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Will Chinese Broadcasters Pay Public Performance Royalties To Record Companies?

Posted in China Business, China Film Industry, Legal News

This is the second in a series of posts on music copyright in China. My first post China Music Copyrights is here.

China is often criticized by the US for its copyright laws but China and the US have more in common than you might have thought when it comes to copyright — they are both among a small number of nations that do not regard sound recording copyright as including a terrestrial broadcast performing right. To put that into perspective, most of the European Union has a terrestrial broadcast performing right. The few other countries that do not recognize this right include North Korea and Myanmar. The Future of Music Coalition has had a lot to say about this if you are interested.  

What it means in practical terms is that, in the US and China, when a recording of a song is played on radio the record company and the recording artist are not entitled to receive any performance royalties. This came about in the US because terrestrial broadcasters won the debate with other stakeholders. They convinced Congress with the argument that radio airtime provides free promotion to record companies and artists so there is no need to pay them royalties.

In China right now we are seeing a similar debate unfolding between the fledging recording industry and the powerful, state-funded broadcasters. Central to the debate have been changes proposed to China’s Copyright Law. The law has been in its current form since 2010.

In this post I’m taking a look at recording-related provisions of the  Fourth Draft of China’s new Copyright Law as promulgated by the National Copyright Administration of China, known as the “NCAC.” As mentioned in my previous post, this is a working draft that will be subject to further change as it passes through several more stages in a process that is relatively open.

Musical works (with or without lyrics) are included in the definition of “works” in the NCAC Fourth Draft. So are several other types of copyright subject matter including a new category of “audiovisual works” in place of cinematograph works. Sound recordings are not classified as “works” and are dealt with separately. It is unclear why audiovisual works should not also be treated separately, but that’s another story.

The NCAC Fourth Draft does not expressly list the rights comprising the copyright in a sound recording. We may infer that they are the rights conferred on the producer of the sound recording. Under Article 39 these include the rights to authorize others to reproduce, distribute and rent a sound recording. Also included is the right to make the sound recording available to the public, by “wireless” and by cable in “the information network,” in such a way that it may be accessed from a place and at a time of a person’s choosing. I am told by Guo Biao of IFPI China that these expressions refer to Internet use generally, including downloads and webcasting. In any case, the right of “making available” in this way is already enjoyed by the producer of a sound recording under the existing law.

What is most controversial is the proposal, under Article 40 of the NCAC Fourth Draft, that the producer of a sound recording should also enjoy a right of “reasonable remuneration” when the sound recording is “transmitted to the public in wireless or cable form” or “transmitted through technical devices”. Again, I’m told by Mr. Biao that this refers only to three categories of use: first, radio or TV broadcasting (wireless), second, cable transmission, and third, transmission through technical devices in public areas as background music. Article 40 does not involve any Internet use. China’s radio and television broadcasters are concerned that Article 40 of the NCAC Fourth Draft would mean that they would need to start paying royalties. So the NCAC Fourth Draft is being met with resistance.

Who do you think will win the debate?

 

 

 

 

Establishing International Schools in China: Part 4 – Future Trends

Posted in China Business, Legal News

This is part 4 of my four part series on establishing an international school in China. In part 1, Establishing International Schools in China: The Basics, I discussed the complications foreign parties typically see when trying to start a school in China. In part 2, Establishing International Schools in China: A Deeper Dive, I focused on what it takes to start a School for the Children of Foreign Workers. And in part 3, Establishing International Schools in China: A Deeper Dive (Continued), I discussed Sino-Foreign Cooperative Schools and Chinese Private Schools. In this, my last post in this series, I look at future trends for international schools in China. 

For a foreign party, establishing an international school in China can be very challenging. The foreign party must choose if it intends to retain full operational control of the school, or is willing to share control of the school with its Chinese partner.

In the first decade or so after China’s opening to the West, foreign educators and embassies found the Chinese government quite welcoming to those seeking to establish foreign controlled schools for foreign students. The 1995 regulations formalized these Schools for the Children of Foreign Workers, and the schools were seen as important to support foreign investment into China.

There is now in China strong demand by newly wealthy Chinese families to send their children to the best quality private schools. In that light, and given ease of land contribution and profit sharing possibilities in a JV school, more and more Sino-Foreign Cooperative Schools are being established. With these schools the Chinese government can provide ways for its own citizens to attend the best schools, in country, and hand in hand with foreign children who attend as well. And best yet, Chinese students can still receive a Chinese diploma alongside their foreign school or IB diploma.

