because such restrictions enable pirates, not industry, to fill demand. The film industry argues that China's film quotas fuel piracy because such restrictions enable pirates, not industry, to fill demand. Anecdotal evidence indicates that Chinese consumers seem increasingly willing to pay more for higher quality fakes, however, and movies that are pirated using handheld camcorders are losing their appeal. Perhaps more consumers will soon be willing to pay for legitimate products. Lack of regulatory transparency and consistency Many foreign film studios cannot predict when industry rules will change or whether local film officials will interpret rules the same way as officials at the State Administration of Radio, Film, and Television (SARFT) in Beijing do. Because of unexpected regulatory changes, Time Warner Inc. announced in November 2006 that it would pull out of its cinema JVs in China. After the PRC government released temporary rules in 2003 that permitted foreign enterprises to own up to 75 percent of cinema ventures—instead of 49 percent—in select Chinese cities, Warner Brothers International Cinemas raised its investment from 49 percent to 51 percent in some theaters. The government retracted the right to foreign majority ownership in 2005, however, and the company pulled out of the business after its JV contracts ended. Other foreign cinema operators are scheduled to open movie theaters in early 2007; time will tell whether they experience greater regulatory stability or will be granted majority control over their investment. Few theaters Despite the construction of 82 new movie theaters last year, China now has only 1,325 theaters with 3,034 screens—about 1 screen per 428,477 people. (In contrast, the United States has roughly 6,100 cinemas and 37,700 screens—about 1 screen per 8,100 people.) Because of the dearth of cinemas, competition for theatrical release is intense. Independent films and films with small and medium-sized budgets have little chance of theatrical release. Blackout dates Foreign film studios increasingly find that during key PRC holidays when crowds and box office profits are largest, such as Chinese New Year and PRC National Day, foreign films are excluded from theaters for "Chinese film festivals." In 2006, The Da Vinci Code was pulled from Chinese theaters short of its scheduled three-week run, allegedly to make room for domestic Chinese films during peak summer viewing days. Before the film was pulled, it had already made more than $13 million in China. SARFT may just want to give Chinese films the best chance to make money by allowing them full access to theaters during peak viewing periods, but some foreign industry representatives wonder whether PRC regulators also pull foreign films that do "too well" at the box office. High ticket prices Since the early 1980s, movie ticket prices in China have risen 300 fold, and box office revenues have dropped by roughly 30 percent, according to Entertainment Asia Network (EAN), a market research company. Depending on the city and theater, movie ticket prices in China currently range from ¥30 to ¥80 ($3.90-$10). In 2006, China's annual urban per capita disposable income hit $1,517, and the annual rural per capita net income reached only $463, making a $10 ticket an expensive outing for most Chinese. In contrast, DVDs usually range from ¥5 to ¥35 ($0.64- $4.50), depending on their features and whether they are legitimate, which makes them much more affordable. Content guidelines and censorship Though the PRC government has issued content guidelines—for example, films and TV programs cannot contain explicit sex or violence—the guidelines remain fairly open to interpretation. To avoid delays and additional production costs related to the censorship process, some studios self-censor their materials. Nonetheless, films still encounter unexpected delays. Last year, the distributors of Mission Impossible III planned to release the film simultaneously in the United States and China. Because of censorship delays, however, it was released several weeks late in China, giving pirates a head start. For years, producers have urged China to implement a film rating system; currently state censors cut films so that they are suitable for viewers of any age. Perhaps because Zhang Yimou's 2006 film Curse of the Golden Flower received criticism for gratuitously showing actresses' busts—to the embarrassment of parents who brought their children to see the film—SARFT may reconsider the establishment of a rating system. Distribution and segmented markets Quota limits placed on theatrical releases do not apply to home entertainment, but distributing DVDs and video compact discs (VCDs) in China poses other challenges. For example, instead of using a handful of large chain stores to distribute DVDs, as many distributors do in the United States, companies in China must coordinate with tens of thousands of distribution points. And whereas film distributors promote nationwide in the US market, China's market