How U.S. and China Film Industries Are Connecting

Lindsay Conner is your consummate Hollywood lawyer, but for one thing. Lately, the Manatt, Phelps & Phillips partner has been working on deals between his domestic film industry clients and Chinese film studios and distributors. The two groups were notoriously at odds for years over intellectual property and piracy issues. China was an open market for DVDs of pirated new Hollywood releases, and the country's leaders were seemingly overwhelmed or unwilling to do anything to curb the billion-dollar traffic.

But Hollywood, ever on the lookout for new audiences (and, culture analysts would say, new ways to spread American culture into formerly resistant markets), now sees the Chinese as a giant consumer of its blockbusters ' in a legitimate way.

What's in it for the Chinese companies? After all, China and the former colony of Hong Kong have a long history of filmmaking. In a few words, they're looking for expertise, both in how Hollywood studios construct narratives and in how they manage to sell their wares worldwide. And, of course, there are the potential profits to be made.

The following interview I conducted with Conner touched on everything from deal-making culture to censorship and how the United States and China, in spite of political differences, manage to work together in business pretty well.

Q: A couple of years ago, there were trade negotiations regarding the entry of American or Western movies into the Chinese market. What are the details? What was each side trying to do?

A: China has for many years imposed a limit on the number of Western films that come into the country. The major change was to increase the number of Western films allowed in, from 20 per year to 34. China also increased the share of the box office that distributors receive; they can now take 25% of the receipts, rather than 15% to 17%. For Chinese and co-produced films, distributors can now receive 43% rather than the old 35% or so. So China advantaged the West in two ways: to permit more films and to give them a larger share of the box office revenue.

Q: All Western films? Not just the U.S.?

A: Yes.

Q: So what kind of films are we talking about? Blockbusters that have mass appeal in China?

A: In general, Hollywood will send its biggest films, to the extent that Chinese censors will allow them to be shown. China is now the world's second-largest market for theatrical box office and will surpass the U.S. in about 2018-2019 at current rates of growth.

Q: What do you do as a lawyer who works with clients who want to get films into China?

A: Sometimes I assist companies that want to do business there. And sometimes I help Chinese companies that want to do business or invest in the United States. The latter typically takes the form of an investment in the entertainment company. That was the form of the Huayi Brothers deal. It's the largest privately owned film company in China. I served as lead counsel for the Huayi Brothers' deal with STX Entertainment. The deal represents an investment by Huayi Brothers for 18 films in a three-year span.

Q: But these films will come under the quota?

A: The STX films will have to qualify under the quota. It is possible that one of more of them may be a co-production. And if it is a co-production, then it won't have to sit within the quota. But most of the STX films will not be co-productions.

Q: One of the things I've noticed in deals that U.S. companies do overseas is the different role or place in society of lawyers elsewhere. Is there an asymmetry in, for example, how a Chinese company sees your role?

A: The Chinese legal system is evolving quickly, but the centrality of lawyers to the deal-making process in the U.S. is not matched in China. But there are powerful reasons for each side to deal with the other. China is the largest growth opportunity for Hollywood on the horizon. Going the other way, for China, Hollywood is seen as the heart of America's cultural engine. And companies in China aspire to learn Hollywood storytelling techniques, production and post-production techniques, as well as Hollywood's international distribution techniques. For Chinese companies it's naturally, a matter of profits, but also to learn “soft techniques.”

Q: Is online distribution a big deal in China?

A: Yes, just a few years ago online video was maybe 10% of revenue, but now it's close to half.

Q: Say this is a film made by STX with investment from its Chinese backers. How does this go through the channels? Is there a really involved censorship process?

A: Yes, there is. An agency of the Chinese government. It's still called SARFT, though it is now an acronym that you cannot pronounce: SAPPRFT, for State Administration of Press, Publication, Radio, Film and Television. People still call it SARFT in conversation. So SARFT continues to play a very powerful role in determining what films are acceptable and what films are not.

Q: To what extent are piracy and other IP issues still a concern?

A: My impression is that as Chinese consumption has moved away from DVDs into theatrical box office and online video, the Chinese are doing a better job of policing piracy. They're trying to push consumers into legal means of consumption.

Q: What does the future hold for the relationship between Hollywood and China?

A: Though there are bound to be bumps along the road, I see ever-increasing cooperation between companies in Hollywood and China. And the rise in investments is going both ways across the Pacific. The Huayi Brothers-STX deal is one of the first investments by a Chinese company in the U.S. film industry. But a few years from now, this will be a commonplace event.

Q: I've looked at other industries in which domestic U.S. products were altered for the Chinese market. Do you think we'll see something similar, where the Chinese investment in Hollywood will lead to changes in what Hollywood produces?

A: I don't think it will change the kinds of films that Hollywood makes. There may be certain films that are considered too sensitive and simply will not be distributed in China. And there may be films that incorporate certain Chinese elements in characters or in storylines, in order to take advantage of co-production. But in the main, Hollywood will continue to produce the kinds of films it's always produced. And I don't see that changing.

Anthony Paonita is Editor-in-Chief of The National Law Journal, an ALM sibling of this newsletter.

