Mergers, Acquisitions and Licensing on Rise for Content Companies in China

Rapid Online Growth

In addition, China has the largest online user base in the world, estimated at around one-half billion. China's rapidly growing online arena has allowed even greater massive, often unchecked, piracy of U.S. entertainment content. But there is earning potential for U.S. companies, too, as some law and order begins to take shape.

For example, in an earlier court fight in 2005, Universal Music, Warner Music and Sony Music sued China's Google-equivalent Baidu ' estimated to account for 80% of online searches in China ' for enabling piracy through deep linking, but the record companies lost in lower court. The music companies appealed to the Beijing High People's Court but resolved the litigation by signing Baidu to content licensing deals. The labels' venture, One-Stop China, made more than one-half million tracks available. The agreement allowed online users to download or stream for free, with per-use monies paid for by Baidu through ad revenues. More recently, this summer, the Chinese e-commerce mega-site Taobao, which is a part of Alibaba Group, agreed to work with the international Motion Picture Association to curb copyright infringement and counterfeiting activities.

Despite the high level of online piracy in China, content licensing deals have been happening for several years now. In TV programming, Disney and CBS were among the early leaders in entering into agreements with China's Youku and Sohu online services for the streaming of such shows as Desperate Housewives, Gossip Girl and Grey's Anatomy. In June 2011, Youku signed a joint venture agreement with Warner Bros Entertainment for pay-per-view movies. Importantly, foreign films aren't subject to the high level of restrictions in online settings as these films are in movie theatres in China.

But online services in China face their own economic challenges. The country's two biggest online video services became one in August following the finalizing of a $1 billion stock deal by Youku, China's largest online video provider, to buy the second-largest, Tudou. Both services had lost money in 2011; prompting the deal was a need for cost-savings, which could be achieved by utilizing greater bargaining power to negotiate lower fees for obtaining content. Youku had previously entered into deals with U.S. entertainment companies like DreamWorks and NBCUniversal.

Still, in an example of the growing value of online services in China, the Chinese e-commerce company Alibaba Group Holding Ltd. agreed in May 2012 to buy half of Yahoo! Inc.'s 40% stake in Alibaba for a minimum of $6.3 billion in cash, plus $800 million in preferred stock.

American Lawyers in China

American lawyers have been working in Hong Kong for many years. On the Chinese mainland, much of the recent influx of U.S intellectual property and entertainment lawyers naturally has been into the large commercial centers of Shanghai and Beijing. Most of these lawyers land in Chinese offices of firms that are well-established in the United States; it would be difficult for boutique firms, for which the entertainment industry is known, to compete on a transnational scale. For instance, U.S. firms with lead roles in the Youku/Tudou merger were mega-firms Skadden, Arps, Slate, Meagher & Flom and Kirkland & Ellis. In the recent AMC deal, U.S. and China-based lawyers from Davis Polk & Wardwell represented the Wanda Group, while Weil, Gothsal & Manges attorneys in both countries worked for AMC. Among the law firms that have recently added lawyers to their mainland China presence is the well-known entertainment industry firm Loeb & Loeb, for which Beijing is its only law office outside the United States.

Intellectual property and entertainment lawyers whose practices involve China face a special blend of legal principles. First, English law has been retained in the former British colony Hong Kong, returned to China in 1997. In gambling center Macau, the former Portuguese island colony located near Hong Kong that was placed under China's administration in 1999, Portuguese law is the still practiced. (Note: Foreign law firms are barred from establishing independent practices in Macau but under local bar regulations can share revenues by referring clients.) Mainland China is based on its own Chinese law.

There is another aspect to doing business in China with which U.S. lawyers aren't used to: In March 2012, the Chinese government ordered all lawyers to pledge their allegiance to the Communist Party, a move reportedly aimed at human rights attorneys. The Chinese government tallies its country's lawyer count at 166,000, with about one-third being Communist party members, a much higher percentage than the general population.

How might the recent pledge requirement affect U.S. lawyers in a content-expressive industry like the entertainment business? One senior partner at a Beijing firm told The American Lawyer, an Entertainment Law & Finance affiliate publication: “At our firm, whether or not you are a Communist Party member has absolutely no effect on your work as a lawyer or how you're made partner.” But according to a lawyer at a different Chinese firm: “[P]olitical factors could send things in directions that are very difficult to forecast.”

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This is the second installment of a two-part article. Part One discussed recent copyright law developments in China, as well as the country's TV and film industries. Part Two continues coverage of Chinese/U.S. film developments, and discusses concerns in the Chinese online industry as well as the increasing presence of U.S. intellectual property and entertainment law firms in China.

2012 has so far reaffirmed the strong appeal of the Chinese market for U.S. film companies. Veronika Kwan Vandenberg, president of distribution for Warner Bros. International, was quoted in The Hollywood Reporter as saying: “The top 10 films [dominated by U.S. movies] through June 30 in China are already 85% of the top 10 films for the entire year in 2011.” Then in September 2012, Imax Corp. announced an increase in the number of Chinese-language films it will format from Chinese production house Huayi Bros. The two companies first partnered for the 2010 release of Aftershock: The Imax Experience. Imax currently has about 50 exhibition sites in Dalian Wanda Group theatres and seeks to increase that to at least 90 in the near future.

