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China Expected to Confirm Second Theatrical Distribution License (EXCLUSIVE)

Hollywood to gain as competition increases

A seismic shift is set to hit the Chinese film distribution sector within the coming weeks.

The Chinese government is expected to confirm the allocation of a second theatrical distribution license. That would break the monopoly currently held by China Film Group (CFG) over the releasing of Hollywood and other imported revenue-sharing films.

It is expected that the China National Culture & Art Corp. (CNCAC) will be announced by the Ministry of Propaganda as having obtained a long-mooted second license. The announcement could come as early as this week and take effect in April.

The CNCAC is a major state-owned enterprise that currently has no role in the film industry but is the preferred channel for most incoming foreign music, theater and touring events. It was formed in 1987 and is headed by Lu Changhe.

The implications for CFG, Hollywood and other film industry players are significant, but complex.

As a company that reports directly to the Ministry of Culture, CNCAC would seem to have the power to become a major counterweight to CFG, which reports to the State Administration for Press, Publication, Radio, Film & Television (SAPPRFT), the quasi-ministry formed last year from the merger of two industry regulators.

Whether or how the two state-owned enterprises become direct competitors is not currently clear. But that appears to be the promise held out by CNCAC at recent meetings in December and February in Beijing that involved the company, the China Communist Party Central Committee Publicity Department, financial analysts and representatives of a handful of Hollywood and Hong Kong-based film companies.

“CNCAC’s application for foreign films import and distribution qualification and license has received full support by the Ministry of Culture of China, CPCCC Publicity Department and SAPPRFT, and the license will be effective at the beginning of the second quarter of 2014,” said CNCAC’s Lu last week.

It is possible that the existing quota of 34 films per year that are imported for revenue-sharing distribution might be reallocated. CFG and CNCAC could split the pool of titles evenly or agree to a sliding scale where CNCAC increases its role over time.

“After getting the license, CNCAC and CFG will be sharing equally in the huge Chinese film market. If institutional restructuring and merger occur in the future, the actual allocation of import films between CNCAC and CFG will be determined and assigned by the higher government authorities, which are in substance parent enterprises of CNCAC and CFG,” said Lu.

The move will likely be welcomed by the Hollywood studios, which currently feel that CFG has too many films 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 prepared to pay for—marketing and promotion. Disney, for example, last week unveiled a deal with 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 as CFG held back royalties to the studios while it checked its legal position over a change in China’s tax code.)

China’s theatrical box office market has grown 30-fold since 2000 to represent a $3.3 billion business last year. And with the unprecedented building of cinema screens at some 5,000 per year growth is expected to continue and many analysts expect the market soon to equal that of North America.

If the two companies were to really compete, Hollywood studios and other would-be film sellers might find themselves having to pitch to two importers and distributors, instead of the current one — as well as the Film Bureau for censorship approval.

But they may also see an improvement to the terms of trade on which they license films in to China.

“As a latecomer, CNCAC will offer the foreign film property right owners a better deal in terms of the film box office revenue sharing, promotion and promotion,” said Lu last week.

He also said that CNCAC also plans to strengthen cooperation with Chinese internet giant Tencent and China Investment Corp. (CIC).

China’s president Xi Jinping has recently proposed that market forces be given “a decisive role in the economy,” but media and communications have so far been exempt from such reform and appear until now to have been too sensitive.

A loss of either the import monopoly or the quasi monopoly over quota film distribution would be certain to have an impact on the operations and strength of CFG. The company is undergoing senior management changes following the recent retirement of its chairman Han Sanping and his replacement by former Film Bureau deputy director general La Peikang and vice chairman Jiao Hongfen.

Specifically, the allocation of a second distribution license could have an impact on CFG’s plans for an IPO. But it is not yet clear whether the arrival of CNCAC on the scene is a necessary precursor to CFG’s flotation, or a new impediment to CFG’s plans

CFG, which was formed 15 years ago, has slowly been trying to restructure itself in order to float its shares on the stock market. An IPO was first mooted as far back as 2006, but was blown off course by the 2008-09 financial headwinds. CFG made a filing with the China Securities Regulatory Commission in January last year to list on the Shanghai stock market and raise 3 billion yuan-4 billion yuan ($483 million-$645 million) but no date has yet been announced.

There has been flurries of speculation over the past year about new possible new licensees, some of which have been tipped as private sector studios such as Huayi Bros. Media, while other have pointed to state-backed groups such as Shanghai Media Group.

CNCAC, however, has been preparing the ground for much of the past year, and has struck preparatory agreements with several partner firms. These include Hong Kong-based i-Marker Culture & Media Investments and Horizon Entertainment Group.

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