CREATe Industry Fellow, Emma Barraclough, has published an article in the World Intellectual Property Organization (WIPO) magazine titled ‘the rise of China’s film industry’, in which she highlights a CREATe project focused on new models for digital film, music and e-fiction production and distribution in China.
Ten years ago, when Jeffrey Yang, a lawyer with Reed Smith, returned to his native Shanghai after almost a decade working in London, he found the streets teeming with hawkers peddling pirated DVDs. “They were on every corner. People could buy the latest blockbusters as soon as they were released. I thought it was inevitable that fake DVDs would devastate the film industry,” he says.
Fortunately for movie executives, Yang was overly pessimistic. Instead, the story of the rise of China’s film industry is something of a success story. The plot takes in a battle with pirates, a technological revolution and dedicated empire builders, weaving together three story lines that help explain how China’s film industry was saved from sellers of pirated DVDs and, along the way, took on a very different shape.
Movie ticket sales surge
The first story line centers on the growing popularity of movie-going among China’s young urbanites and its burgeoning middle classes. Last year the Chinese spent more than USD6.5 billion on movie tickets – up almost 50 percent on the year before – according to the State Administration of Press, Publication, Radio, Film and Television, with more than 20 cinema screens opening every day to service the demand. If China’s box office revenues grow at their current rate, they will top USD11.9 billion by the end of 2017, overtaking the United States.
Chinese films accounted for just over 60 percent of those box office revenues, with home-grown action adventure movies Monster Hunt and Mojin: The Lost Legend and the comedy Lost in Hong Kong making the list of top five grossing films along with US blockbusters Furious 7 and Avengers: Age of Ultron.
China’s film industry makes more than 80 percent of its revenue from the box office, according to Amy Liu of EntGroup, a film industry data consultancy. In contrast, filmmakers in the US make as much money from selling DVDs, broadcast rights and merchandising as they do from ticket sales. But with double-digit growth rates and a population approximately four times that of the US, which remains largely untapped, the Chinese film sector still has huge scope for growth, suggests Qiaowei Shen, Professor of Marketing at Wharton, University of Pennsylvania. While Chinese filmmakers, like their counterparts elsewhere, continue to face problems of counterfeiting, DVD piracy and illegal streaming of content, things are looking up, says Liu. “Until recently China wasn’t able to build brands around its own films in the same way as Hollywood. Now we are starting to see the development of franchise movies and co-branding deals with local companies.” Chinese filmmakers are starting to tap into consumer demand for film-related merchandise. Last year, Beijing-based online movie ticketing company, Mtime, struck a deal with China’s biggest cinema chain, Wanda, which will see it install retail stores within theaters to sell licensed merchandise.
Government policy
The second subplot in the story of China’s film industry is a stronger commitment to the creative industries on the part of the government. Not only does a vibrant national film industry offer valuable soft power potential, says Andrew White, Associate Professor of Creative Industries and Digital Media with the University of Nottingham in Ningbo, a powerful movie industry can help steer China towards its post-industrial future. “It wants its cities to compete with London, Tokyo and New York and it knows that it needs strong creative industries to do that.”
Allied with this is a more robust approach to intellectual property (IP) protection. Draft provisions to strengthen the country’s copyright law, China’s 2014 ratification of the Beijing Treaty on Audiovisual Performances, and a forthcoming Law on The Promotion of the Film Industry signal the government’s commitment to protecting film industry copyright in China. But while lawyers suggest that movie makers can use Chinese law to tackle copyright abuses, damages remain low. “Compensation is not as high as in the US and Europe,” says Chen Jihong of Zhong Lun law firm. “If the actual loss to the copyright owner and the actual illegal gains cannot be calculated, the existing compensation ceiling is RMB500,000 (USD75,000), making the deterrence very limited for films.”
Also central to this part of the story line is the government’s decision to put a ceiling on the number of foreign films shown in the country’s cinemas. Though unpopular among foreign studio bosses, the quota policy has given China’s domestic industry time and space to grow. Regulations deterring foreign companies from making their own films in China has spawned joint venture and co-production deals, giving Chinese filmmakers greater access to foreign know-how and foreign companies an entry to the Chinese market. With hindsight, the controversial quota system appears to have helped align interests in support of greater IP awareness and a more robust copyright system: Chinese filmmakers and the state-owned companies that distribute foreign films want to crack down on piracy as much as any Hollywood producer.
Technological ecosystems
The third, and the most important, subplot in the story of China’s film industry focuses on a technological and social revolution. At the same time that rising disposable incomes made cinema-going a favorite activity for urban Chinese, Internet technology has boomed. The country now has more people online than any other, and, helped by some favorable government policies, has seen the emergence of an A-list of home-grown tech companies, from smartphone maker Xiaomi to the big-hitting Internet platforms collectively known as BAT: search engine Baidu, ecommerce business Alibaba and social media company Tencent.