Because of the win-win perception of Sino-Foreign Cooperative Schools, it seems clear that most future international schools in China will be of this type. The experience of my own firm reflects this: we are seeing an increase in colleges and private schools looking to set up these types of partnerships while requests to set up private schools exclusive to foreigners has decreased. Though setting up a Sino-Foreign Cooperative School is in many ways similar to a standard Joint Venture arrangement, there are enough intricacies involved to warrant special care during the establishment process.

Though the demand for Schools for the Children of Foreign Workers has decreased there remains a need for them in newly developing areas in China, especially in certain second and third tier cities. On top of that, we have found that the Chinese government is more likely to approve such schools there.

What are you seeing out there?

Establishing International Schools in China: Part 3 – A Deeper Dive (Continued)

Posted in China Business, Legal News

This is part 3 of my four part series on establishing an international school in China. In part 1, Establishing International Schools in China: The Basics, I discussed the complications foreign parties typically see when trying to start a school in China. In part 2, Establishing International Schools in China: A Deeper Dive, I focused on what it takes to start a School for the Children of Foreign Workers.  

In this post, I will be discussing Sino-Foreign Cooperative Schools and Chinese Private Schools.

But before I do, I will reiterate that establishing a School for the Children of Foreign Workers is either not suitable or unworkable or just not possible when any of the following are true of the parties involved:

  • They want to provide a university level education
  • They want to open a training school
  • They want the Chinese party to have equity in the educational entity
  • They want the Chinese party to legally control the entity
  • They want the school to serve Chinese students.

The below are potential alternatives to a School for the Children of Foreign Workers.

Sino-Foreign Cooperative School. In 1995, the Ministry of Education published the PRC Guidelines for Running a Sino-Foreign Cooperative School (中华人民共和国中外合作办学条例). The main purpose of the law, which was updated in 2003, was to boost the development of quality private schools in China by recognizing the need for foreign education partners invest their intellectual property and expertise.

A Sino-Foreign Cooperative School is essentially a joint venture between a recognized foreign education entity and a Chinese entity. Although education is a restricted area of foreign investment, Sino-Foreign Cooperative Schools can actually be foreign-majority owned and can have up to half of the seats on the governing board held by the foreign entity. Note that the equity component held by the foreign party in the school cannot usually consist of more than 1/3 of the total possible equity.

The legal representative of a Sino-Foreign Cooperative School can also be a foreigner. However, the president of the school must be a Chinese national. In practice, the Chinese partner will usually insist on controlling the entity and on majority control of the board since they typically provide the land for the school and a significant amount of the money needed to get it going.

The Chinese party’s land investment is what usually makes Sino-Foreign Cooperative Schools an attractive structure for establishing an international school in China. Land zoned for schools is difficult to obtain in China, and having the Chinese partner undertake this as their responsibility can be the key to a project’s success. The foreign party primarily contributes the IP and, in some cases, a financial investment. Disputes about the value of each party’s contributions and getting a clear understanding of the implications of the ownership share ratios often stalls efforts to establish Sino-Foreign Cooperative Schools.

In our role as lawyers representing the foreign party in these deals, our main role is usually to help the American (or other foreign) educational institution negotiate a satisfactory administrative and financial power sharing arrangement for the possible new school.

A Sino-Foreign Cooperative School can serve students of any age and nationality, although the law makes clear that secondary, university and training school collaborations for Chinese students is what is being encouraged. NYU’s campus in Shanghai is a good recent example of a Sino-Foreign Cooperative School.

Quite a few secondary (high school) Sino-Foreign Cooperative Schools have also been established in the last few years. These schools are typically connected with an American or European secondary school, and they can offer both an international (often the Internal Baccalaureate) and a Chinese diploma. Both foreign and Chinese students can attend, provided they meet the particular school’s admissions standards. Some of these schools are connected in some way to existing Chinese private schools, and they often have dorms for attending students. These schools can also be branded as an “International School” or a “Bilingual School.”