is so segmented that films must be promoted separately in each city. Foreign film distributors generally need more time to release DVDs and VCDs for international home distribution than for distribution in their home countries because they must add subtitles, change the product's cover and design for the new market, and provide tailored extras—such as downloadable content in the target language. Films for home distribution in China must also face China's censors and make necessary edits before release. In contrast, pirates can release whatever material they want—uncensored—immediately after or sometimes even before a film's theatrical release, undermining the market for licensed products. Meager revenue-sharing deal China's box office revenue-sharing deal is reportedly one of the worst in the world for film studios. As set by SARFT, foreign films earn about 13 percent of ticket sales in China. In contrast, film distributors in the United States earn, on average, 50 percent of ticket sales. Problem solving Instead of simply lobbying for regulatory change, film distributors are doing what they can to tackle pirates or even convert them into legitimate retailers. Industry regulators and players can make many changes to further open China's film sector. In an ideal world, the PRC government would remove market access restrictions, such as film quotas, and prevent blackout dates. It would also strictly enforce IP laws, implement harsher penalties for IP violations, and consistently conduct more criminal prosecutions—instead of short-term antipiracy campaigns. Meanwhile, instead of simply lobbying for regulatory change, film distributors are doing what they can to tackle pirates or even convert them into legitimate retailers. Legal action Hollywood won a string of court cases, filed by the MPA, in December 2006. A Beijing court ordered Sohu Internet Information Service Co., a subsidiary of the Chinese Internet portal Sohu.com, Inc., to pay about $140,000 in damages to Hollywood studios and publicly apologize for making more than 100 movies available for illegal download. A Beijing court also ordered two Beijing shops accused of selling pirated movies of six Hollywood film studios to pay a total of $20,964 in costs and damages. But winning court cases is only the first step because enforcing awards from a case can be difficult in China. As the CBR went to press, the courts were unable to locate the store owners, and the fine may never be paid. Experimenting with cheap DVDs Some players in the market—such as Time Warner and, more recently, Twentieth Century Fox Film Corp.—have been experimenting with DVD release dates and pricing to beat the pirates. Warner Home Video As the first US studio to establish an in-country DVD/VCD distribution and marketing operation in China, Warner Home Video formed a JV with China Audio Video in 2005. The JV, CAV Warner Home Entertainment Co., soon became known for its experimental DVD pricing and release dates—set to compete with film pirates. Tony Vaughan, managing director of the JV, explained: "To stop people from buying cheap fakes, companies can't only appeal to people's morals. Companies have to give consumers a better alternative. For example, genuine DVDs have a clear quality advantage over counterfeit DVDs, which usually jump, wear out faster, and lack surround sound, and the dubbing and subtitles are off." Vaughan noted that pirates entered China's market because legitimate DVDs were too expensive for the average Chinese consumer, the release dates were too late, and the demand for films was higher than the available supply. Treating pirates as competitors, CAV Warner Home Video has lowered its prices, shortened the window between the theatrical release and DVD release, and offers bonus features. "Initial research told us consumers in first-tier cities would be willing to pay ¥20-¥22 [$2.6-$2.8] for legitimate DVDs," he said. "So we developed different products and pricing for second-tier cities. Depending on the release date and bonus features, our DVDs range from ¥15 to ¥35 [$1.9-$4.5]. We released the DVD for Crazy Stone, which was priced at ¥10-¥15 [$1.3-$1.9], two weeks after the theatrical release. Crazy Stone did very well at the box office and on DVD, and because of its quick release date and low price, we were able to outplay the pirates." Vaughan mentioned other IP protection strategies the company uses, such as promoting IP protection at film events, arranging for movie audiences to receive coupons for discounts on DVDs, and attempting to convert stores that sell counterfeit goods into sellers of licensed DVDs. Twentieth Century Fox Home Entertainment News Corp.'s Twentieth Century Fox Home Entertainment, LLC formed a distribution agreement with Zoke Culture Group, China's largest video distributor, in November 2006 and is establishing a representative office in Guangzhou. To provide consumers licensed films at low prices, the Fox-Zoke team will also collaborate on ways to reduce DVD and VCD piracy. In January 