China entertainment lawyer

The pace of change is so rapid that it’s always hard to keep up with developments in China. What made sense last month often makes no sense this month. Here’s my attempt to make sense of what’s going on in video streaming right now.

1. More subscribers

As recently as four or five years ago it seemed that Mainlanders simply weren’t prepared to pay for online content. Advertising-supported delivery seemed the only commercially viable form of distribution. These days, millions of Chinese are prepared to subscribe, either to access the increased volumes of premium content now on offer or simply to avoid advertising. The rapid growth of mobile wallets like those provided by WeChat and Alipay is supporting this process. Whatever the reason, in 2017 online video revenues increased by 49% to $14 billion.

2. More streaming, less social media

Over the last five years we’ve seen a huge increase in traffic on VOD sites as Chinese people move over from social media to VOD. The 2018 WeChat Social Commerce Report says that increased engagement on video apps is causing the decreasing use of social apps.

3. VOD, and not TV, is now driving production

VOD platforms are pushing TV broadcasters aside with their production spends. Anke Redl, MD of CMM-I, says “VOD platforms have become production powerhouses. They are investing in other platforms and spending more on production costs. Their content creation spends now far exceed those of the TV stations”.

4. Big platforms are spending big on original content

According to Redl, “The VOD ecosystem has changed dramatically in the last few years. In the past, the platforms were more inclined to buy existing content, much of it foreign. As foreign content restrictions bite, they are now more careful about acquiring foreign content and more inclined to invest in local content”. Youku, Tencent Video and iQiyi, China’s three big OTT players, are all investing more in the production of premium content. In an interesting twist,  increased local production spend may be a way of allowing platforms to access more foreign content because their foreign imports must be a proportion of their local offerings.

5. Content prices are up

The transformation of China’s video market is driving up content acquisition prices. Platforms are now spending two or three times more per episode than they did two years ago. Per episode production spends are reportedly now in the range $1.6 to $2.4 million.

6. Content is local language, China focused

While there will always be demand for foreign content, Chinese people mostly like watching Chinese content. They are very happy with Chinese programs. This basic fact often comes as a surprise to foreigners. This is an underlying cultural preference that can’t be blamed on foreign content restrictions and import quotas. The good news for China’s producers and distributors is that the domestic market is large enough to show substantial returns on investment. The bad news, though, is that there is no foreign market for Chinese programs. A show that fails here has nowhere else to go.

7. Regulation of foreign content is increasing

No surprises there. The US-China trade war obviously isn’t helping. See this recent post for a summary of new proposed regulations. By the way, the Chinese aren’t the only ones restricting foreign content. Look at the new EU law requiring streaming platforms to carry 30% European content.

8. There is a growing market for non-exclusive foreign content deals

Quota places follow the imported programs, not the importing platform. Non-exclusive foreign content deals therefore allow more than one platform to benefit from a quota place. More and more of the smaller platforms are operating in this space. They will clear particular programs for a quota place, shop them around and then license them non-exclusively to bigger platforms. In this way the benefit of quota places is spread more widely across the market.

9. Capital markets are paying attention

Thomas Hui, CMC Holdings COO, says “Specialty and short form content platforms are gaining traction with viewers and in capital markets“. There sure has been a lot of activity at the big end of town. iQiyi raised more than $2 billion when it went public in New York earlier this year, while Tencent invested $1.1 billion in a single day — $461.6 million in Huya and $632 million in Douyu TV.

10. Despite it all, big China platforms are making losses

Subscriptions may be up but subscribers still remain in the minority. They accounted for only a quarter of total online video revenues in 2017, with advertising accounting for half. Tencent recently reported its first profit decline in more than 10 years, wiping more than $100 billion off its market capitalization. According to analysts referred to by The Information, Youku, Tencent Video and iQiyi are all operating at a loss.

On September 20th, 2018 China’s film and TV regulator, NATR, published a discussion draft of the Provisions on Administration of Import and Broadcasting of Overseas Audio-Visual Programs. The provisions apply to “overseas” films, TV programs, animation and documentaries. “NATR” is the National Administration of TV and Radio, the result of a recent restructuring of SAPPRFT, the State Administration of Print Publication Radio Film and TV.