The Sino-Foreign Cooperative School regulations do not completely address the important issue of whether investors can receive future profits on their investment, nor, if so,  how exactly they can do so. Income received by the school is required to be used exclusively for the school. In light of this lack of clarity, investors will typically form a separate company to charge royalties or other service fees to the school, making a return on their investment that way. Some recent draft regulations seem to indicate that the government is warming to the idea of for-profit schools. If these modifications are confirmed, they will likely provide clearer guidelines on how to handle the issue of investor returns.

Chinese Private School. A Chinese Private School (民办学校) is simply a Chinese investor wholly-owned school, serving mainly Chinese students. It is not surprising to find these schools located within the investor’s own property development. The main difference between these schools and China’s public schools is that these private schools often work to infuse some foreign or other higher-level education standards into their curriculum. These schools often emphasize English or another foreign language or a well-funded arts program. Some even offer of US high school Advance Placement classes at the secondary level. Dorm housing is also usually available.

These schools can also be branded “International Schools,” though it is more common to see them branded as a “Bilingual School” or an “Experimental School.”

In my final post in this series, I will look at some of the future trends relevant to establishing international schools in China.

Establishing International Schools in China: Part 2 – A Deeper Dive

Posted in China Business, Legal News

This is part two of my four part series on establishing an international school in China. As I mentioned in Thursday’s part one post about establishing a school in China, it is important for both the foreign and the local party to know the relevant regulations early in the process. The first step to determining what regulations are relevant is to determine the type of school each party is actually intending to establi This is most easily accomplished by understanding each type of school the Ministry of Education allows and then reviewing the guidelines for that particular type of school.

Schools for Children of Foreign Workers. In 1995, the Ministry of Education (MoE) published Interim Measures for the Schools for the Children of Foreign Workers (中华人民共和国国家教育委员会关于开办外籍人员子女学校的暂行管理办法). There are currently over 120 schools of this type in China, with the majority of them in Beijing and Shanghai. Though some foreigners send their children to Chinese local public schools (one of our Beijing lawyers does that), most do not. The Chinese government long ago recognized that good schools for foreigners is good for foreign investment into China (FDI). In Schools for the Children of Foreign Workers, foreign students typically receive an education very similar to what they would receive in their home country. Most of these schools contain “International School” in their name,

The MoE made an allowance for this type of school to be completely under foreign control. MoE review of the curriculum at these schools is not required, and both its governing board and legal representative can be foreigners. These schools, however, cannot be religious in nature and no Chinese students are allowed to attend them. Once property developers understand the “no Chinese student” restriction, they often are not as interested in establishing this type of school. Why would their wealthy Chinese customers want to buy a high-end apartment only to have to watch foreign children go every day to a top school that their own children are forbidden to attend?

The following is a brief overview of issues to consider when establishing a School for the Children of Foreign Workers:

  • The school must be only for early childhood, primary and secondary education. Post-secondary (university level, technical training school, etc.) education is not permitted.
  • The school must have a China legal entity sponsor its establishment. This entity can be a  Wholly Foreign Owned Entity (WFOE) or a Joint Venture (JV) whose purpose is to start and operate a school. Our China lawyers have established numerous WFOEs for this purpose, and it should be noted that the requirements on WFOE type, business scope and name substantially differ from standard WFOEs. More than once, lengthy negotiation was required between the local SAIC and Education Bureau to secure approval for a WFOE with the Chinese characters for education (教育) in its WFOE name.
  • Local Education Bureaus differ in the amount of registered capital required, but it is often a minimum of USD$1,000,000.
  • The sponsoring company appoints the first school director and governing board. This fact is often critical in determining whether to go into this sort of venture as a WFOE or a JV.
  • Once established, a School for the Children of Foreign Workers is an independent legal entity, owned by itself (as non-profits are) and governed by its board. All money received by the school must be used by the school, and therefore cannot be remitted as profit to investors, of which there are none. It follows, then, that there are no investment shares possible in this type of school, a fact that often also scares off would be powerful Chinese investors or government officials looking to cash in on their influence and connections.
  • As mentioned earlier, only non-PRC students are allowed to attend these schools. Note that the regulation carefully uses the term commonly used for non-PRC citizens,外籍人, rather than the term for “foreigner,” 外国人. The effect of this is that students from Taiwan, Macau and Hong Kong families can also attend a School for the Children of Foreign Workers.
  • From 1995 – 2012, all School for the Children of Foreign Workers applications had to be approved by the National Ministry of Education in Beijing. From 2013 onward, each provincial Education Bureau has had approval authority for these types of schools, which, due to a lack of clear procedures existing at the provincial level, has only further complicated application efforts.

