The Chinese market may be booming, but with quotas very much in place it remains off-limits to many foreign films. Liz Shackleton explores the reality of releasing in China

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

Richard Fox, executive vice-president, international, Warner Bros Entertainment

“This is a very exciting and challenging time for Chinese film-makers. Working within a unique set of limitations, we’ve seen some wonderfully creative films which experiment with genres, art and technologies. There is, however, some concern that the admission growth rate is significantly lower than that of box office. If ticket price continues to soar, this may ultimately hurt the long-term development of the local film industry.”

Andrew Cripps, president, Paramount Pictures Int’l

“If you look at screen growth, it’s up to 6,200 screens, an increase of 32% in the past year. With high disposable income, an emerging middle class and high 3D penetration, it adds up to a vibrant, exciting marketplace. We were very pleased last year with the results from Iron Man 2 and both the DreamWorks animated films [How To Train Your Dragon and Shrek Forever After]. For 2011 we are excited by the prospects of Transformers: Dark Of The Moon and Kung Fu Panda 2, as well as other films on our slate.”

Sunder Kimatrai, senior vice-president, Asia Pacific, 20th Century Fox International

“We have seen the production business come of age in the last few years and become a creative force to be reckoned with, the emergence of a rich and varied landscape of distributors and what is easily the most rapidly growing exhibition industry in the world and easily among the highest in quality of the consumer experience. Of particular note is the widespread adoption of digital cinema, enabling China to become one of the leading 3D markets in the world.”

Top 10 foreign studio films, 2010

RankTitlePrint countGrossDistributor
1Avatar (US)700 + 3D + Imax$203.92mChina Film, Huaxia
2Inception (US)500 + D* + Imax$69.03mChina Film, Huaxia
3Alice In Wonderland (US)200 + D + 3D + Imax$33.81mChina Film, Huaxia
4Harry Potter And The Deathly Hallows: Part 1 (US-UK)600 + D + Imax$33.4mChina Film, Huaxia
5Iron Man 2 (US)500$27.08mChina Film, Huaxia
6Clash Of The Titans (US)Digital + 3D$26.95mChina Film
7Prince Of Persia: The Sands Of Time (US)500$25.98mChina Film, Huaxia
8Toy Story 3 (US)3D + Imax$17.56mChina Film Digital
9Knight And Day (US)400$14.4mChina Film, Huaxia
10Shrek Forever After (US)200 + D + 3D$14.06mChina Film Digital

Top 10 foreign independent films, 2010

RankTitlePrint countGrossDistributor
1The Expendables (US)400 + D$32.13mChina Film
2Resident Evil: Afterlife (US-Ger)Digital 2D + 3D$21.6mDMG
3The Spy Next Door (US)200 + D$9.67mChina Film & Creastar
4The Extraordinary Adventures Of Adele Blanc-Sec (Fr)200 + D$7.92mChina Film & Domo Media
572 Tenants Of Prosperity (HK)100 + D$4.99mChina Film & Sun Wah
6Echelon Conspiracy (US)200 + D$2.26mForbidden City, Trinity Pics
7Secret Couple (S Kor)200 + D$2.14mChina Film & Huaxia
8The Orphanage (Sp-Mex)100 + D$1.88mShanghai Huayu
9Gamer (US)200 + D$1.73mCreastar
10The Jade And The Pearl (HK)100 + D$1.45mSun Wah Media