China’s film quota cracked

Hollywood sees China move as first step

China’s decision to allow more foreign films and to change the terms creates “a new ceiling” in China-Hollywood negotiations, and should encourage the industry to re-examine some of its production plans, according to MPAA topper Christopher Dodd.

The deal was announced Friday after intense 11th-hour negotiations involving Chinese vice president Xi Jinping and U.S. veepee Joe Biden. While the agreement will result in greatly increased B.O., the U.S. biz will likely seek to open Chinese borders even further.

China’s agreement to loosen its restrictions on foreign films will give Hollywood what it’s wanted for years — a bigger piece of China’s exploding media marketplace.

The decision to allow the importation of 14 more 3D or large-format films per year and a profit-sharing increase from 13% to 25% for foreign film companies is a major victory for U.S. negotiators, who revved up their efforts to seal the agreement in the days leading up to last week’s visit of Xi.

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“It kind of came down to the last few weeks,” Antony Blinken, national security adviser for Vice President Joe Biden, told Variety. Blinken has spent the last week accompanying Biden on his trip to Los Angeles, where the VP played an instrumental role in getting leader-in-waiting Xi to help reach an agreement.

Chinese box office surpassed $2.1 billion in 2011 and could grow to $5 billion by 2015. Anagrow to $5 billion by 2015. Analysts have said that even allowing 10 more films could mean half a billion dollars per year for major studios, so 14 premium-priced titles could return even more revenue than that to Hollywood.

“I think, overall, people feel like it’s important to get movement here and then go back to the drawing boards and push for more openers,” said Dodd.

Tentpoles such as “Avatar” and “Inception” will continue to be favored, but the agreement will also boost 3D conversions of 2D titles like “The Lion King” and “Titanic.”

The proposed increase in the profit-sharing percentage for foreign film companies was debated all day Friday. Blinken noted that in the morning, the number hovered just north of 20%. But the White House had wanted 27%, and Biden consulted with toppers including Bob Iger and Jeffrey Katzenberg to see what number could really work for the industry.

“The only way we could move forward was if he could convince (Xi) to move to 25%,” he said. Xi and Biden sat next to each other at a lunch on Friday, hours before the announcement, where both leaders took part in some last-minute dealmaking.

“Biden leaned over to Xi and said, ‘Look, we’re very close to this film deal. It’s a good deal for one of our most important industries and, I think, a good deal for China. If we could get to 25% we’ll have a deal, and if you could do it while you’re in Los Angeles, that would also be very symbolic.'”

By the afternoon, officials from each administration began receiving word that preliminary commitments were to be signed, with the agreement officially set for inking the following week.

With the potential for hundreds of millions more in annual box office revenue from China, execs expressed satisfaction with the accord.

Walt Disney Co. CEO Iger said the agreement “represents a significant opportunity to provide Chinese audiences increased access to our films.”

“We applaud this breakthrough agreement and thank Presidents Obama, Hu, Vice Presidents Biden and Xi, the MPAA and Ron Kirk and his team at USTR for their tireless efforts to promote market access in the filmed entertainment industry,” said Warner Bros. chairman Barry Meyer.

Jeff Small, president and COO of DreamWorks Studios, said, “Chinese consumers are showing a high demand for quality American product, and this decision will allow them to see our films in their theaters with greater ease. We’re looking forward to much more business in this fast-growing market.”

Independently produced films could also benefit from loosened quotas. “For the first time, through this agreement, there is a promise of creating a commercial foundation that will allow independent producers to participate more fully in the Chinese marketplace,” said Jean Prewitt, CEO of the Independent Film & Television Alliance.

On Friday, the White House said that the agreement “will allow significantly more job-supporting U.S. film exports to China and provide fairer compensation to U.S. film producers for the movies being shown there.”

Agreement will be reviewed after five years, and the U.S. can return to the WTO to seek relief.

In 2009, the WTO ruled against Chinese restrictions on importing and distributing films, DVDs, music, books and journals, but in practice, the quota of 20 foreign films per year remained in place in China.

Chinese leaders were concerned that opening up barriers would cause a flood of foreign films to wipe out the local movie industry. But some observers say that limiting the new increase to 3D and Imax movies addresses those concerns.

“Most of the Chinese moviemakers, they are not making Imax, they are not making 3D movies anyway,” Qiang Bai, CEO of 3D China Ltd., told Variety.

Dan Mintz, CEO of L.A.- and Beijing-based DMG, cautioned that the new agreement looks great on paper, but it does not mean the market will become a free-for-all.

“At the end of the day, every movie trying to get in will still have to go through censorship. If the government doesn’t want your movie in, it won’t. And just because a movie is in, it doesn’t mean that it will be shown in all of the screens in China,” said Mintz, who is overseeing DMG’s $300 million fund to bring co-production tentpoles to China.

He noted that China Film Group owns 50% of screens in China, and it is also promoting domestic films.

“So, at the end of the day, anyone trying to enter Hollywood still has to have relevance as well as strong access in the market,” Mintz said.

(Clifford Coonan in Beijing contributed to this report.)

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