In my next post, I will look at the remaining two options for establishing an international school in China.

Establishing International Schools in China: Part 1 – The Basics

Posted in China Business, Legal News

There is clearly a demand for English-based and Western-style education in China. An ever increasing number of expatriates choosing to live with their families in China and wealthy Chinese seeking to prepare their children to attend elite universities abroad have combined to create clear demand for suitable schools. Our firm often receives requests to assist individuals and organizations seeking to establish private schools to meet this demand. In this four part series, I will be explaining what goes into starting such a school in China.

In most of these cases, the foreign party seeking to establish a school has been encouraged to do so by local governments and/or property developers. Local governments want a “famous brand” school to give face to their ambitious development initiatives. Property developers want a prestigious school to add value to their new developments, bringing in the deep-pocketed Chinese buyers so valuable in an over-supplied residential market. With strong local support that most foreign investors can only dream about, it would seem that establishing a private school in China should be a piece of cake.

Starting a private school in China is actually very difficult even under the best circumstances and time and again, our clients and the local Chinese side misunderstand the laws involved in such businesses.

The first misunderstanding is often made by the foreign party (our client), who is either not aware or does not fully understand that foreign investment in education in China is restricted — as per both MOFCOM’s list and Ministry of Education’s guidelines. In many Western societies, establishing a school is seen as a noble effort, a service to the greater community. In China (just as we mentioned previously about health care in Identifying Your China Risk Factors), education is viewed by China’s citizens to be the responsibility of the government. The Chinese government though views at least some aspects of Western education as a threat to the educational content it wants its citizens to receive.

The second, similar misunderstanding involves the local Chinese party who is encouraging the Western party to establish a new private school. Because establishing certain types of private schools are rare for large swaths of China – especially those under foreign control – most local and provincial Education Bureaus have no procedures or clear understanding of how to go about setting up such a school. On more than one occasion, our China lawyers have had to teach local Education Bureaus about the laws their own Ministry of Education has published.

These core misunderstandings often result in a costly comedy of errors on both parties and it is not uncommon for the Western party to come to us after having squandered a not-so-insignificant amount of money and having frayed once strong relationships.

When it comes to establishing an alternative to Chinese public schools, the Ministry of Education has published clear guidelines, allowing for three types of schools:

  1. School for the Children of Foreign Workers 外籍人员子女学校
  2. Sino-Foreign Cooperative School 中外合作办学
  3. Private School 民办学校

In our next post I will discuss these three main types of private schools that can be established in China. I will then examine the various levels of foreign involvement and control possible for each type of school and discuss what it takes to establish international schools in China.

Basic China Compliance Rules For SMEs

Posted in Legal News, Recommended Reading

As a member of AmCham China, I get a copy every month of AmCham’s magazine, Business Now. This month’s issue [hard copy version] has an article by John Zane, entitled, Playing by the Rules: As compliance comes to the fore, small businesses must take action. The thrust of the article (and the thrust of many a blog post we’ve done over the past year) is that China is cracking down on all businesses, foreign and domestic, large and small, and because of that, foreign SMEs need to initiate a compliance program to ensure that they are understanding and complying with China’s legal system.  

The full article is worth a read, but the “money” section is the following bullet point list of what every small company doing in business should be doing  by way of a China compliance program:

  • Review the advantages and disadvantages of company formation, the business scope, and registered capital requirements. Be aware of what is involved in any changes to the company’s legal standing.
  • Create employee contracts that comply with all aspects of Chinese labor law, and update them yearly. Whether the contracts are being renewed or terminated, they need to be reviewed at least a month prior to their termination date.
  • Develop an employee handbook which complies not only with Chinese law but also international law. It is imperative that staff understand what inappropriate behavior is in terms of business practices, and that non-compliant behavior is listed explicitly and extensively. This is not only essential for employee training but is necessary in the event that such behavior results in litigation.
  • Evaluate any contractual relationships with third parties or potential business partners thoroughly. Although extensive background checks and due diligence are often beyond the means of a small enterprise, risk assessments related to a third party are essential. Public records are available, such as a business license, company literature and website, operation location, and current operational ability of the company. Interviews and site visits should also be a part of this process.
  • Be aware that compliance risks vary by location in China. Regulations adopted and adhered to in one city or province may not be the case in others. A small enterprise should have a thorough understanding of these markets and the particular business practices that exist within them.

