After years of explosive international growth, Hollywood is currently struggling to collect box office revenue from China, the world’s second largest market for films. Blockbuster films including Iron Man 3, Skyfall, The Hobbit, Man of Steel and Star Trek Into Darkness were believed to have scored hundreds of millions of dollars for their respective studios under a landmark World Trade Organization agreement signed last year. (1) According to the terms of WTO agreement, China would pay out 25% of its domestic box office revenue to foreign studios for their films, a significant increase from the previous share of 13-17%. (2) But studios balked after the Chinese Film Group (CFG), a state-owned distributor in China, attempted to pass on a 2% luxury tax levied by the Chinese government on box office revenue. Believing the additional tax to be a breach of the WTO agreement, U.S. studios refused to pay and the China government responded by withholding all box office revenue. (3) As a result, Hollywood studios have yet to see a penny of the profits from some of the their most successful films in the market. The chairman of the Motion Picture Association of America, Chris Dodd, is currently negotiating with Chinese parties in the hopes of reaching a solution. (4) Nevertheless, such a significant dispute so soon after the new agreement is not an auspicious sign for the future of Hollywood in China.
The real question is whether Hollywood will reconsider its sycophantic approach to the Chinese film regulation. In the past, studios have gone to extreme lengths to accommodate the Chinese government with the hope of securing a long-term foothold in the market. For example, the Chinese cut of Iron Man 3 featured Chinese celebrities and the producers of Transformers 4 cast Chinese actors to appeal specifically to Chinese audiences. (5)(6) On the basis of the box office receipts, such doting would appear to be a sound policy. But the current CFG holdout evidences a cavalier regard to WTO policies and suggests that the costs of dealing in the Chinese market may not be apparent on the face of an agreement. When laws and agreements can be bent at the will of one contracting party, the risks of deal-making rise dramatically for the other. Accordingly, U.S. studios may decide to devote more resources to other international markets and leave China to its own devices.
On the other hand, the Chinese market is growing at an astonishing rate and is expected to supplant the U.S. as the world’s largest film market within the next five years. (7) So even in absence of reliable agreements, U.S. studios may opt to play along and simply hope to snare as big a piece of the growing pie as possible. Unfortunately, as Chinese films become more successful (8), Hollywood studios will have fewer chips to bargain and the Chinese government will have even less incentive play by the rules.