When the Beijing-based Wanda Group completed its $2.6 billion purchase of the giant Kansas City-based AMC Entertainment theatrical-exhibition chain in September, Wanda chairman Wang Jianlin also noted Wanda's strategy for AMC and major U.S. films producers to enter into joint ventures. (Wanda's AMC acquisition makes it the largest theatrical exhibitor worldwide, though AMC previously had foreign ownership interests, after Loews Theatre merged with Canada's Cineplex Odeon Corp. to create Loews Cineplex Entertainment, which merged with AMC.)

Rapid Online Growth

In addition, China has the largest online user base in the world, estimated at around one-half billion. China's rapidly growing online arena has allowed even greater massive, often unchecked, piracy of U.S. entertainment content. But there is earning potential for U.S. companies, too, as some law and order begins to take shape.

For example, in an earlier court fight in 2005, Universal Music, Warner Music and Sony Music sued China's Google-equivalent Baidu ' estimated to account for 80% of online searches in China ' for enabling piracy through deep linking, but the record companies lost in lower court. The music companies appealed to the Beijing High People's Court but resolved the litigation by signing Baidu to content licensing deals. The labels' venture, One-Stop China, made more than one-half million tracks available. The agreement allowed online users to download or stream for free, with per-use monies paid for by Baidu through ad revenues. More recently, this summer, the Chinese e-commerce mega-site Taobao, which is a part of Alibaba Group, agreed to work with the international Motion Picture Association to curb copyright infringement and counterfeiting activities.

Despite the high level of online piracy in China, content licensing deals have been happening for several years now. In TV programming, Disney and CBS were among the early leaders in entering into agreements with China's Youku and Sohu online services for the streaming of such shows as Desperate Housewives, Gossip Girl and Grey's Anatomy. In June 2011, Youku signed a joint venture agreement with Warner Bros Entertainment for pay-per-view movies. Importantly, foreign films aren't subject to the high level of restrictions in online settings as these films are in movie theatres in China.

But online services in China face their own economic challenges. The country's two biggest online video services became one in August following the finalizing of a $1 billion stock deal by Youku, China's largest online video provider, to buy the second-largest, Tudou. Both services had lost money in 2011; prompting the deal was a need for cost-savings, which could be achieved by utilizing greater bargaining power to negotiate lower fees for obtaining content. Youku had previously entered into deals with U.S. entertainment companies like DreamWorks and NBCUniversal.

Still, in an example of the growing value of online services in China, the Chinese e-commerce company Alibaba Group Holding Ltd. agreed in May 2012 to buy half of Yahoo! Inc.'s 40% stake in Alibaba for a minimum of $6.3 billion in cash, plus $800 million in preferred stock.

American Lawyers in China

American lawyers have been working in Hong Kong for many years. On the Chinese mainland, much of the recent influx of U.S intellectual property and entertainment lawyers naturally has been into the large commercial centers of Shanghai and Beijing. Most of these lawyers land in Chinese offices of firms that are well-established in the United States; it would be difficult for boutique firms, for which the entertainment industry is known, to compete on a transnational scale. For instance, U.S. firms with lead roles in the Youku/Tudou merger were mega-firms Skadden, Arps, Slate, Meagher & Flom and Kirkland & Ellis. In the recent AMC deal, U.S. and China-based lawyers from Davis Polk & Wardwell represented the Wanda Group, while Weil, Gothsal & Manges attorneys in both countries worked for AMC. Among the law firms that have recently added lawyers to their mainland China presence is the well-known entertainment industry firm Loeb & Loeb, for which Beijing is its only law office outside the United States.

Intellectual property and entertainment lawyers whose practices involve China face a special blend of legal principles. First, English law has been retained in the former British colony Hong Kong, returned to China in 1997. In gambling center Macau, the former Portuguese island colony located near Hong Kong that was placed under China's administration in 1999, Portuguese law is the still practiced. (Note: Foreign law firms are barred from establishing independent practices in Macau but under local bar regulations can share revenues by referring clients.) Mainland China is based on its own Chinese law.

There is another aspect to doing business in China with which U.S. lawyers aren't used to: In March 2012, the Chinese government ordered all lawyers to pledge their allegiance to the Communist Party, a move reportedly aimed at human rights attorneys. The Chinese government tallies its country's lawyer count at 166,000, with about one-third being Communist party members, a much higher percentage than the general population.

How might the recent pledge requirement affect U.S. lawyers in a content-expressive industry like the entertainment business? One senior partner at a Beijing firm told The American Lawyer, an Entertainment Law & Finance affiliate publication: “At our firm, whether or not you are a Communist Party member has absolutely no effect on your work as a lawyer or how you're made partner.” But according to a lawyer at a different Chinese firm: “[P]olitical factors could send things in directions that are very difficult to forecast.”

For Twitter, LinkedIn, Facebook and Google+ followers, click here to subscribe to Entertainment Law & Finance at a special introductory rate of $319. This offer is valid for new subscribers only.