If implemented in their present form, the provisions will seriously impact the streaming and broadcasting of foreign motion picture and TV content. These provisions are part of a process of increasing regulation of foreign content that began in 2014. One of the stated objects of this process is to support the domestic Chinese entertainment industry and to improve domestic program standards. One of the effects of the process will be to reduce foreign access to the Chinese market.

For streaming:

  • NATR will be required to publish and maintain a catalogue of overseas programs approved for streaming in China. Streaming of overseas programs not listed in the catalogue will be prohibited. This would be an entirely new development.
  • Each platform will be required to limit overseas programs to 30% of its programming in any one “category.” This would be in addition to the general 30% limit on overseas programs introduced in 2014.

For broadcasting:

  • Each TV broadcaster will be required to limit overseas content to 30% of the broadcaster’s total daily broadcast time in the applicable “categories.” This too would be an entirely new development.
  • Primetime broadcast of overseas programs of any kind will be prohibited without NATR approval. This would replace the 2016 regulations that already restrict primetime broadcast of foreign formats to two per broadcaster.

The big issues right now are how to draw the line between foreign and domestic content and how best to structure IPR in Sino-foreign film & TV deals.

We will keep you posted as developments occur.

China entertainment lawyer

On September 26, China media and entertainment lawyer Mathew Alderson will be discussing how movie and TV producers can “make the most of the opportunities China offers” as part of a FREE webinar. Go here to register.

PACT, “the trade association representing the commercial interests of UK independent television, film, digital, children’s and animation media companies,” is putting on this webinar and it describes it as follows:

To shine some light on how producers can make the most of the opportunities China offers, we have invited Mathew Alderson, Partner at Harris Bricken to take part in a webinar. Mathew is a transactional entertainment lawyer based in Beijing. He has a wealth of knowledge about the Chinese TV and Film industries and will share his experiences about working with China.

Topics to be discussed include:

–    An overview of China
–    Information about SART and how they work in the market
–    The biggest mistakes companies make when working in/with China
–    An explanation of how copyright works in China
–    The benefits of working within the co-production treaty
–    Contracts and Chinese law
–    How companies can protect their IP
–    Chinese quotas
–    Payment in China, tax, and additional costs
–    Legal representation

To register for this webinar, click here. I remind you that it’s free.

PACT (quite accurately) describes Mathew as follows:

Mathew Alderson is a transactional entertainment lawyer in Beijing. He represents major Hollywood studios, major tech companies and gaming companies, as well as independent producers and distributors. Mathew frequently advises UK companies on the structuring of projects in order to minimize the impact of quotas and other restrictions on foreign content in China. Mathew focuses on protecting his clients’ IP and reducing their exposure to payment defaults in China. He handles China theatrical and episodic projects from development through production and distribution.  Mathew is the author of the UK-China Film & TV Toolkit and a frequent contributor to China Law Blog.

We would add that Variety Magazine described Mathew as a “game-changing” lawyer rocking the movie biz for Mathew’s leading- edge work as a China entertainment lawyer.

You do not want to miss this, so go here and register.

China copyright lawsCurrently, the number one film in China is the smash hit Hello Mr. Billionaire (US$306M and counting). It’s a comedy about a hapless soccer player who stands to inherit 30 billion RMB, but only if he can spend 1 billion RMB in a month (albeit with a number of complicated conditions, like no gambling, donating the money, or purchasing illegal substances).

If the story sounds like déjà vu all over again, that’s because it’s the same plot as a 1985 Universal movie starring Richard Pryor called Brewster’s Millions. The idea for Hello Mr. Billionaire originated with Universal, which was seeking to exploit their back catalog by remaking movies for a Chinese audience. It’s a brilliant strategy when it works, except that it didn’t actually work for Universal: they decided not to finance the remake and merely allowed the filmmakers to use some of the plot points from the 1985 film.

The track record of Chinese remakes is decidedly mixed. In 2017, Disney remained highly involved in The Dreaming Man (a remake of the 1995 Sandra Bullock film While You Were Sleeping) but it barely registered at the box office. Before that, the 2004 film Cellular was remade in 2008 and bombed; the Coen Brothers’ 1984 film Blood Simple was remade in 2009 by Zhang Yimou and enjoyed modest success; and the 2000 film What Women Want was remade in 2011 and basically broke even. It only takes one success to start a trend, though, and the outsize profits of Hello Mr. Billionaire will surely lead to similar remakes being fast-tracked.

