China-US relations are once again being tested, this time because of action on the big screen.
The Motion Pictures Association of America (MPAA) has hired an accounting firm to audit China’s box office, Bloomberg reports. While the audit will only apply to certain films, American studios are hoping that it will prove that they are not receiving their fair share of the profit from Chinese theaters.
It is little wonder that US studio executives are concerned with how their movies are doing in China, considering that the Chinese box office is expected to surpass that of the United States by 2022. For many studios, Chinese audiences can make or break a movie. For example, within its first week of release Paramount Pictures’ Transformers 5 has made nearly twice as much in China than it has in America.
Rather than the exception, this is starting to become more of the rule for many Hollywood blockbusters. Big budget films such as The Great Wall and Warcraft flopped when they hit American screens, but were saved thanks to their incredible success in Chinese cinemas.
According to the Hollywood Reporter, US studios are hoping the audit will confirm their suspicions that Chinese vendors have in fact under-reported ticket sales, falsely attributed profits from particularly successful films to others, and intentionally misrepresented ticket sales as a marketing ploy. Hollywood’s executives are particularly attached to the East Asian market considering the fact that in the past five years, the average ticket sale growth has raced up at a stunning 37%. While that slowed to just 3.7% in 2016, it is still more impressive than North America’s 2% growth rate. If the MPAA’s hunch is correct, it means that American studios have been cheated out of money, and a lot of it. Here’s why:
A 2012 World Trade Organization contract and additional 2015 negotiations outlined the basic terms of relations between the Chinese and American film industries. According to the agreement, more foreign movies would be allowed to be shown in China on a flat base fee. The result: in 2016, 51 foreign films were shown in Chinese theaters, as compared to the measly 28 which premiered in 2015. Additionally, major studios currently hold revenue sharing deals with specific Chinese companies. This means that studio executives receive 25% of the profit from box-office sales in China. Consequently, when dealing with blockbusters which are raking in millions, accurately reporting sale data is crucial.
A third-party audit may seem like an aggressive tactic by the MPAA, but in the past, their suspicions have been correct. In 2013, industry experts reported that they believed that at least 10% of Chinese box-office sales were fraudulent. When, in 2015, Chinese officials conducted their own investigation into the issue in Beijing, they found over 300 vendors to be guilty of illegal practices. Infamously, it was also discovered that the domestic animated hit Monster Hunt had given out over 40 million free tickets to help it become China’s highest grossing movie of all time.
Ideally, the audit will conclusively reveal the extent of these fraudulent methods across China. It is not likely that major studios will withdraw their films from this burgeoning market, but severe penalties can be expected. In the meantime, digital ticket sales are helping to curb illegal and fraudulent sales. Digital sales, which now make up 80% of the market, through platforms such as Weying and Alibaba’s Tao Piao Piao, publish their ticket sales frequently and accurately, which makes records much more difficult to falsify.
We can only hope that this latest Hollywood drama doesn’t affect what we get to watch on the big screen.
By Emma Abrams
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