A nice basic list. What do you think?

For more on China compliance, check out the following:

 

China Employment Law And How To Treat Your Pregnant Or Nursing Employees: Very Nicely

Posted in Legal News

It’s funny. Most of our clients know very little about China employment law but most know well that China has very high expectations regarding how to treat pregnant and nursing employees. Our clients know this because they all seem to know of some American company that had to pay a lot of money for not knowing this.  

Chinese labor law does take a humane approach regarding pregnant or nursing female employees. This means employers should familiarize themselves with applicable laws relating to pregnancy and nursing and do their utmost to be aware of which of their employees are either pregnant or nursing. A failure to do so can result in civil damages, administrative fines, and even criminal liability. In this post, I highlight a few of the things you as an employer in China should keep in mind in dealing with a pregnant or nursing employee, or even just an employee who claims to be pregnant or nursing. It is not uncommon for terminated female employees to claim that they were pregnant when fired, whether they were or not.

The most important thing for you to know is that Chinese labor law prohibits employers from unilaterally terminating the labor contract of a pregnant or nursing employee. For the same reason, an employer cannot initiate a mass layoff that will include employees who are pregnant or nursing.

China’s laws also prohibit an employer from arranging overtime or night shifts for female employees who are more than seven months pregnant or who are nursing. Regular checkups before birth are considered normal working time. This means that you as the employer cannot make your pregnant employee make up for work time lost by missing work due to a doctor’s appointment. Moreover, if your pregnant employee provides you with a certificate from a health institution proving she is unable to perform her usual job duties due to her condition, you must reduce her workload or adjust her job duties accordingly.

According to the Special Rules on the Labor Protection of Female Employees (女职工劳动保护特别规定), female employees are entitled to the following special leaves:

  • A total of 98 days of maternity leave, including 15 days before birth.
  • Additional special leave for a “late” childbirth (as explained below, the rules vary by locality).
  • An additional 15 days of special leave for a “difficult” childbirth.
  • An additional 15 days of special leave for each additional child (twins, triplets, etc.)
  • 15 days of special leave for an employee who miscarries when less than four months pregnant.
  • 42 days of special leave for an employee who miscarries when more than four months pregnant.

As noted above, the rules on additional special leave for a late childbirth differ by locale. For example, in Jiangsu province, the Jiangsu Province Population and Family Planning Regulation (江苏省人口与计划生育条例) mandates that employers give an additional 30 days of special leave for a “late” childbirth and an additional 10 days of giving care leave for the husband. For purposes of China’s employment laws, a childbirth is considered “late” if the woman has reached the age of 24 and is giving birth for the first time, or if the woman was married after the age of 23, and is giving birth for the first time.

China employers also must provide at least one hour per day during normal working hours for female employees who need to breastfeed. This requirement lasts until the baby turns one year old. Female employees who birthed more than one baby get an additional hour per day for breastfeeding for each additional baby.

Bottom line: Chinese labor law offers a number of protections to female employees who are pregnant or nursing. And as is true of just about all aspects of China’s employment laws, you as employer need to be mindful of both national laws and regulations and of local requirements.

 

China Treatment Of Foreign Businesses: Mr. Harris Goes To Washington

Posted in Basics of China Business Law, China Business

Earlier this week, Dan Harris (one of this blog’s co-editors) traveled to Washington, D.C. to testify before the U.S.-China Economic and Security Review Commission’s Hearing on the Foreign Investment Climate in China. I joined Dan at the hearing as an observer.

By way of background on the Commission and this week’s hearing, the Commission was established by U.S. law to analyze and submit to the U.S. Congress annual reports, and where necessary recommendations, on national security issues arising from China’s economic relationship with the United States. This week’s hearing provided Commissioners an opportunity to hear experts in various fields provide analyses and opinions on various issues concerning China’s investment climate.

The hearing was held in a formal conference room in the Dirksen Senate Office Building. Commissioners were seated in the front of the room behind an elevated, semi-circular table facing two tables at which the witnesses sat and took turns offering initial testimony and then answering the Commissioners’ questions. It’s a serious event with serious questions.  However, at least for the panel on which Dan participated, the Commissioners maintained a lively, conversational pace such that the witnesses were able to offer insights on a variety of important issues.