But Hello Mr. Billionaire is not just any remake. It’s based on the 1902 novel Brewster’s Millions by George Barr McCutcheon, which has been adapted into a film at least 12 times and in multiple countries. Sure, the story is fun, but I suspect the real reason it’s been remade so often is that the IP is free – the book’s copyright has expired and the story has been in the public domain for years. Thus, when Universal decided not to fund Hello Mr. Billionaire, the only chain of title issues the filmmakers faced were with respect to plot points or characters that solely appeared in the 1985 film. (The filmmakers may have had other contractual obligations to Universal, but that’s a separate matter.)

Let’s thicken the plot even further. China and the US are both signatories to the Berne Convention, but they don’t have the same rule when it comes to the expiration of copyright. The basic rule in China is that a published work enters the public domain after the life of the author plus 50 years (i.e., the minimum protection under the Convention); the basic rule in the U.S. is the life of the author plus 70 years. Both countries have numerous exceptions to the rule, which in the U.S. are even more advantageous to copyright holders.

It remains unclear whether China would apply its own rule or the U.S. rule for a work created in America — say, a book or play or other source material for a movie. It may seem like a moot point because most movies are created for an international audience, but the Chinese film audience is so big now that a Chinese movie only needs to succeed in China. As of December 31, 2018, the works of any author who died in 1968 will arguably be in the public domain in China. That’s a lot of potential material coming on the market, including the oeuvres of John Steinbeck, Edna Ferber, and Upton Sinclair. And that doesn’t even consider anyone who died before 1968! The larger question is whether Hollywood will view this as a threat, an opportunity, or both.

China movie lawAs everyone who follows the Chinese film industry already knows, the would-be blockbuster Asura had one of the strangest and most ignominious openings in film history last weekend. With an estimated budget of US $113 million, it ranked as the most expensive domestic production of all time, and featured a high-profile international cast and crew including Chinese teen heartthrob Lei Wu, Hong Kong legends Tony Leung Ka-Fai and Carina Lau, the costume designer from the Lord of the Rings movies and the visual effects supervisor from Deadpool. But after an anemic opening weekend of $7.1 million and a huge decline in box office even from Friday to Sunday, the film was yanked from theaters on Sunday evening like a vaudeville act getting the cane.

The producers announced their decision to pull the movie via the film’s official Weibo account (in Chinese). Some stories have emphasized that the producers (and not the theaters) pulled the movie. This is true, but elides the fact that Chinese theaters adjust the number of theaters every day for every film, especially on a film’s opening weekend. By Sunday evening Asura was already circling the drain, caught in a vicious cycle of low admissions, terrible reviews, and dwindling screens, and the producers faced a Hobson’s choice of pulling the movie themselves or having it effectively pulled for them.

No one quite believes the producers’ announced plan for Asura, which is that they will modify the film and re-release it. Numerous films have been successfully retooled after preview screenings, but after a wide release with a huge marketing push? It reminds me of the long and troubled history of the Broadway show Spider-Man: Turn Off the Dark, which at the time was the most expensive Broadway show in history, had the most number of “previews” in history, and was revamped several times but still ended up losing more than $60 million.

But if the producers really are going to re-release Asura, their plan to pull the movie early may have been a stroke of genius: by pulling the movie early, they may have given up a million or so in revenue, but they’re getting that back and more with the free publicity surrounding the mystery of what’s next. And the producers are just adding fuel to the fire by alleging they were sabotaged by a deluge of (ostensibly fake) negative reviews. I can’t decide which P.T. Barnum quote is more apt: “There’s a sucker born every minute” or “I don’t care what the newspapers say about me as long as they spell my name right.”

The coverage has bordered on the gleeful, with pundits from across the spectrum weighing in on what went wrong. Everyone agrees that the movie was a disaster, with particular attention to the effects (uninspiring), the story (a strange fusion of Tibetan mythology and action-adventure tropes), the actors (poorly cast), and the marketing (off-putting with its emphasis on the movie’s cost). Indeed, in retrospect it’s hard to identify anything that went right with this movie.

