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.

China Movie QuotasLast week, the Chinese film bureau announced a new domestic film incentive program. The exact details of the program have yet to be spelled out, but the gist is that starting January 1, 2018, Chinese movie theaters will receive financial rewards for showing more Chinese films. The rewards are based on a theater’s total box office receipts for the year and kick in if at least 55% of those receipts are for domestic films. Even bigger rewards kick in if the percentages exceed 60% and 66%, respectively. Theaters must submit box office information through the government’s internal system and cannot engage in box office fraud (duh).

The 55% mark may be difficult to attain. As of a few weeks ago, Chinese films had a market share of 52.4% for 2017, and that’s largely because of the enormous revenues from Wolf Warrior 2, the highest-grossing film in China’s history. During the first 6 months of the year (Wolf Warrior 2 opened on July 27), Chinese films had a market share of only 39%.

Many jurisdictions have film incentives, but most are geared toward film production, based on the theory that film productions inject money into the local economy, provide local employment, and develop local expertise (thereby making the jurisdiction even more attractive for future productions). British Columbia is the canonical success story for production incentives, but many US states have also pursued this strategy, as have numerous countries in Europe and beyond. Similarly, almost every country, from the US to Europe to China, offers grants, tax breaks, and other incentives to local filmmakers.

Tying an incentive program to consumption sends a very different message. Measuring the percentage of box office revenue is a zero-sum game; if Chinese films have a higher percentage, that means foreign films (most of which are American) have a lower percentage.

Whether this deal will cause movie theaters to book more Chinese films will largely depend on the specifics of the incentives. All things being equal, this incentive should spur movie theaters to book a Chinese film rather than a foreign film. But when are all things equal? Chinese movie theater owners act in their own economic best interests. Even if they would rather show Chinese films (and I’m sure most of them would), they are in the business of filling seats, and if showing Chinese movies results in lower attendance, the incentives will need to be both enticing and attainable.

This isn’t the first time China has announced an incentive program for increasing the market share of Chinese films. A similar program was announced last March, but the incentive only kicked in for theaters that derived at least 66% of their box office receipts from domestic films. I don’t think the Chinese government reduced the target because they were feeling generous. They wanted results, and they weren’t getting them at 66%.

The knock on Chinese movies of late (at least, until Wolf Warrior 2 single-handedly changed the narrative) was that they hadn’t been good enough to draw audiences. Quality is subjective, but it’s hard to look at the China box office success of films like Warcraft, Resident Evil: The Final Chapter, and Pirates of the Caribbean: Dead Men Tell No Tales and conclude that Chinese audiences have inordinately high standards. Perhaps that’s exactly the point. If foreign movies like these can dominate the Chinese box office, where does that leave Chinese mediocrities?

This incentive program makes the implicit assumption that Chinese movie theaters can affect what Chinese moviegoers decide to see. Otherwise, why reward them? I have my doubts this is true, but if it is, the work of Nobel-prize winning psychologist Daniel Kahneman suggests the Chinese government is going about this all wrong. They should give the incentive to all theaters, and only demand repayment if theaters show too many foreign films. It’s exactly the same economic proposition. But instituting an explicit bias against foreign films has bad optics, and the Chinese government is still negotiating with the MPAA.

No matter what comes out of those negotiations, the bottom line is clear: the Chinese government wants fewer foreign films in its marketplace, not more. Hollywood studios’ involvement in domestic productions may soon shift from a backup plan to the main event.

China Movie IndustryChinese film director Zhang Yimou has made some of my favorite Chinese-language films: Raise the Red Lantern, The Story of Qiu Ju, House of Flying Daggers, Hero, and more. He also produced the spectacular Opening Ceremony of the 2008 Olympics in Beijing, for which he is justly revered in China. Despite some recent missteps (The Flowers of War, The Great Wall) his credibility as an artist and Chinese cultural icon is nigh-unassailable.

Last week Zhang published an opinion piece in The New York Times titled “What Hollywood Looks Like From China” I’m not sure what to make of it. The piece contains some lovely metaphors and a call at the end for mutual cultural understanding. But the middle section, ostensibly a summary of the relationship between the Chinese and American film industries, reads like the opening statement in a trade negotiation: “But at the moment, a large discrepancy exists in that very few Chinese movies are able to enter the American market and attract a significant audience. Chinese audiences provide Hollywood with huge profits, but what does China’s film industry gain in return?”