Dan participated in a panel discussion of “Industry Perspectives on the Foreign Investment Climate in China” that lasted approximately 90 minutes. The other member of Dan’s panel was Dr. Robert Atkinson, President of the Information Technology and Innovation Foundation.

I could blog on this week’s hearing from several different perspectives: the different (and important) issues raised by both Commissioners and witnesses; the importance of such hearings to bilateral relations between China and the United States; the perspectives of different U.S. interests concerning foreign investment in China. However, I want to focus on the importance of Dan’s testimony at the Commission’s hearing – one reason for which is that I Dan would not have drafted such a blog himself.

Dan introduced himself to the Commission as an attorney with a law firm that represents companies from the United States and other countries, many of which are small- to medium-sized businesses (SMEs), that either have or are interested in expanding operations into China.  uring his testimony, Dan spoke about recent Chinese actions that have chilled foreign investment in China, specifically China’s regulation of foreign technology companies such that they cannot compete in China in the same way they would in their home countries.

However, the importance of Dan’s testimony is how he focused on issues that U.S. SMEs have actually faced and continue to face in China. The Commissioners were clearly interested in hearing about real companies and real issues. One issue Dan highlighted is how many U.S. and foreign companies in China face unfair competition by following Chinese rules and regulations concerning employment and taxes that their Chinese counterparts may ignore without penalty. In addition, many U.S. and foreign companies face uncertainty about how to comply with China’s laws in that their Chinese employees often argue that such laws either are inapplicable or should be generally ignored. Raising these very real issues that companies continue to face in China provided the Commission insights that will hopefully inform their recommendations to Congress on issues to address in the China-U.S. economic relationship.

This U.S. China Economic and Security Review Commissio link provides the schedule for Wednesday’s hearing, the speakers, and links to the speakers’ testimony and a copy of the Commission’s 2014 Report to Congress can be accessed here.

How To Sell Your Food And Beverages Into China The Easy Way

Posted in Uncategorized

A friend of mine with one of China’s leading online retailers just sent me an article listing out food and beverage companies that are using JD.com to market and sell their product in China. For more on JD.com, check out this week’s New York Times story on it. The article my friend sent me is entitled, China: JD.com expands imported food program.

Our China lawyers have long advocated a “distributorship-type” model as a lower cost and oftentimes better alternative for foreign companies looking to sell their products into China The following posts (going all the way back in 2010) detail why a distributor/reseller model can be a better way to “get into” China than via a WFOE or a Joint Venture and explain the ins and outs of such a model in China:

It makes particular sense for food companies to sell their food and beverage products into China through distributors and resellers. China’s food safety regulations, import laws and food and beverage distribution systems can be immensely complex, and someone like JD.com is likely going to be better able to navigate these things in China than you are.

But it takes more than just saying “yes” to a company like JD.com to succeed with selling your food or beverage products into China. Even if you end up using an established China food or beverage distributor for your products, you should, at minimum, do the following:

  1. Make sure that your agreement with your distributor/reseller protects your reputation in China and elsewhere.
  2. Make sure that your agreement does not lock you in with your distributor or reseller if sales are poor.
  3. Make sure to protect your intellectual property (particularly your trademarks) from both your distributor/reseller and from China and elsewhere.

For many American food and beverage companies, relationships with companies like JD.com make perfect sense, so long as they are done right.

China’s Film Industry Getting More Industrial

Posted in China Film Industry

China Economic Review editor Hudson Lockett interviewed our Beijing-based entertainment lawyer, Mathew Alderson, for his story, 2014: The year China’s film industry got more industrial. Mr. Lockett was interested in some of the issues Mathew covered in his recent series on digital ancillaries in China’s film industry.

The below are some of the questions and answers from Mr. Lockett’s interview with Mathew:  

 

CER:                      To what extent does focus on box office take for domestic films obscure the greater earnings potential of the industry?

Alderson:            To a substantial extent. But let’s not forget that ancillaries still account for a tiny proportion of the market so it’s natural to focus on box office.

 

CER:                   Broadly speaking, what role has copyright enforcement, or lack thereof, played in the stunting of digital film ancillaries in China?

