Chris Lee China National Culture Group

A second pipeline for movie imports is opening in China soon, causing a seismic shift in the country’s distribution sector, and promising to offer better financial terms to studios onfilms that are allowed to enter the mainland, improving the split on per-pic profits to as much 50%.

Yet movie import quotas remain firmly in place, and studios are still not allowed to set up their own distribution shingles in the country. China currently allows only one firm, state-owned China Film Group, to operate as a gateway for imports of foreign films that can enjoy full revenue-sharing release.

As always in China, the particulars are complex. Leading the new entity, which will be called China National Culture Group, is Chris Lee, the former Columbia TriStar head and producer of “Superman Returns” and “Valkyrie.” He has been tapped president of China Railsmedia Group, one of the components in a chain of companies that will operate the distribution license.

The Hong Kong-based China Railsmedia Group will change its name to China National Culture Group, a move that reflects both its new role and its close connections with China National Culture & Arts Centre (CNCAC), the mainland Chinese state-owned enterprise that expects to receive the second license. Also onboard is Hong Kong-based iMarker, which struck an exclusive cooperation deal with CNCAC in September.

“(The company is being structured) this way because we have larger resources than i-Marker,” Bondy Tan, board director at China Railsmedia/CNCG, said. “We have a large management team and will be finding the right films (to import). We are already in the film marketplace, we are in Hollywood, and we will be talking to producers.”

In what should be music to Hollywood’s ears, Tan said: “We will offer better financial terms to Hollywood. What is holding back Hollywood in China is a hole in the distribution system. We want to fill that hole. It is to our mutual benefit that this happens.”

CNCAC is expected to receive the second distribution license in or around the second quarter of the year.

Responding to recent industry talk that the license has not yet been activated and that CNCAC may not be alone in hoping to receive the permit, Tan explained: “This is a very Chinese process. It is definitely happening, but it is likely that not everyone has been informed of the details yet.”

Tan added, “It is simply not possible that the license would be issued directly to a private-sector company; this is a cultural sector,” noting that there is no prospect either of more licenses being granted in the foreseeable future, nor an expansion of the import quota.

He also described as “too sensitive” the arcane political reasons why CNCAC should pact with a Hong Kong firm for movie acquisitions and finance.

Documents showed that China Railsmedia/CNCG will raise all necessary funds for the business, and “share 50% of the net profits” with studios over an initial 10-year period. The new importer is required to establish strategic partnerships with mainland Chinese cinema circuits; form a professional team responsible for developing competitive film selection plans and strategies; and collaborate in the setup of strategic partnerships “with world-class Hollywood and international studios.”

While the likely arrival of CNCAC on the scene certainly will be welcomed by the Hollywood studios, it still falls short of the American studios being allowed to set up and operate their own film-releasing mechanisms as they do in most other countries.

Imported films also will have to pass pre-release censorship and be approved for release in a system where there are no ratings certificates. All films released in China must be fit for audiences of all ages and sensibilities.

The CNCAC is a major state-owned enterprise that reports directly to the Ministry of Culture. It currently has no role in the film industry, but is the preferred channel for most incoming foreign music, theater and touring events that enter China.

China’s theatrical market generated $3.5 billion in box office last year. And with the unprecedented building of cinema screens at some 5,000 per year, growth is expected to continue. Many analysts expect the market to soon equal that of North America’s.

Apart from the improved revenue-sharing scheme, a new licensed distrib is good news in general to the studios, which feel that China Film Group has too many pics on its plate to fully extract maximum box office revenues from releases.

Although they pay CFG an all-in fee for marketing and distributing their films in China, Hollywood studios are already becoming more involved in — and are prepared to pay for — marketing and promotion. Disney, for example, recently unveiled a agreement with the nation’s online video leader, Youku-Tudou, to help with the promotion of upcoming “Captain America: The Winter Soldier.”

The Hollywood studios were also in a quiet, but expensive, deadlock with CFG for much of last year, when the distrib held back royalties to the studios while it checked its legal position over a change in China’s tax code.

As for CFG, which is hoping to float its shares on the Shanghai stock exchange, the presence of a competitor may impede that plan.

In Hong Kong, the announcement of the new entity was welcomed with pomp and ceremony in an event held at the posh Four Seasons, and attended by more than 100 executives from major Hong Kong film studios, industry financiers, the VP of the Hong Kong Trade Development Council, talent agents and even a leading casting director. Some 30 local companies had sent wreaths and messages of good will traditionally offered in China at the launch of a new business venture.

Hollywood, start dialing your florists.

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