Entering the dragon

In contrast to the huge amount of competition in China’s production and exhibition sectors, the distribution business remains tightly controlled, with just four companies accounting for almost 90% of the market.

Only China Film Group is sanctioned to import foreign movies into the country, and just two state-owned companies — China Film Group and Huaxia Film Distribution — are allowed to distribute foreign films. Two private companies — Bona Film Group and Huayi Brothers — together account for around a third of the box office for local films.

Huayi has an in-house hit factory due to its ongoing relationship with Aftershock director Feng Xiaogang while Bona, which started out distributing Hong Kong-produced films, is moving up the value chain by investing in local production.

“I realised that not owning the copyrights of the films I distributed was a big disadvantage,” says Bona CEO Yu Dong. “Our main business is to cover all the links in the film industry chain. A film company with a single business model will definitely not make it.”

China Film also takes around a third of the revenue for local films and nearly all the revenue for foreign product. The US studios only take up to 17% of the box office of each revenue-sharing import. As China Film also invests in local production and owns cinemas, it is safe to say the state-owned behemoth took a hefty chunk of last year’s $1.5bn box-office haul.

Taking all this into account, it is clear the foreign studios pushing for greater access to the China market are up against commercial as well as political interests. Nonetheless, China has until March 19 to implement a World Trade Organisation (WTO) ruling that it must stop its exclusive use of state-owned companies to distribute foreign movies, music and books.

Speculation has been rife about how the ruling will be interpreted, and while nobody will know the outcome until next month, most in the industry believes change will be incremental.

‘A film company with a single business model will definitely not make it’

Yu Dong, Bona CEO

The ruling did not address China’s annual import quotas of 20 revenue-sharing films, mostly US blockbusters, and around 20-30 smaller films imported on a flat-fee basis. China’s State Administration of Radio, Film and Television (SARFT) will also continue to censor all imports, and top officials said last year that the country is unlikely to introduce a classification system. This means — whether the quota is widened or not — the emphasis will remain on films with broad appeal which are suitable for younger viewers.

Yet despite all the restrictions, Avatar’s $204m gross — and $69m for Inception — highlight the potential of the Chinese market. And as local productions are also performing well, there may be some wriggle room for imports over the next few years. Certainly 3D films will be welcomed — China has invested heavily in 3D projection equipment, so is allowing some 3D movies to be imported outside of the quota.

Expanding choice

Meanwhile US executives observe that the territory is also starting to take a wider range of films. The success of Inception, which did not have the most child-friendly of storylines, is likely to make officials sit up and take notice. Some interesting choices are also slipping through among the flat-fee imports. Twilight and Spanish thriller The Orphanage have both been released in China despite the censors’ aversion to horror and vampires.

Though China Film is the official importer for the flat-fee titles, much of the acquisition, promotion and distribution activities are being outsourced to private companies under the ‘assisted promotion’ scheme. It is a tough business — in 2010 the flat-fee films took only 7% of the market and only four titles, including The Expendables and The Spy Next Door, grossed more than $5m (see chart, below).

Private buyers usually stump up only around $100,000 or less for all Chinese rights, but have to contend with both censorship and a competitive environment. Most deals see the buyers pay an upfront sum to the sales company of around 20% of the acquisition price, which they risk losing if the film fails to pass censorship. If they are given the green light, China Film expects a fee and a cut of box office above a certain level. China Film sometimes covers the p&a, which on average costs around $1.5m.

But those involved say it is still a viable business and is less about making money than building relationships and developing expertise in distribution, in anticipation of the restrictions being relaxed.

“It’s about testing the market and showing people what we can do,” says Dan Mintz, CEO of DMG Entertainment which has released titles including Twilight, Knowing and Resident Evil: Afterlife in China. “By the time Twilight came out here, New Moon was being released in the US already. It is tough to schedule because of censorship and all the deliverables. But it’s now inching up to day-and-date which is obviously where we want to be.”

Chinese film officials prefer non-US and foreign-language films to be distributed on the flat-fee basis, though audiences swing resolutely towards action and adventure films, which are not found in abundance outside North America. Therefore, the more commercial sides of the European, Russian and East Asian film industries may find an opening here. Luc Besson’s The Extraordinary Adventures Of Adele Blanc-Sec grossed nearly $8m last year, The Orphanage took nearly $2m and Russian action film Back In Time managed $1.2m. These might not be huge numbers and the producers concerned would only have received a small payment, but it is a crack in an otherwise impenetrable fortress.

Upcoming titles distributed through the assisted promotion scheme include DMG’s Red and Killers and 3D animation Alpha And Omega, via a deal negotiated by David U Lee and backed by New China Media. Lee also structured the deal for last year’s third-biggest flat fee release, The Spy Next Door, released by China Film and Creastar.

The international view

Top 10 foreign studio films, 2010

Top 10 foreign independent films, 2010