Alderson:        Though the strength of copyright protection is certainly a factor it’s not the only one. Other factors include that the market is still relatively undeveloped and growing at an extraordinary rate. Over the past five years we’ve seen unprecedented growth in box office. That is attributable to something known as “physical exclusion” — it’s a relatively simply matter for copyright stakeholders to exclude moviegoers from theatres if they don’t buy tickets. This doesn’t depend on copyright. Improvements in the strength of copyright protection have only started taking shape during the time that box office has been exploding, but the means of exclusion in the non-theatrical sphere have been slower to develop because they have been more dependent on enforcement and technology. The stunting of digital ancillaries, as you put it, was originally caused, or at least abetted, by the absence of a legal or technological form of exclusion.

 

CER:                   Before going too deep into digital ancillaries, how does China’s current IP environment affect the profitability of ancillary rights for physical merchandising–particularly for animated films/franchises?

Alderson:            China is awash with counterfeit merchandise. Counterfeits are often made in the same factories as genuine merchandise. This makes them harder to detect because, in such instances, the manufacturing standards and overall quality are the same. The luxury brands don’t like to talk about this but they accept it as a cost of doing business here. There are even retail assistants in the boutiques of Beijing and Shanghai who swap genuine items for counterfeit items without the buyer, or the brand, being aware. This is less an intellectual property problem and more a problem in the enforcement of license terms. Physical merchandising, as a type of ancillary, is subject to these problems too. These problems all erode profitability.

 

CER:                   As online-mobile consumption increases, how likely is it to cannibalize box office revenue?

Alderson:            I don’t know whether it will cannibalize it. I think it’s more likely that online handheld viewing will supplement box office as digital ancillaries grow.

 

CER:                   How did the 2009 Coca-Cola/Pepsi infringement case spur growth in licensed content?

Alderson:            In that case the plaintiffs went after foreign advertisers and held them responsible for contributing to the infringements that were occurring on the platforms on which they advertised. The Chinese providers of these platforms were facing the rapid evaporation of their advertising revenue. They started to clean up their act and the result was an explosion in license fees for content that had previously been pirated.

 

CER:                   You mentioned Charles Zhang referring to an “explosion in paid content”, but how easy is it to shift from the ad-based model now en vogue to a pay-for-content strategy as the basis for ancillary revenues?

Alderson:            It has proven relatively easy when the license fees are set per program or per series. It has proven more difficult when entire catalogues or channels are licensed. Deals of the latter type involve lump sum advances and the task of calculating recoupment or allocating fees among discrete programs is difficult because the usage data are either unavailable or unreliable.

 

CER:                   How rampant is online piracy of films in China, not just via streamed video, but through torrenting and other methods? Are there reliable figures available, and if so, how are they trending of late?

Alderson:            It remains a problem but my impression is that it is not getting worse. If anything it is getting better. Don’t forget that the Chinese are now the most-IP litigious people in the world. Chinese companies are now suing each other over copyright all over the place. Gone are they days when copyright was a kind of stick wielded by Hollywood alone. There are Chinese production and distribution companies whose in-house legal departments include full-time copyright litigators. They spend good money acquiring copyrights and they will no longer sit back and let other Chinese companies free-ride on the investment. The prevention of free-riding has long been the classic economic rationale for copyright law. The landscape is now much more sophisticated than foreigners realize.

 

CER:                   You end the series on a more upbeat note suggesting creativity will outpace censorship, but if the success in clamping down on Weibo and Weixin was in part possible because of those companies’ reliance on friendly ties with the government to do business, won’t BAT-produced films run the same risk?

Alderson:            Ultimately, yes.
CER:                   How do you think cinema is likely to change in form to suit the online-mobile format in China?

Alderson:            I take the view that a preponderance of handheld viewing will naturally lend itself to shorter programs and aspect ratios different to those for feature-length motion pictures. That is not to say that the theatrical format itself is threatened. I think there will always be a place for it and the Chinese are certainly demonstrating a zeal for movie-going. It will just make more sense to format for the handheld screen, in much the same way as motion pictures are formatted for television or in-flight viewing.

 

CER:                   What unique features of the consumer landscape need to be taken into account?

Alderson:            That Chinese consumers consume goods and services online at a higher rate than Americans and they use handheld devices to do it.