Asura wasn’t some strange labor of love backed by a mysterious billionaire. It was a studio film, produced by powerful and experienced Chinese companies like Zhenjian Film Studio, Ningxia Film Group and Alibaba Pictures. Numerous executives must have weighed in on every aspect of development and production, yet nobody with the power to stop it ever did. I can honestly say that this movie looked horrible and I would have predicted that it would fail, but I would have said the same thing about Warcraft and Resident Evil: The Final Chapter and those movies went gangbusters in China despite being largely ignored in the rest of the world.

As a general rule, I root for Chinese films to succeed. But if this film was as bad as it seems, it’s good that it failed, because Chinese audiences deserve better. Maybe the failure of Asura will even prove a corrective to Chinese studios trotting out 17 Monkey King movies every year. But I doubt it.

The real lesson from Asura, and the reason I think its implosion will ultimately prove to be a good thing, is that it shows the Chinese film industry is maturing. It can fail, and fail spectacularly, in the same way that Hollywood has done for years (see, for instance, Cleopatra, Heaven’s Gate, Ishtar, Cutthroat Island, The Adventures of Pluto Nash, and John Carter). And just like Hollywood, the Chinese film industry will shrug off this failure, because the Chinese film industry is doing just fine – the two movies that dominated the box office last week, Dying to Survive and Hidden Man, are home-grown successes attracting audiences and critical acclaim in equal measure.

It bears noting that Renny Harlin, director of Cutthroat Island, has moved to China and restarted his once-faltering career, with numerous big-budget films lined up including one for Alibaba Pictures. What could possibly go wrong?

China film lawyerLast Tuesday, U.S. Trade Representative (and Trump appointee) Robert Lighthizer released a statement explaining that his office would seek to impose a second round of tariffs on Chinese imports, this time 10% tariffs on an additional $200B in imports. The first round of tariffs, which went into effect on Friday, July 6, imposed tariffs on $34B in imports, and was quickly matched by China’s imposition of tariffs on $34B in US exports to China.

The USTR is justifying its actions on the basis of the 200-page Section 301 report which detailed a wide range of allegedly unfair trading practices by the Chinese government, including forced technology transfer, theft of IP and technology, improper government subsidization, and lack of reciprocity.

It is difficult to find anyone outside China who disagrees with the substance of the Section 301 report, but it is difficult to find anyone outside the Trump administration who understands – let alone agrees with – the country’s blithe entry into a trade war. Ramesh Ponnuru, a senior editor at National Review (hardly a bastion of liberal thought), wrote a cheeky opinion piece in Bloomberg laying out what he saw as Trump’s Four Rules for Conducting a Trade War:

  1. Assume that you will win it effortlessly.
  2. Make sure your tariffs are designed to inflict maximum damage on your own country’s companies.
  3. Take on as many countries simultaneously as you can.
  4. Don’t feel that you have to make your negotiating demands clear.

The USTR has released a tentative list of 6,031 product categories that, in aggregate, allegedly represent $200B worth of Chinese imports. Included on this list, to the chagrin of almost everyone in the entertainment industry, is the following category: “Motion-picture film of a width of 35 mm or more, exposed and developed, whether or not incorporating sound track.” The list also includes motion picture films of a width less than 35mm, but it is silent as to whether this would extend to movies on digital media, which is how the vast majority of films are distributed these days. See Rule (4) above.

Industry observers have been trying to figure out what, if anything, this means to the Chinese film industry, the US film industry, and the interaction between the two. From an economic standpoint, putting tariffs on motion picture imports from China is solely a symbolic gesture. China would love to be exporting films in such quantities that these tariffs would hurt, but as we wrote in What Does the Chinese Film Industry Get From Hollywood?, Chinese films simply don’t do business in the U.S. In the past 10 years, the highest-grossing Chinese films in the U.S. have been The Grandmaster (2013, $6.6M), The Mermaid (2016, $3.2M), and Wolf Warrior 2 (2017, $2.7M).

Meanwhile, multiple U.S. films each year gross more than $100M in China.

