China gearing up for H'wood expansion

Commentary: Expect Chinese company to buy U.S. studio

Updated January 14, 6:30 pm Beijing Time

Ni hao ("hello" in Chinese). The next two years are likely to see a significant expansion of connections between China and Hollywood, and don't be surprised if it culminates with a Chinese company buying a U.S. studio. Having just returned from Beijing, and after meeting with people in the entertainment industry both in the government and at private and public companies, we offer the following reasons for this prediction:

-- Similar to India, China has a huge, sophisticated entertainment industry. While most of it is focused on the rapidly expanding Chinese market (it helps to have 1.3 billion people), it is practically bursting at the seams to expand internationally. The industry aspires to make big-budget films, which will require financing based on revenue outside China. This in turn will require a U.S. release as an anchor for foreign sales, which will mandate English-language productions (even if also made or dubbed in Chinese) and the tapping of Hollywood creative talent.

-- Chinese entertainment and investment companies, many of which are controlled by the government, have vast financial resources. China could cash in a small part of the U.S. debt it owns to buy all of Hollywood. The nation will have to do something with all the U.S. dollars it holds, so why not invest them in Hollywood?

-- Even with only 6,000 screens (though many more are being built), China ranks among the highest foreign boxoffice territories for U.S. films that get through the quota system there, including being the No. 1 overseas territory for such recent hits as "2012" and "Transformers: Revenge of the Fallen." And ticket prices in China are equivalent to, and in some cases higher than, ticket prices in the U.S.: A ticket to "Avatar" in Beijing now is $22 a person.

The underlying forces at work will lead to numerous opportunities for cross-border cooperation and financing. For starters, a huge untapped reservoir of successful Chinese films that have proven their mettle in the crucible of a darkened theater could be remade for an international audience. Thus, the trend that began with remakes of "The Ring" and "The Grudge" from Japan will be expanded to Chinese films, as already occurred with "The Departed."

More importantly for U.S. studios, China has an annual 20-film quota on foreign films released in China, and notwithstanding the recent World Trade Organization ruling against that system, we were advised that the quota is staying -- hell or high water -- whether as China's interpretation of the WTO ruling or under the rubric of China's censorship rules. But the one key exception to the system is a co-production with a Chinese company, even for English-language films, if the co-production receives the official blessing of the China Film Co-Production Corp. Thus, we would expect studios with an eye on China's huge and growing market would use these co-productions to produce English-language films in China to get the exemption, with a side benefit of producing films at a much cheaper cost if local crews are used.

There also will be a push by U.S. studios to produce Chinese-language films for the Chinese market, just as they have expanded into local production in other countries, because local-language productions recently have been beating Hollywood films in many territories ("If you can't beat 'em, join 'em"). These local productions by U.S.-controlled companies also will have to get through the quota system, and again a government-approved co-production with a Chinese company is the answer. Disney has taken the lead in China on this front and is producing a Chinese-language remake of "High School Musical" as an approved co-production with a Chinese company.

Finally, as Chinese film companies seek to expand beyond China's borders, the next logical stop is Hollywood. They will have to make English-language films to play to a worldwide audience, and that will bring them to Hollywood to tap its creativity and talent pool. A logical steppingstone would be to set up or finance production companies here, perhaps even as large as the DreamWorks-Reliance transaction, and the endgame might be the acquisition of a major studio, as what occurred with Matsushita's acquisition of Universal or Sony's acquisition of Columbia. There would not be the same political resistance to such an acquisition as there was to the acquisition of an oil company by China because the U.S. does not view Hollywood as a precious natural resource. Even beyond a strategic acquisition by a film company, an acquisition could be made by a Chinese investment fund as a pure financial play, and such funds are in the works.

One unanswered question, however, is just how much China is willing to allow filmmakers to flex their creative muscles and address themes and plotlines provocative enough to entice mass audiences. In short, anodyne might have to give way to out-there and edgy if the Chinese cinematic culture is to resonate worldwide. How that process shifts into gear will be fascinating to watch.

In any case, even as this creative tussle goes on, get ready for the next wave of cross-border financing.

Schuyler Moore and Lex Kuo are lawyers at Stroock. Moore is the author of "The Biz: The Basic Business, Legal and Financial Aspects of the Film Industry," and is an adjunct professor at UCLA Law School and the UCLA Anderson School of Management. Kuo is licensed in Taiwan, New York and California and recently passed the China bar exam. They can be reached at smoore@stroock.com and lkuo@stroock.com.
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