The language is slightly ambiguous (by intention, I assume), but a fair inference is that the playing field isn’t fair, and it’s specifically unfair to Chinese films because American movies dominate the Chinese market and rake in the cash, but Chinese movies are prevented from gaining a foothold in the U.S. market.

Reading this sort of thing, I’m sure, makes Hollywood’s blood boil. For years, China has systematically and formally constrained the ability of foreign movies to enter the Chinese film market through a quota system and periodic blackouts on non-Chinese films. The films allowed in under the quota system receive only 25% of the net profits, and even those numbers are aspirational, as the box-office numbers are woefully underreported and payments are sometimes months or years late. An additional number of foreign films are allowed in as buyouts, which except in limited situations (e.g., Resident Evil) do not involve any revenue sharing. The number of buyout films has been increasing and is expected to hit an all-time high of 70 films this year. Long story short, even when US films do well in China (and they often do) most of the revenue stays in China with the Chinese distributors and exhibitors.

Meanwhile, Chinese films have essentially unfettered access to the US market. All it takes is a willing distributor, which could be a Chinese-owned distributor like China Lion. When you add streaming to the mix, it is theoretically possible for every single Chinese movie to be released in America and the Chinese filmmakers can receive whatever sort of profit-sharing arrangement they can negotiate.

And we haven’t even talked about content restrictions: China regularly censors content, whether it be lopping off several minutes (Logan), agreeing to show a movie then pulling it in the middle of its first showing (Django Unchained), or declining to show a movie altogether (Ghostbusters). By contrast, Chinese films are generally shown uncut in the US absent a specific agreement between the filmmaker and the distributor.

Zhang is absolutely correct about the box office disparity, though. Despite the restrictions in China, American movies still do huge business there – although Chinese movies continue to gain strength and popularity. And notwithstanding the openness of the US market, Chinese films continually fail to gain any traction in the U.S. market.

But so what? People watch what they want to watch. It’s not as if films from other countries do any better in the US. The list of top-grossing foreign-language films in the US since 1980 is dismal reading if you’re a foreign filmmaker: Crouching Tiger, Hidden Dragon is in the lead with $128M, but the next film after that (Life is Beautiful) only made $57M, and by the time you get to #11 the grosses are down to $20M. The market for foreign films in the US remains small and largely limited to two demographics: diaspora-driven audiences and arthouse audiences. Otherwise, Americans don’t want to watch movies with subtitles and won’t accept dubbed films. And although Crouching Tiger’s phenomenal success cannot be ignored, it is extremely hard to see it as anything but a once-in-a-lifetime event. Zhang Yimou should know this better than anyone; his films Hero (#3 all-time foreign film with $53.7M) and House of Flying Daggers (#26 all-time with $11M) benefited from the post-Crouching Tiger box office swell for Chinese films that ended nearly as quickly as it started.

It’s perfectly understandable for a country to support and protect its own filmmakers and retain its own cultural identity. If I had grown up in another country, I’m sure I would have mixed feelings about America’s cultural dominance. But justifying China’s protectionist measures by comparing relative box office percentages is an argument of false equivalents. Let’s not forget that foreign companies are prohibited from distributing films in China, and can only produce movies in China if they have a Chinese partner. Meanwhile, China’s Dalian Wanda Group, through its ownership of AMC Theatres, is the largest film exhibitor in the United States.

It’s reasonable to ask what the Chinese film industry gets from Hollywood. But it’s also reasonable to ask what the Chinese film industry should get. Many would argue that China is already getting more than its fair share. But as Zhang’s piece makes clear, that’s not how China sees it. Backup plans, anyone?

China and Hollywood and Big DataThis past Saturday I attended the USC Entertainment Institute on Entertainment Law and Business. In past years the Institute has had entire panels on China, but this year things were pretty low-key, with just one panelist having a China connection (Chia-Chi Li, Director of Tencent’s Content and Technology Transactions Groups).