Lindsay Conner is your consummate Hollywood lawyer, but for one thing. Lately, the Manatt, Phelps & Phillips partner has been working on deals between his domestic film industry clients and Chinese film studios and distributors. The two groups were notoriously at odds for years over intellectual property and piracy issues. China was an open market for DVDs of pirated new Hollywood releases, and the country's leaders were seemingly overwhelmed or unwilling to do anything to curb the billion-dollar traffic.

But Hollywood, ever on the lookout for new audiences (and, culture analysts would say, new ways to spread American culture into formerly resistant markets), now sees the Chinese as a giant consumer of its blockbusters ' in a legitimate way.

What's in it for the Chinese companies? After all, China and the former colony of Hong Kong have a long history of filmmaking. In a few words, they're looking for expertise, both in how Hollywood studios construct narratives and in how they manage to sell their wares worldwide. And, of course, there are the potential profits to be made.

The following interview I conducted with Conner touched on everything from deal-making culture to censorship and how the United States and China, in spite of political differences, manage to work together in business pretty well.

Q: A couple of years ago, there were trade negotiations regarding the entry of American or Western movies into the Chinese market. What are the details? What was each side trying to do?

A: China has for many years imposed a limit on the number of Western films that come into the country. The major change was to increase the number of Western films allowed in, from 20 per year to 34. China also increased the share of the box office that distributors receive; they can now take 25% of the receipts, rather than 15% to 17%. For Chinese and co-produced films, distributors can now receive 43% rather than the old 35% or so. So China advantaged the West in two ways: to permit more films and to give them a larger share of the box office revenue.

Q: All Western films? Not just the U.S.?

A: Yes.

Q: So what kind of films are we talking about? Blockbusters that have mass appeal in China?

A: In general, Hollywood will send its biggest films, to the extent that Chinese censors will allow them to be shown. China is now the world's second-largest market for theatrical box office and will surpass the U.S. in about 2018-2019 at current rates of growth.

Q: What do you do as a lawyer who works with clients who want to get films into China?

A: Sometimes I assist companies that want to do business there. And sometimes I help Chinese companies that want to do business or invest in the United States. The latter typically takes the form of an investment in the entertainment company. That was the form of the Huayi Brothers deal. It's the largest privately owned film company in China. I served as lead counsel for the Huayi Brothers' deal with STX Entertainment. The deal represents an investment by Huayi Brothers for 18 films in a three-year span.

Q: But these films will come under the quota?

A: The STX films will have to qualify under the quota. It is possible that one of more of them may be a co-production. And if it is a co-production, then it won't have to sit within the quota. But most of the STX films will not be co-productions.

Q: One of the things I've noticed in deals that U.S. companies do overseas is the different role or place in society of lawyers elsewhere. Is there an asymmetry in, for example, how a Chinese company sees your role?

A: The Chinese legal system is evolving quickly, but the centrality of lawyers to the deal-making process in the U.S. is not matched in China. But there are powerful reasons for each side to deal with the other. China is the largest growth opportunity for Hollywood on the horizon. Going the other way, for China, Hollywood is seen as the heart of America's cultural engine. And companies in China aspire to learn Hollywood storytelling techniques, production and post-production techniques, as well as Hollywood's international distribution techniques. For Chinese companies it's naturally, a matter of profits, but also to learn “soft techniques.”

Q: Is online distribution a big deal in China?

A: Yes, just a few years ago online video was maybe 10% of revenue, but now it's close to half.

Q: Say this is a film made by STX with investment from its Chinese backers. How does this go through the channels? Is there a really involved censorship process?

A: Yes, there is. An agency of the Chinese government. It's still called SARFT, though it is now an acronym that you cannot pronounce: SAPPRFT, for State Administration of Press, Publication, Radio, Film and Television. People still call it SARFT in conversation. So SARFT continues to play a very powerful role in determining what films are acceptable and what films are not.

Q: To what extent are piracy and other IP issues still a concern?

A: My impression is that as Chinese consumption has moved away from DVDs into theatrical box office and online video, the Chinese are doing a better job of policing piracy. They're trying to push consumers into legal means of consumption.

Q: What does the future hold for the relationship between Hollywood and China?

A: Though there are bound to be bumps along the road, I see ever-increasing cooperation between companies in Hollywood and China. And the rise in investments is going both ways across the Pacific. The Huayi Brothers-STX deal is one of the first investments by a Chinese company in the U.S. film industry. But a few years from now, this will be a commonplace event.

Q: I've looked at other industries in which domestic U.S. products were altered for the Chinese market. Do you think we'll see something similar, where the Chinese investment in Hollywood will lead to changes in what Hollywood produces?

A: I don't think it will change the kinds of films that Hollywood makes. There may be certain films that are considered too sensitive and simply will not be distributed in China. And there may be films that incorporate certain Chinese elements in characters or in storylines, in order to take advantage of co-production. But in the main, Hollywood will continue to produce the kinds of films it's always produced. And I don't see that changing.

Anthony Paonita is Editor-in-Chief of The National Law Journal, an ALM sibling of this newsletter.