Beijing based attorney

Our Beijing-based attorney, Mathew Alderson, is Co-Chair of AmCham China’s Media & Entertainment Forum. Each year the Forum puts together a chapter on media and entertainment for the AmCham China White Paper. As part of the research for the 2013 White Paper, Mathew interviewed Nathaniel Davis, a director of Split Works and Splatter, which are Shanghai and Beijing based live music/festival promotion agencies & music strategy/creative consultancies. Part of the interview is reproduced here.

Alderson: What unique problems do foreign promoters face when promoting shows in China? In other words, what problems are particular to China as opposed to being prevalent in developed markets?

Davis: The main problem or barrier to foreign companies operating as show promoters in China is that neither foreign entities nor China-registered  WFOE companies can legally operate as sole entities and apply for performance permits (批文) from the China Ministry of Culture. This can only be done in partnership with Chinese domestic companies, either in terms of a formal joint venture or a temporary partnership.

Another serious problem is distortion of the market brought on by promoters (both foreign and local) who offer fees to international acts that are not in line with the realities of the market. In other words, many international acts are being paid premium fees for shows here when there is very little chance for the promoter to make that money back because they are hobbyist promoters with family or government money and have no real understanding or desire to help create and develop a sustainable environment for shows in China.

The other main problem is the entire 批文 system set up by the Chinese government which requires extra lead times for promoters to confirm shows before they can even begin to advertise, promote or market those shows and then even longer lead times until tickets may be sold, for those events of a size (e.g. arena, stadium, festival shows) requiring Public Security Burea (“PSB”) approval. This process can require anywhere from 20-40 days.

Alderson: How could the live entertainment sector in China be improved to encourage more participation by foreign promoters?

Davis: The answer would partly be the conclusion of the last White Paper chapter:

“streamline and clarify relevant procedures and regulations, not only for the benefit of live entertainment venues, producers, and artists, but also for the benefit of China’s cultural industry overall.”  That is a good place to start.

After that, I would suggest there also needs to be not just a streamlining and clarifying of regulations, but also a reduction in procedures and regulations. The legal process for having shows approved — particularly large shows — is nearly incapacitating. The lead time for these approvals can be crippling. It simply takes too long and it is often hamstrung by something as banal as  one of the government officials who needs to sign off on the approval being out of Beijing and needing to wait until he is back to physically sign the permit.  It is not easy to do shows here — that is why there are so few of us here doing it.

This is not just relevant to foreign promoters but to everyone working in the industry.

Alderson: What particular problems beset the advertising and promotion of live performances in China?

Davis: A lack of non “pay-to-play” media (i.e. media that are actually interested in stories, rather than what they get paid to promote.)

Lack of real media interest in anything other than mainstream music-celebrity driven stories.

Also the previously mentioned problems of not being able to legally promote or advertise a show until Ministry of Culture permits are received.

Alderson: What particular problems beset the selling of tickets to the public in China?

Davis: The problems are not dissimilar to those in the U.S. There is a robust scalped ticket market made up of a combination of fake tickets and tickets that have “leaked” from the venues, ticketing companies and government agencies that receive free tickets.

Otherwise, the main problem is still a relatively limited market for live music even in the major metropolitan areas of China, including Beijing and Shanghai. Ticket prices remain extremely high relative to the purchasing power of ordinary people.

I think there is also the lack of a completely secure, transparent and trustworthy ticketing service. We could definitely benefit from the development of a secure e-ticketing platform.

Alderson: How difficult is it to book large, high quality venues and what are the main difficulties in doing this?

There are only two real high-quality venues in the country, both of which were set up by AEG and one of which is still managed by AEG. The Beijing venue — the MasterCard Center — was originally built for the 2008 Beijing Olympics. The Shanghai venue — the Mercedes Benz Arena — was opened in 2010.  All of the other large venues are old and were originally indoor sports arenas and were not really built to do concerts or live entertainment events. The two aforementioned venues can be difficult to book simply because they are very busy.

However the difficulty lies not in the “booking,” but in the logistics of actually putting a show on at that level and in dealing with the vagaries of the system and specifically with the PSB.

Alderson: How good are local Chinese sound engineers, technicians and crew?