Why the shift? Undoubtedly one reason is the high-profile collapse of several deals involving Chinese money and Hollywood. Who wants to see a discussion about all the money that’s not being invested? Another possible reason is that the giddiness of the past few years – during which many people in Hollywood viewed Chinese investors as the new “dumb money” – is over and the Chinese entertainment industry is maturing, with most of the remaining players being relatively well-run, competent outfits. Or perhaps it’s that the annual US-China Film Summit is taking place in two weeks, and there are only so many times you can have a “What’s The Deal With China?” panel.

But China nonetheless kept creeping into the discussions. The morning panel on music (“Where the Money is in Music These Days”) broke down the ways in which artists and record labels actually generate revenue today, with particular attention to YouTube and streaming services. The panelists all complained about the revenue stream from YouTube (currently the biggest single medium by which consumers listen to music), but almost as an aside noted that the revenue model for music in China was even worse. Meanwhile, multiple panels referenced the social media/DIY music video phenomenon that is, albeit without a word about the app being Chinese. As I wrote a few months ago, this is exactly the kind of soft power the Chinese government has been hoping for.

Professor Jeffrey Cole, Director of USC’s Center for the Digital Future, started off the institute, as he has done for the past few years, with a fascinating speech about the future of the entertainment industry (“The Industry: Trends, Fads and Transformation”). Although most of his talk centered on domestic concerns, he closed with an intimation that there was a failure of comprehension (and imagination) about the size, wealth, and power of the BAT companies (Baidu, Alibaba, and Tencent), and what it meant for Hollywood.

In determining the future of the US entertainment industry, Prof. Cole noted that two of the most basic concerns are how people spend their time and how they spend their money. In the US, numerous companies are competing for either or both. In China, the competition exists in name only; Alibaba controls the majority of consumer purchases, and Tencent’s WeChat is so dominant and so comprehensive in terms of user base and “stickiness” that – and this is a direct quote from Prof. Cole – it is in many ways like the commercials from the 80s for the Roach Motel: “Roaches check in, but they don’t check out.” Despite the negative connotations, Cole meant it as a compliment of the highest order: a recognition that a substantial majority of the Chinese population uses WeChat all day, every day and for almost everything. We have written about this before – if you are doing business of any kind in China, you need a WeChat strategy. Indeed, we have been approached multiple times by companies interested in forming a WFOE for the sole purpose of opening up an official WeChat account.

Meanwhile, Tencent’s representative, Mr. Li, was one of the best panelists of the institute and with by far the highest degree of difficulty, because whether he wanted to or not, he had to represent the views of himself, his employer, the Chinese entertainment industry, and China as a whole. That’s a lot of water to carry.

Mr. Li made several points worth repeating, but I’d like to focus on two. First, he acknowledged that though some Chinese companies had payment problems because the RMB is not freely convertible, Tencent (and other successful Chinese companies) had access to funds outside China and if they want to make an overseas investment they can. This is true enough, but it somewhat sidesteps the issue: the Chinese government may not be able to control what Tencent does with money in its US bank accounts, but it can certainly control what Tencent does in China, and thereby exert indirect control. Still, the point remains that for large Chinese companies already in the media and entertainment business, not having to secure government approval for every wire transfer is a big advantage.

Second, according to Mr. Li, any foreign film that hopes to do well at the Chinese box office needs a Chinese partner. His specific examples: Warcraft ($47M domestic box office, $386M foreign box office with $213M of that in China) and A Dog’s Purpose ($64M domestic, $136M foreign with $88M of that in China) had major Chinese partners (Tencent and Alibaba, respectively). The LEGO Batman Movie ($175M domestic, $136M foreign with $6M of that in China) did not.

On a certain level, this argument sounds familiar.China is too big to understand without local help, so don’t even try. But Mr. Li was actually making a more subtle point. In his telling, the reason Warcraft was successful in China (and nowhere else) is because Tencent had so much data about its users that it could identify nearly every single Warcraft player in China and could push targeted ads and marketing material to them. Similarly, the reason A Dog’s Purpose did so well in China is because Alibaba had so much data about its users that they already knew the identity of every dog-owning household in China.

