In the past few months, we’ve all been deluged with entertainment news about foreign studios cozying up to Chinese producers and distributors. Some of these deals have been more traditional inward investment ventures, like the DreamWorks tie-up, while others have been unprecedented, such as the outbound AMC acquisition.Since the U.S. and China struck a deal on the foreign film quota, most of the talk has been about how it was a great win-win. Foreign studios get more of their product into the country, and local distributors will enjoy their piece of the action. With China’s box office receipts rising quite dramatically over the past couple of years, everyone seems happy.
Yes, but hold on a moment. I’ve seen a lot of distribution/licensing and Joint Venture deals over the past 13 years or so, and while everyone is still enjoying the honeymoon period, I have a pretty good idea of what might be coming in the out years.
Coincidentally, one rather obvious potential area of friction between foreign studios and distributors is in the news, although this dispute concerns two domestic companies:
Beijing-based film and television investment company United Film Investment recently filed suit against the China Film Group in the Beijing No.1 Intermediate People’s Court. United alleges that the China Film Group violated a number of terms of the companies’ agreement for the film My Own Swordsman, on which they cooperated, including “severe falsification” of box office profit reports. (Marbridge)
You don’t need any special knowledge of the entertainment industry to understand what’s going on here. Very familiar territory for most companies in China and quite a few foreign enterprises as well. Essentially, United Film was the owner of a product and made a deal with China Film Group to sell that product in return for a percentage of the revenues. Could have been anything — in this instance the product was the theatrical film “My Own Swordsman.”
Now that the product has been sold, the two parties are arguing over that revenue. As we’ve seen countless times before, the distributor is being accused of under-representing sales. (The accusations might also involve cost issues, but I’m assuming the dispute relates to gross receipts). If the allegations are true, that would mean the China Film Group actually sold more of the product than it disclosed to United Film, pocketing all the revenue from those sales itself.
Sound familiar? I’ve had many clients who have either had this problem or have had to prepare against the possibility. For me, this typically crops up when negotiating and drafting a licence/manufacturing/distribution agreement. The licensee is motivated to fake the documentation, so the agreement should always give the licensor the ability to perform local inspections, audit sales records, etc. Keeping multiple sets of books is a widespread practice that should be assumed.
So the good news is that the legal system, and commercial agreements, gives parties like the studios the ability to investigate and keep their partners honest. Theoretically.
The bad news is that it’s easier said than done. One huge problem is that companies are quite expert at hiding information, and even if you pop in on someone to inspect their books, that doesn’t necessarily mean that you will find the right data. Additionally, at least in my experience, many companies fail to utilise audit powers, even when they have local staff in China who could do so at low cost. It might be extremely difficult to uncover fraud, but if you don’t even bother doing spot audits, you will definitely fail.
I’m a cynic and usually look for the poor outcome. But here, we already know that games are being played with box office receipt records (the United Film dispute is not unique), and we know how foreign licensors fare in these kinds of situations. In other words, look for more of this in the future.
How will the foreign studios react? Well, considering that many of the titles in question would have been barred entirely from the market in the past, I expect that the studios will be happy with whatever they can get and build from there. Beggars can’t be choosers. On the other hand, that acceptance won’t last forever, and eventually they will end up confronting their China distributors. Won’t be for a few years, but it will happen eventually.
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