Davis: There are several good ones working out of Beijing, but they are few and far between. There are several foreign sound engineers here now who are in great demand. But overall there is a huge gap in the maturity of the live event industry here. There is top level gear here, but a limited number of qualified people to use the gear properly.

According to Mathew (who represents Nathaniel’s companies, along with a number of other companies involved with China entertainment), Nathaniel’s assessment is entirely consistent with the way that foreign involvement in live entertainment is classified by the Chinese authorities. As with other forms of entertainment, foreign involvement in China’s music industry is restricted. Live performances are considered particularly sensitive given the tendency of some foreign performers to publicly support causes or individuals that are “off limits.”

This is the third in a series of posts on China’s film industry. The first post was “Sino-Foreign Film Co-Productions in China.” The second was “Making Films in China. You Talkin’ To Me?

Cinemas are being built in China at unprecedented rates and we are constantly hearing of explosive growth of Chinese box office takings. Needless to say, foreign producers frequently get seduced by these trends and their promise of enrichment and they have a tendency to assume that a slice of China’s box office receipts will magically flow to investors outside of China.

Unfortunately, this usually does not happen even when the film pops in China.

Why is it so hard for foreign co-producers to get paid? There are three main reasons:

1. There are no trusted intermediaries for film in China. Collection agents, escrow account holders, trustees and the like simply do not exist here in China. The foundations of international film finance are not in place. In itself, that makes you wonder how completion guarantors can underwrite Sino-foreign co-productions.

2. You need to rely on your Chinese co-producer to collect the box office and pay your share to you outside of China. Good luck with that.

3. Even if you are lucky and your Chinese co-producer has some vague intention of paying you, they cannot pay you unless they can show the Chinese tax authorities that income tax has been paid on the gross receipts and that the withholding tax on their payment to you will be deducted. Even then, they will still need SAFE (State Administration of Foreign Exchange) approval before being able to send money overseas. The vast majority of Chinese businesses will not want to do business this way.

Even in the developed world, taxation of international films is one of the most difficult areas of taxation. For China, this situation is compounded by many orders of magnitude due to a new tax code, a non-convertible currency is not convertible and SAFE involvement from the time the money enters China to when it leaves.

In previous posts (here and here) we looked at the basic framework of rules governing foreign film production in China, as applied by the China Film Co-Production Corporation (CFCC).  As it is illegal for foreigners to independently produce films in China, a Sino-foreign co-production is required and the CFCC provides a standard co-production contract.

The CFCC contract deals effectively with Chinese approval of the production process and content and censorship of the film, but it does not deal at all with the more important issues of taxation and distribution of proceeds. The regulations and the form contracts are silent on the role of distributors; they mention no role for distributors in financing. In fact, there is no explicit provision for the role of any parties other than the co-producers. There is no mention of banks, completion guarantors, distributors, sub-distributors, or collection agents. There also is no general treatment of overseas financing and rights. Participation in the project by such entities is not prohibited; it is simply ignored.

In the CFCC contract, it is assumed the foreigners have the money and that all will be paid for “up front,” with no participation by the financing players and with little or no consideration to how and when payment will be made to the foreign financiers. On the other hand, the documents and rules are extremely flexible and are not encumbered with many of the restrictive rules that apply to joint ventures and WFOEs.

The CFCC contract clearly provides that all proceeds are collected and processed by the co-production partners. There is a bank account controlled by both sides and careful accounting controls are put in place. The Chinese side is not put in complete control of things. In essence, the co-production partnership is its own collection agent manager. At least in theory, this can work because there are only two parties: the two producers.

The problem that we have seen with this arrangement is that there is no mechanism in China for the partial or primary funding of a film project by distributors. The assumption is that all of the advance funding comes from or through the foreign producer, with no direct involvement from third parties. The structure is therefore designed so that money and other benefits flow into China, but proceeds and other benefits will not escape from China. For producers not worried about Chinese box office, so long as the physical film escapes from China, the proceeds and other benefits issue is typically not of vital importance.

In our experience, foreign producers who want to get paid are usually better off allowing their Chinese co-producers to take China distribution rights in return for an up-front payment because the back-end off the receipts is usually just a mirage.