'Buyouts' Offer Indies Unique Path to Chinese Market

China Hollywood Studio - P 2013

China Hollywood Studio - P 2013

Distributors in China are increasingly scoring at the box office by paying a one-time-only fee for the rights to American B movies.

It’s no secret that moviegoers in China can’t get enough of American-made films. Box-office receipts in the country grew by 35 percent last year alone, and more than half of all ticket sales came from foreign movies. This is despite China’s controversial quota system, which only allows foreign studios to distribute 34 films a year in the country. But, as is often the case in China, there are ways around the rules -- and in recent years the quota has supercharged a lesser-known corner of the Chinese film industry that allows distributors to skirt the government-mandated cap.

Known as the "buyout movie," this loophole allows a Chinese company to pay a one-time fee for the rights to a foreign film from the international distributor. The deal breaks down like this: A Chinese firm can land the exclusive rights to release a film in China and collect all the box-office take, while the foreign distributor gets a one-time payout. Additionally, in a buyout deal, the foreign film doesn’t get counted as part of the government-mandated quota for non-Chinese movies.

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The numbers of buyout movies seeping into China is rising. In 2011, there were 78 foreign films shown in China, 38 of which were buyout movies, according to Beijing-based EntGroup Inc., a consulting agency focusing on China’s film industry. That’s up from 62 foreign films in 2010, 31 of which were buyout movies.

“We have more Chinese buyers this year than ever,” says Lon Haber, communication representative of Arclight Films, whose title Bait 3D, about people trapped in a flooded shopping mall with a great white shark, grossed $20 million at the Chinese box office after Beijing-based Enlight Pictures bought it for an undisclosed amount.

Since only the two big state-owned studios -- ChinaFilm Group Corporation and Huaxia Film Distribution Company -- are allowed to distribute official releases, the two firms get something akin to right of first refusal for other movies. If they pass, smaller Chinese companies can buy the rights. As a result, buyouts are primarily genre fare and B movies.

So just how lucrative can a buyout movie be for a Chinese company? It depends on the film, of course, but the upside can be huge. In 2010, Nu Image/Millennium’s The Expendables was sold to Chinese shingle E Stars Film for a mere $500,000. The film ended up grossing $30 million. And while the buyout price for this year’s Expendables 2 surged to $5 million, the film took in an impressive $53 million at the Chinese box office.

Millennium president Mark Gill says the buyout strategy makes sense in China, where building relationships is key to doing business successfully. “The good news for [E Stars] is they did very, very well with this movie,” he says. “That's fine with us, because it means they're more inclined to do business with us again.”

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Another buyout movie that had a strong performance was the 2011 thriller Source Code, which brought in almost $11.7 million for its buyer, Bona Film Group Ltd, the leading non-state owned Chinese distribution company.

Bona won’t say how much it paid for the film, but sales rep Lili Jiang says the average price for a buyout deal three years ago at the American Film Market was $100,000; now it’s $1 million or higher. The third installment of the Expendables franchise, which hasn’t started shooting yet, was reportedly priced at $15 million at the AFM this year -- and eventually sold at a slight discount of $14 million.

The price of the sequel to The Mechanic, starring Jason Stratham, also climbed to $6 million, up from less than $1 million for the first one.

David Lee, president of the film-entertainment company Leeding Media, has been involved in a number of Chinese-American co-productions, including Relativity’s The Spy Next Door, which grossed $8 million in China. Lee says that American indies are becoming increasingly sophisticated about the buyout film market and see it as a way to compete with the studios for an all-important slice of the fast-growing Chinese market. “While prices have continued to rise,” he says, “most of the top sellers are more discerning about whom they choose to sell to now.”

Millennium’s Gill agrees: “We're a more risk-averse company. The studios tend to be in it all the way, so they'll make the movie and pray to god they sell tickets. The indies tend to be more risk averse, and wanting to at least cover half or two-thirds of their cost before it gets released in case, god forbid, it wipes out.”