WTO tells China to share the wealth on Hollywood movies

With an eye on China's moviegoer, Hollywood got a Christmas present, today.

Cash-strapped American studios are likely to get a greater share of profits from the fastest-growing movie market in the world. Eight years after China joined the World Trade Organization (WTO), the Geneva-based body rejected Monday China's appeal and upheld a decision designed to break Beijing's state control of the distribution of imported films, books, and other copyrighted cultural materials.

The decision comes as multiplex cinemas mushroom in China, anchoring shopping malls selling the consumer culture that Hollywood promotes; and as the swelling middle class stands to get impatient with the limited choice available on their local silver screens.

Movie tickets costing as much as 70 yuan ($10.25) apiece still often qualify as a white-collar date and must compete with readily available, illegal $1 DVDs and free downloadable bootlegs.

To give locally made films a fair shot at growing box office revenues, regulators at China's State Administration of Radio Film and Television have long capped at 20 per year the number of imported films allowed into the country.

That cap won't go away under the WTO ruling, but the official gatekeeper's monopoly will. To get a film shown in China, Hollywood has long had to deal with the China Film Group, the sole state-run film importer and largest film distributor, which divides the country with its state-run cousin, Huaxia Film Distribution.

Better shot for Hollywood movies

Jiang Wei, general manager of Broadway Cinemas, owner of one of the fanciest multiplexes in downtown Beijing, says the WTO decision will help his company.

"If more than two companies can bring imports in, distributors will have to balance the release dates of films more carefully," he says.

Mr. Jiang has long had to work around state-imposed blackout periods that bar imports from competing with big local productions during the holidays, which are key moviegoing periods.

He and other owners of China's roughly 2,000 cinemas (and more than 5,000 screens) have historically liked Hollywood blockbusters best because they draw the biggest crowds and make the most money.

In July, "Transformers: Revenge of the Fallen" became the first Hollywood film to gross more money in China than in any other territory outside the US. The film's 19-day haul of 423 million yuan ($62 million) boosted it, briefly, to the all-time record set in 1998 by "Titanic."

But "Transfomers" was quickly supplanted in theaters by "Founding of a Republic," a China Film movie about Mao Zedong's establishment of Communist China in 1949. The film got an unprecedented wide distribution push.

Spurring China’s movie business

Still, just as other local Chinese film companies are learning to tell better stories, raising their production standards to give imports a run for their money, Monday's WTO decision will force upstart distributors to hone the art of marketing movies, something China Film never had much stake in doing since it controlled the release calendar.

"This decision will be good for us theater owners and good for the marketplace," says Jiang.

The WTO decision not only cracks China Film's iron grip on distribution, but also weakens the 20-films-per year import cap that remains in place, says David Wolf, coauthor of a recent report on the WTO ruling for Beijing-based consultancy China Media Monitor Intelligence.

"With the monopoly broken by the WTO appeal ruling, there will be a need to ensure that China Film continues to make its accustomed money even as more state-owned or joint venture film importers start to take a piece of the pie," Wolf says.

One way to do that might be allowing more Hollywood films into the marketplace. To encourage this, the Motion Picture Association of America (MPAA) may point to the many big Chinese-made films to be released next year to argue that it helped to create a movie-going public interested in local product. By the end of 2009, China's box office is expected to chalk up its sixth straight year of growth averaging 25 percent. Last year, ticket sales rose more than 30 percent to $635 million.

More pressure to come

MPAA Chief Policy Officer Greg Frazier says the WTO's decision is "a breakthrough by any definition, but it does not mean the work is finished. Getting the ruling implemented successfully will be a challenge."

Even after the trade victory, the MPAA will likely up the pressure on Beijing again, as both Chinese and Hollywood filmmakers continue to lose out to China's well-established movie pirates and weak intellectual property rights protections.

"We can expect IPR pressure to reach another cyclical crescendo” late next year, says Wolf, doubtful that China will be able to rein in the pirates. Instead, he predicts, "the Chinese will offer a higher theatrical cap as a fillip to the US.”