Putting all this together, it seems possible (if not likely) that the Trump administration is simply baiting the Chinese government to retaliate against the liberal redoubt of Hollywood. See Rule (2) above. China would love to see Chinese films dominate the Chinese box office, and they certainly don’t care about protecting American business interests. But they also don’t want to do Trump’s dirty work for him.

At this point, all options are open to the Chinese government, and they have even more political cover to take whatever action they like. My guess is that the Chinese won’t do anything except use the threat of tariffs as an excuse to postpone the already-interminable negotiations over the revised film quota and profit-sharing arrangements. I’d do the same thing in their place. How could they possibly reach an agreement on film imports with the threat of retaliatory action hanging over the entire process? This way, the Chinese can have their cake and eat it too.

Of course, it’s also possible the Trump administration didn’t think about any of this too deeply and everyone is reading in complexity where there is none. Being There, anyone?

China IP lawyerHow do you know when a copyright has been infringed? For years, this wasn’t even a question people asked in China because it was so obvious. The guys on the corner with carts full of bootleg CDs and DVDs, the illegal BitTorrents and download sites – all of them were wantonly and flagrantly engaging in copyright infringement. Indeed, infringement was their business model. If they weren’t offering copies of copyrighted works, nobody would be interested.

Slowly but surely, though, China’s enforcement of copyright infringement has improved – in large part because large Chinese companies like Baidu and Alibaba and Tencent now control the rights to a great deal of content and their business models are based on people not getting such content for free somewhere else. The BAT companies have turned to Chinese agencies and courts to enforce their rights, evidenced by a concomitant surge in copyright-related litigation. We wrote about this last year in Copyright Protection in China– It’s Real, and It’s Spectacular:

The point is not that Chinese courts are establishing new rights, but that they are enforcing the rights that already exist for copyright owners – and doing so in a meaningful way. Both Chinese and foreign copyright owners are turning to Chinese courts to enforce their rights, and are prevailing. At least with the easy cases.

China still has work to do on the easy cases before it gets to the level of the US or the EU, but the concept (and value) of copyright has taken hold in China. Bring on the not-so-easy cases! Like the ongoing “Blurred Lines” case in the US, in which Marvin Gaye’s estate sued Robin Thicke and Pharrell Williams for allegedly copying the musical style of “Got to Give It Up.”

Where is the line between plagiarism and inspiration? American courts have grappled with this question for years; lawsuits are filed every day by songwriters and screenwriters who hear a hit song or see a hit movie or tv show and think that the creators stole their work. Many of these cases are spurious and easily dismissed on summary judgment, but not always.

Robin Thicke and Pharrell Williams lost at trial and on appeal, but still deny that they copied Marvin Gaye. Led Zeppelin prevailed in a lawsuit over “Stairway to Heaven,” but the plaintiff (the songwriter for 70s band Spirit) has appealed. Sam Smith quietly settled with Tom Petty before a lawsuit was even filed – perhaps because he feared he would lose the battle of forensic musicologists.

It’s more common to see a music-related case alleging infringement go to trial than a film or tv-related case – probably because musicology offers at least a semblance of objectivity when comparing the original and the allegedly infringing work. But that doesn’t stop online fans from crying foul when they see uncanny echoes of their favorite works in a new program. That’s what happened last week when the Chinese tv show Legend of Fu Yao was taken to task for allegedly ripping off numerous plot points from J.K. Rowling’s Harry Potter and the Goblet of Fire (book four in the seven-book Harry Potter cycle).

This is hardly the first time the Potterverse has been ill-used in the Middle Kingdom. Back when new Harry Potter books were still coming out, Chinese publishers did a brisk business in fake Harry Potter books. Who can forget “Harry Potter and the Hiking Dragon,” “Harry Potter and the Chinese Empire,” or “Harry Potter and the Big Funnel”? Laugh if you want, but these books sold millions of copies. You can understand why loyalists would be unhappy about the latest affront to the Hogwarts canon. The difference is, these days J.K. Rowling can do something about it.

I haven’t seen Legend of Fu Yao and can’t comment on the extent and depth of the alleged similarities. But if the producers of that  show really did steal from J. K. Rowling she could sue in China under the Copyright Law and the Law Against Unfair Competition. That was Disney’s successful strategy against the Chinese filmmakers who made The Autobots, a film whose anthropomorphic cars looked almost the same as Lightning McQueen et al. from Cars.