The BAT companies are pursuing ambitious strategies to create what are known as online to offline ecosystems, encouraging people to conduct more of their daily activities – from buying cinema tickets to watching movies – on their platforms. To help them build their empires, BAT companies and other platforms are producing audio-visual content themselves, as well as doing deals with partners across the content value chain. In 2013, for example, Baidu bought Internet video provider PPS. A year later it secured a USD300 million investment from Xiaomi for its iQiyi video-streaming platform. That deal came in the same week that Xiaomi bought a stake in Youku Tudou, another video-streaming platform part-owned by Alibaba. Last year Alibaba and Tencent snapped up more shares in Huayi Brothers, China’s largest private-sector film company and the maker of Mojin: The Lost Legend.
With 650 million Internet users in China, it is easy to see why companies are so excited about the potential of online platforms. But what is important from an IP perspective is that copyright-related deals are now central to their growth. Platforms want to leverage film to drive growth in mobile gaming, merchandising and other derivative forms of entertainment as they build their ecosystems. “IP deals are the new buzzword,” says Nic Garnett, a copyright and ecommerce consultant at Tilleke & Gibbins. “It’s about spreading IP across platforms, much of which relates to local repertoire. What is interesting is that copyright is no longer a brake on innovation but a spur. The ability to own IP is the cornerstone of this empire building.”
The BAT companies, and others like them, are blurring the distinction between types of audio-visual content, allowing users to watch blockbuster films, made-for-TV movies, user-generated content, TV shows and a growing number of programs made in-house across a variety of devices. They are also experimenting with a range of business models, from advertising-driven to subscription-funded and pay-per-view. Their goal, one shared by many across the global film industry, is to make their respective ecosystems so comprehensive that users will find it more convenient to access content legally – even at a cost – than to seek out pirated content.
Unlike cinema chains and DVD manufacturers, online platforms have also been able to amass plenty of data about their users’ preferences: the music they listen to; their Internet purchases; and the film stars they follow on social media. That allows them to cross-reference the data and make films targeted to their cultural tastes. “Making movies in China is quite a scientific, logical process and less of a creative one,” jokes EntGroup’s Amy Liu. Such a commercial approach might not help Chinese filmmakers win international awards, but it does help secure the industry’s financial future.
Lacking the kind of powerful and well-connected legacy copyright industries that exist in many other parts of the world, China’s dynamic new online businesses have had more freedom to develop in innovative ways. “The young executives in China have only ever known about exploiting online content,” says Garnett. “That makes the country different to Europe and the US where executives always want to know: “Will this cannibalize what we already have?”
China’s technological leapfrogging doesn’t mean that its online shift has been trouble-free for the country’s film industry. Movie makers are still plagued by online piracy, although China’s courts are getting tougher on Internet platforms that facilitate breaches of copyright and the advertisers that keep illegal sites in business. IP officials are closing down more illicit streaming services, says Han Yufeng, a former judge now with Lung Tin law firm, while Zhang Wenlong, a program officer in the National Copyright Administration of China, warns pirates that they face more targeted action this year, along the lines of the annual “Sword Net” campaign. Even the US Trade Representative in its annual Special 301 report praised recent efforts by China’s authorities to tackle piracy, highlighting a record USD42 million administrative fine imposed in 2014 against QVOD, a video-streaming website, for making available pirated movies and TV shows to its subscribers.
After often beginning life in legal grey areas, many of China’s online platforms have developed legitimate business models and are among some of the world’s most valuable tech companies. Notice-and-takedown mechanisms to report and remove infringing content are now a common feature of large websites. As a result, licensing revenues for filmmakers are growing sharply.
The sequel?
The business models being developed by Chinese companies to distribute films and audio-visual content online have turned China into something of a copyright laboratory and they are being watched closely by industry executives and researchers. A group of academics led by Edinburgh University’s Shen Xiaobai, for example, is working on a project for CREATe focused on new models for digital film, music and e-fiction production and distribution in China.
“Chinese companies that previously felt they were on the receiving end of the IP regime are now considering how they could put these tools to their own purposes,” says Shen. “Businesses are putting together their best minds, creatively molding and sharpening these tools and testing them in the Chinese market. They may be less constrained than their counterparts in imaginatively creating new business models.”
The story of China’s film industry is a multi-layered one that tells us much about new business models in the copyright industries, the increasingly blurred boundaries between film and other audio-visual content, and the changing way in which that content is being consumed. This may just be the first part of a long-running franchise.
Read this article first posted on the WIPO Magazine.