Hollywood Studios Finalize Distribution Contract With China (EXCLUSIVE)

U.S. studios lock in payment terms, timing and ability to audit Chinese state distributors

Hollywood has finally put its relationship with China on a more stable, contractual footing after signing a “long-form agreement” with the Chinese authorities. The contract should help film companies doing business in China to collect payments in a more timely manner and give them the ability to audit state distributors.

The agreement is the belated result of the historic February 2012 agreement between China and the U.S. that was brokered in person by China’s then-Vice President Xi Jinping and U.S. Vice President Joe Biden.

That 2012 handshake deal established a new regime for revenue share distribution in China and expanded China’s import quotas – raising them from 20 films per year to 34 for revenue-sharing films.

However, as the agreement was not codified until now, there have been gray areas and behind-the-scenes disputes, some of which have become public knowledge. In recent weeks issues of possible under-reporting and ticket fraud within the exhibition and distribution chain have again resurfaced, most notably with questions about revenues being diverted away from “Terminator Genisys” in favor of a Chinese title.

The long form contract was referred to in the communique issued at the end of Xi’s September state visit to the U.S. It restates some of the 2012 norms and also goes a couple of steps further:

* The agreement confirms that 25% net revenue is payable to studio rights owners by the state-owned Chinese film distributors.

* It also confirms that rights owners will be paid in a timely fashion.

* And it establishes the right of the owners to audit the Chinese distribution chain.

The new bilateral agreement can begin to be renegotiated in February 2017. But, given the history of protracted negotiations, it is likely to be in place for significantly longer.

In 2017, Hollywood studios would likely be interested in pushing for greater commercial potential with concessions such as a greater share of theatrical revenues, an expanded import quota, reducing state intervention in the choice of film release dates, co-marketing by the studios’ Chinese offices alongside the state-owned distributors and the ability to apply for and receive licenses permitting direct distribution in China.

“As the Chinese government announced following President Xi’s visit to the United States, the China Film Group Corporation and the Motion Picture Association of America, with the oversight and assistance of the U.S. Trade Representative, have now reached ‘an Agreement on Cooperation in Importation and Distribution of Revenue-Sharing Films and expressed commitment to continue their cooperation in the film industry,’” the Motion Picture Assn. said in a written statement.

“We are grateful to the leadership of the State Administration for Press Publication Radio Film & Television and the China Film Group Corporation for recognizing the importance of the growing partnership between China and the United States with regard to our film industries.

“Both the rapid growth of Chinese audiences and the incredible contributions that Chinese filmmakers make to the global film industry continue to make this relationship important.  Our two industries have done an excellent job meeting these new and exciting opportunities and we look forward to further growth of our partnership in the years ahead.”

Although the 34 film revenue sharing deal was almost immediately adopted in early 2012, the Hollywood studios tangled with China over delayed payments in 2013, when China Film Group held back monies owed and sought to deduct new sales tax payments from the studios’ share of revenue. The matter was subsequently resolved.

The long-form agreement puts into writing that the 25% revenue must be net of all taxes and marketing expenses. It also specifies that payments must be “timely,” albeit without specifying a number of weeks or days.

The right to audit will allow the studios to examine the accounts and operations of the state distributors which handle all revenue sharing films, and have those distributors follow the chain of sub-distributors and cinema operators.

The MPA and the USTR are billing the long form agreement helping all foreign film companies doing business in China.

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