Suing over Legend of Fu Yao would likely be tougher sledding, but figuring out whether you have a case is what lawyers do for a living. If I were J.K. Rowling, I’d ask my lawyer to engage a China IP lawyer, stat.

China film quotasSince 1994, China has had a quota on the number of foreign films that could be shown in Chinese theaters on a revenue sharing basis (i.e., with the Chinese distributor remitting some percentage of the revenues to the foreign film’s producer). The quota started at 10 per year in 1994, was increased to 20 films per year in 2002, and then was increased again to 34 films per year in 2012 with the proviso that at least 14 of the films be in either 3D or IMAX format.

The exact revenue sharing model has varied, but the current rule, as outlined in the 2012 US and China Memorandum of Understanding (which was a settlement after the US had prevailed in a WTO complaint), allows the foreign film producer to keep 25% of all domestic revenues, without any withholdings or deduction. That percentage has been more aspirational than actualized; money from China is often both too little and too late.

Hollywood has been negotiating a new deal with China for more than a year (the 2012 memorandum expired in 2017), in hopes of raising the quota, increasing the percentage on revenue shares, and gaining more control (or at least transparency) with respect to distribution logistics such as release schedules and blackout dates. But the on-again, off-again US-China trade war has thrown those negotiations for a loop and effectively given China the ability to take whatever position it likes, from slapping a huge tariff on all US films to conceding on all of Hollywood’s deal points. But China is in no hurry to agree to anything. Why should it be? They’re fine with the status quo.

Meanwhile, an alternative to the quota import system has emerged that may render the whole discussion moot. For years, in parallel with the quota-based foreign films, China has also allowed the importation of “buyout” foreign films: films bought for a flat amount, with no required profit sharing. But in recent years, as the Chinese box office has become ever more profitable, the competition for buyout films has gotten increasingly fierce, with many distributors offering better terms, i.e., profit sharing. The most famous example of profit sharing on a buyout film came in January 2017 with Resident Evil: The Final Chapter, which became a smash hit in China to the surprise of all parties involved. Once the film passed RMB 500 million in domestic revenue (which happened on opening weekend), the film producer started getting a piece of the revenue.

As Resident Evil goes, so goes the world. Indeed, strict buyout films are now more the exception than the rule, and the revenue-sharing provisions are getting better and better. The US negotiators must be wondering why they are spending so much time negotiating an agreement for terms that are not appreciably better than what foreign filmmakers are already getting on the open market.

Except it’s not really an open market; China’s theatrical distribution system is dominated by two huge players, China Film Co. and Huaxia, both of which are state-owned. Even the buyout films have to go through those distributors to play in theaters, because foreign companies are legally prohibited from distributing films in China. If there is a convergence between the revenue-sharing terms of buyout films and quota films, it’s only because the Chinese authorities want that to happen (or at least are allowing it to happen).

It’s anyone’s guess how long buyout films will be allowed in on similar terms as the quota films or what the Chinese authorities really think about buyout films. Maybe they’re letting all of this play out to see what happens. Maybe they’re just roiling the waters between the MPAA (which represents the Hollywood studios, who provide most all of the quota films) and the IFTA (which represents non-studio producers, who provide many of the non-quota films). Either way, if you’re an independent producer, it’s a good time to be selling to China.

China movie contracts
Photo by George Baird

Over the past couple weeks, the Chinese Internet has been abuzz with chatter about how Chinese movie stars allegedly underreport income via a dual-contract system in which only one contract is disclosed to the tax authorities.

The ruckus started when television personality Cui Yongyuan uploaded a redacted actor employment contract apparently for Chinese A-list actress Fan Bingbing’s work on the upcoming Bruce Willis film Unbreakable Spirit. (Initial reports stated, incorrectly, that the contract was for Fan’s work on the upcoming Feng Xiaogang film Cell Phone 2.)