2007, Keith Feldman, general manager and executive vice president of Twentieth Century Fox Home Entertainment, told the CBR, "We're not limiting ourselves to a strict pricing and release policy; we just want to be accessible to consumers and competitive with pirates. We know we have to experiment and try many methods to combat pirates. Fortunately, our partner, Zoke Culture Group, has a great distribution network and an active antipiracy enforcement arm." Feldman continued, "Because we have only released three films so far in China...it is too soon to evaluate the strategy's success. We know that Chinese consumers have a very strong appetite for film entertainment, however, and this makes us feel bullish about the market. We're hopeful and confident that Chinese consumers have a desire for quality and legitimate products." Coproductions Many companies are also engaged in film coproductions—especially since the success of the 2000 film Crouching Tiger, Hidden Dragon, which was coproduced by companies from mainland China, Hong Kong, Taiwan, and the United States. In 2004, Warner Brothers Pictures, China Film Group, and Hengdian Group formed the first Sino-foreign JV film-entertainment company in mainland China. The JV—Warner China Film HG Corp.—develops, finances, produces, markets, and distributes feature films, made-for-TV films, and animation. The JV released four films in 2006: Crazy Stone, which became one of the highest-grossing, low-budget domestic films in 2006; Phone Number 601; Jade Warrior; and The Painted Veil, which reached North America in December. The Walt Disney Co. plans to release its first coproduced film in China in 2007. The Secret of the Magic Gourd, Disney's first film made in China for Chinese viewers, in Mandarin, is a coproduction among Buena Vista International, Inc., the international theatrical distribution arm of the Walt Disney Studios; Centro Digital Pictures Ltd., a visual effects production company in Hong Kong; and the China Film Group Corp. The film is an adaptation of a children's novel written by the late Chinese author Zhang Tianyi in the 1950s. New media take up the slack China must either allow its domestic industry to produce better films and TV programming—or allow more imports. Many observers agree that China must either allow its domestic industry to produce better films and TV programming—or allow more imports (see Mixed Signals). Because official supply cannot meet demand, consumers are already turning to alternative, legal media, namely the Internet. For example, China Internet Café Cinema Line, operated by Beijing Netmovie Co., Ltd., served up to 2 million Internet café users a day on its personal computer terminals in 2006, according to EAN. Also, in late 2006, six Hollywood studios were negotiating with BestTV, an arm of Shanghai Media Group, to distribute their movies to China's Internet protocol TV market in 2007. If launched, the video-on-demand service would create a new channel for film distribution in China. Until legitimate supply can satisfy demand, however, the average consumer will likely support the pirate industry by purchasing bootlegged DVDs and downloading pirated films and TV programs, as MPA statistics suggest. China already has a large Internet base: According to the latest China Internet Network Information Center survey, China boasted 137 million Internet users in 2006, second only to the United States. And a January 2007 survey by the China Youth Daily Research Center and Sina News Center found that, of 2,952 Chinese youth surveyed, 81.4 percent said the Internet was their top entertainment choice; television followed at 65.6 percent. The Internet can be a powerful tool for consumers and companies, as well as for pirates. As a player in the international arena, China is obliged to better protect IP, which will stimulate the flow of creative juices from both domestic and foreign entertainment companies. Strong Growth in China's Film Industry In terms of the number of films produced per year, China's film industry is the world's third largest—after India's Bollywood and the United States' Hollywood. ¥2.62 billion ($337 million) China's total 2006 box office revenue, up ¥620 million ($79.8 million) from 2005. ¥5.73 billion ($737 million) Total revenue earned by China's motion picture industry in 2006, up ¥930 million ($119.6 million) from 2005. 55 percent Share of 2006 total box office revenue earned by domestic films. 330 Number of domestic feature films produced in China in 2006, about one-third of which played in cinemas. 270 Number of film production companies in China, of which roughly 75 percent are privately owned. Source: PRC State Administration of Radio, Film, and Television Paula M. Miller is associate editor of the CBR. Further Reading Mixed Signals China Data: Entertainment China's Film Industry Steps Out of the Shadows Click here for copyright permissions Copyright 2007 US-China Business Council Top of Page Table of Contents
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