China Film: Quota? What Quota?

China film quotasSince 1994, China has had a quota on the number of foreign films that could be shown in Chinese theaters on a revenue sharing basis (i.e., with the Chinese distributor remitting some percentage of the revenues to the foreign film’s producer). The quota started at 10 per year in 1994, was increased to 20 films per year in 2002, and then was increased again to 34 films per year in 2012 with the proviso that at least 14 of the films be in either 3D or IMAX format.

The exact revenue sharing model has varied, but the current rule, as outlined in the 2012 US and China Memorandum of Understanding (which was a settlement after the US had prevailed in a WTO complaint), allows the foreign film producer to keep 25% of all domestic revenues, without any withholdings or deduction. That percentage has been more aspirational than actualized; money from China is often both too little and too late.

Hollywood has been negotiating a new deal with China for more than a year (the 2012 memorandum expired in 2017), in hopes of raising the quota, increasing the percentage on revenue shares, and gaining more control (or at least transparency) with respect to distribution logistics such as release schedules and blackout dates. But the on-again, off-again US-China trade war has thrown those negotiations for a loop and effectively given China the ability to take whatever position it likes, from slapping a huge tariff on all US films to conceding on all of Hollywood’s deal points. But China is in no hurry to agree to anything. Why should it be? They’re fine with the status quo.

Meanwhile, an alternative to the quota import system has emerged that may render the whole discussion moot. For years, in parallel with the quota-based foreign films, China has also allowed the importation of “buyout” foreign films: films bought for a flat amount, with no required profit sharing. But in recent years, as the Chinese box office has become ever more profitable, the competition for buyout films has gotten increasingly fierce, with many distributors offering better terms, i.e., profit sharing. The most famous example of profit sharing on a buyout film came in January 2017 with Resident Evil: The Final Chapter, which became a smash hit in China to the surprise of all parties involved. Once the film passed RMB 500 million in domestic revenue (which happened on opening weekend), the film producer started getting a piece of the revenue.

As Resident Evil goes, so goes the world. Indeed, strict buyout films are now more the exception than the rule, and the revenue-sharing provisions are getting better and better. The US negotiators must be wondering why they are spending so much time negotiating an agreement for terms that are not appreciably better than what foreign filmmakers are already getting on the open market.

Except it’s not really an open market; China’s theatrical distribution system is dominated by two huge players, China Film Co. and Huaxia, both of which are state-owned. Even the buyout films have to go through those distributors to play in theaters, because foreign companies are legally prohibited from distributing films in China. If there is a convergence between the revenue-sharing terms of buyout films and quota films, it’s only because the Chinese authorities want that to happen (or at least are allowing it to happen).

It’s anyone’s guess how long buyout films will be allowed in on similar terms as the quota films or what the Chinese authorities really think about buyout films. Maybe they’re letting all of this play out to see what happens. Maybe they’re just roiling the waters between the MPAA (which represents the Hollywood studios, who provide most all of the quota films) and the IFTA (which represents non-studio producers, who provide many of the non-quota films). Either way, if you’re an independent producer, it’s a good time to be selling to China.

This article was written by Matthew Dresden and published on China Law Blog. Original Post: https://www.chinalawblog.com/2018/06/china-film-quota-what-quota.html      

View the original article here.

Matthew Dresden

Matthew focuses on international and China law, with a focus on technology and entertainment law and Chinese transactional and IP work. He represents a wide range of companies, from start-ups to NYSE-traded companies. His work has included matters for film studios, cable channels, film and television production companies, video game developers, magazines, restaurants, wineries, international design firms, product manufacturers, outsourcing companies, and computer hardware and software companies.