Cui complained that Fan was massively overpaid – nearly $1.6M for only four days’ work – and her contract was bad for the Chinese film industry. The contract also detailed some of Fan’s allegedly egocentric contractual demands: screenplay rewrites, her own hairstylist and voice artist, luxury car service, a $200+ daily food allowance, and a requirement that the studio also hire her personal makeup artist at more than $12,000/month. Here in the United States, The Smoking Gun and other websites have posted so many celebrity contracts that we are inured to such terms, but Chinese netizens went berserk. Some penned impassioned defenses of Fan; others bemoaned the country’s skewed priorities.

Cui was just getting started. The next day he published a second redacted contract, this one for $7.8M, and intimated that the two contracts were so-called “yin-yang contracts” for Fan Bingbing: a form of tax evasion under which the smaller contract is reported to the tax authorities as income, and the other is unreported and therefore tax-free income.

At this point the Chinese tax authorities got involved and announced they would be investigating various Chinese film companies and also Fan Bingbing’s own production company. Shares in most of China’s major film companies promptly took a dive, presumably on the assumption that accounting flim-flam was rampant.

Meanwhile, the supposed evidence of Fan’s financial misdeeds unraveled nearly from the beginning. Cui conceded that the second contract had no connection to Fan Bingbing and in fact he had no evidence of any tax evasion on her part. Fan has vehemently denied the allegations of a second contract, and has threatened to sue Cui for damage to her reputation. It’s enough to make your head spin.

Actor compensation is an increasingly touchy subject in China, as the government more control over the film industry while also wanting to exert “soft power” through its cultural exports. With the possible exception of Olympic champions, movie stars probably represent China’s most bankable and least controversial form of soft power. But if the stars shine too brightly (or get paid too much), then the optics start to look bad, especially internally. For this reason, last fall the China Alliance of Radio Film and Television passed guidelines (almost certainly at the behest of the Chinese government) seeking to limit actors’ pay in two ways: capping acting fees at 40% of a project’s budget, and capping any one actor’s fee at 70% of the casting budget.

At this point the only thing that seems (relatively) clear is that Fan Bingbing received $1.6M for four days’ work on Unbreakable Spirit. But let’s imagine for a moment that Fan did receive a separate, larger payment via a second contract. There’s no proof this occurred, but even if it did there’s nothing illegal about it, unless the recipient never reported it. Indeed, all of the criticisms leveled against Fan thus far are similarly uncompelling. Consider:

  1. Fan is being paid too much for her acting services. It’s not difficult to muster a convincing argument that as a policy matter celebrities should not be paid more than, say, teachers or scientists. But the producers of Unbreakable Spirit are the ones who have to pay Fan, not the public, and they have obviously made the calculation that Fan is worth it. She is one of the most popular actresses in China, and they’re not running a charity. Why shouldn’t Fan get as much money as possible for her role? Fame (and the attendant paychecks) can be fleeting, and it’s hard to begrudge anyone who demands to be paid what the market says they’re worth. Especially a female actor, in this age of #metoo. If Unbreakable Spirit were an American film no one would think twice about Fan’s compensation.
  2. The contract is with Fan’s company, not her personally. The vast majority of actors in Hollywood are hired through their own companies, usually LLCs called loanout companies. The main reasons for this are to limit liability and to gain preferential tax treatment. The situation in China is similar. Nothing illegal about it.
  3. Fan (might have) signed two contracts for the same film. Fan has her own production company and it’s quite common for big stars to work as actual or de facto producers on a film. That is: they use their fame, connections, and/or money to help get the film financed, made, and distributed. If someone not  an actor did that, they’d be paid as a producer. Nothing illegal or even unusual about having a second contract for different services.
  4. If she signed two contracts, Fan was paid much more for producing than for acting. Actors take lower fees all the time for various reasons. Maybe they love the movie and take less just to get the movie made. Maybe they believe in the movie and will take less upfront for a piece of the profits (or even revenues, as pioneered by Jack Nicholson in 1989’s Batman). Maybe they’re also directing and producing the film and effectively want to invest their sweat equity in the film. It’s also possible Chinese filmmakers may also be trying to avoid the 2017 rule limiting actor compensation. Such a workaround is arguably a gray area but seems difficult to police, especially with talent that legitimately provides more than just acting services. Who should decide the actual value of their acting services?
  5. Fan’s contract requests are outrageous. By Hollywood standards, Fan’s requests for Unbreakable Spirit are neither outrageous nor particularly diva-like; I’ve received bigger, less rational asks from actors who are much less famous. It’s almost expected for an actor (or their agent) to push the envelope and see how much they can get, not least because it establishes a benchmark for the actor’s next picture. And sometimes a seemingly outrageous request has a legitimate purpose, as most famously embodied by Van Halen’s prohibition of brown M&Ms.

Even if Fan Bingbing hasn’t done a single thing wrong (which is very possible), it wouldn’t be surprising to learn that tax evasion is rampant in the film business. Tax evasion is like a national sport in China. Mainland factories regularly misreport income by having payments go to a Hong Kong or Taiwanese holding company. So-called “independent contractors” in China rarely report their income because they and their foreign employer are both operating illegally. And the billion-dollar daigou business is profitable largely through tax and customs fraud.

But if Chinese celebrities are committing tax evasion through two contracts, it’s because they’re not reporting income, not because there’s anything wrong with the two-contract model.

China online gaming lawyers
China online gaming laws. It’s complicated.

Online gaming in China is subject to the same overall regulatory framework that applies to software as a service (SaaS) in China.

The regulatory framework comprises no less than a dozen key components that have developed over the past twenty years or so. The development has not evolved neatly. Earlier regulations have not been comprehensively replaced or modified by later regulations. Rather, the development has been somewhat haphazard; with an apparent tension between the various authorities competing for control of the relevant sectors. A painstaking chronological analysis is therefore required to discern those threads surviving or running consistently throughout. As is always the case in China, the regulatory framework includes certain inconsistencies and loose ends, and the authorities may not always interpret the regulations in a manner consistent with a plain reading.

We explored these regulations in Selling SaaS in China: Resistance is Futile. As we noted in that post, the lawful delivery of SaaS in China requires a platform hosted on a server located in China and operated by a Chinese-owned entity. The operating entity must have direct contact with Chinese consumers and must have the required licenses and approvals. A system is required for the proper handling of the gamers’ personal information in accordance with Chinese cyberlaw.

Foreign online gaming companies often balk at these restrictions or expect simple workarounds.

One popular but flawed workaround involves a “variable interest entity,” or “VIE.” There are still people in the tech sector who believe these entities can be used to overcome the regulatory hurdles. A VIE involves Chinese partners holding assets on behalf of foreigners in sectors from which those foreigners are excluded. These structures are unsupported by law and the sector perception is based on myths and legends and history that no longer jibes with the present day. Our China lawyers have seen companies waste a lot of time and money on illegal structures over which the foreigners have no effective control.

Another flawed workaround involves delivery of online games to Chinese nationals from foreign servers. This is popular because it circumvents the requirements on what needs to be housed on Mainland servers. In taking this route, many foreign gaming companies ultimately compromise their access to the Chinese gaming market. Most Chinese do not use VPNs, so the foreign servers are hard for them to locate and are even harder for the foreigners to properly market. Foreign gaming companies also run the risk of having their games blocked when they are distributed this way.

For these reasons, we conclude that resistance to the regulations is futile. Especially if you are a serious player.

To gain full access to the Chinese market, online gaming companies must comply with the regulations by identifying and co-operating with the right Chinese companies. The biggest problem is usually finding an appropriate Chinese partner or licensee — one with all of the required licenses and approvals. We have identified and analyzed the requirements an appropriate Chinese company must satisfy. Not less than 6 separate licenses and permits are required. As is so often the case in China, confirming whether a Chinese company has (or could hope to have) these licenses and permits is a relatively simple matter of due diligence. Again, we see a lot of time and money wasted on deals with Chinese companies that lack the necessary capacity.

In most instances, the only PRC companies with the capacity to obtain the necessary licenses and permits are major internet service providers with established gaming platforms. Proper marketing to Mainland gamers will be effectively impossible without the involvement of such companies in any event. Typically, these companies will expect the foreign game supplier to provide a turnkey or pre-installed solution and to give them an interest in the underlying technology and game IP. They will also take a certain share of gross receipts. So, even when you’ve found a Chinese company with the necessary capacity you need to understand their commercial requirements well in advance so you can decide whether they even make sense for you.