It’s a compelling argument if you can get past the Big Brother-ness. I’m not sure it entirely holds up under scrutiny; why wouldn’t this strategy work for every movie released in China? Still, it’s hard to explain the success of Warcraft in China in any other way, because the movie was a critical and popular bomb everywhere else in the world. Maybe it only works for movies with a clearly defined affinity group.

Either way, China will only become more sophisticated in its collection and use of big data and companies going into China will need to keep pace — which probably means partnering with one of the BAT companies — or else they’ll just be rolling the dice. At least in the film business, the stakes are too high to accept those odds.

China box office numbersAs reported by numerous media outlets, the MPAA-requested audit of the Chinese box office numbers is complete and the numbers ain’t pretty. Chinese theaters underreported 2016 box office results by 9%, which given the 25% revenue share for quota movies, means that US studios have been underpaid by about $40 million.

I don’t know anyone who follows the Chinese movie business who was surprised by these results. No, I take that back. Many people (myself included) were surprised the number wasn’t considerably higher. One possible explanation is that PricewaterhouseCoopers conducted the audit, and after the Oscars debacle they were probably triple-checking their results and eliminating anything they couldn’t justify six ways from Sunday. And even with that, they still found a 9% discrepancy.

The full audit results haven’t been publicly released; all we know is that the auditors looked at data for 29 films in a handful of theaters and then extrapolated the results across China’s more than 40,000 screens. Such extrapolation, based on statistical sampling, is commonplace and perfectly normal, but I have to wonder what a full audit would have found. Without putting too fine a point on it, a lot of strange things happen in China’s third and fourth-tier cities. Even as it is, the audit found a whole host of irregularities, including unreported screenings, unreported ticket sales, and counting box office revenue as concession sales. No word on whether the audit turned up more instances of ascribing ticket sales from US films to Chinese films – which is what happened in 2015 when an alleged $11 million in ticket sales for Terminator: Genisys were instead attributed to the Chinese propaganda film The Hundred Regiments Offensive.

So what now? One argument is that the audit helps the United States in its ongoing negotiation to increase the quota and the revenue share, but it’s also likely that it hurts. China already knew it had massive problems with movie accounting and had taken steps earlier this year with a very public punishment of 326 cinemas for box office fraud. Being called out in the press like this by foreigners is a tremendous loss of face. Then again, $40 million is a lot to leave on the table.

It’s easy to understand the studios’ frustration that led to the audit. Box-office fraud in China has been rampant for years, and even the box-office revenue that is reported takes eons to get paid. And as China’s box office continues to grow, the revenue share becomes an increasingly important part of studios’ bottom line. Long gone are the days when revenue from China is just a nice bonus for US studios; indeed without China, some movies wouldn’t be made at all.

I’m reminded of the opening lines of Annie Hall: “There’s an old joke. Two women are at a Catskill mountain resort, and one of ’em says, ‘Boy, the food at this place is really terrible.’ The other one says, ‘Yeah, I know; and such small portions.’” That’s essentially how the studios feel about their relationship with Chinese movie theaters – full of underreported revenue and unhappiness, and they hope it never ends.

Of course, if the studios actually see the $40 million in additional revenue, the audit will be worth it. Either way, we can expect to see more of them.

And it’s not like the US studios are the only ones who should be conducting audits. We work with accounting firms that audit Chinese film and television productions on behalf of Western investors, and the extent (and creativity) of the financial shenanigans is astounding. For most of these audits, there’s no political or reputational element; it’s just common sense.

If you’re dependent on your Chinese partner to account for and remit revenues (be it in the movie industry or otherwise), an audit should be part of your repertoire too.

China movie quota lawyerWhat a wild ride it’s been for the Chinese film industry! Until July 27, it had been a year of one depressing story after another. Downward-trending box office, high-flying entertainment companies imploding, deals to purchase foreign assets falling through, the biggest movie studio on the planet sold to a real estate developer, the can’t miss co-production The Great Wall tanking. Even the Transformers franchise couldn’t save the day, with the latest installment performing well below expectations in China.

But on July 27, the action film Wolf Warrior 2 opened, and within 12 days of its release it had already become the highest-grossing film of all time in China. As of this writing the film has pulled in more than $720 million in China alone. The narratives are almost writing themselves, with pundits trying to explain why Chinese people are going in droves to see a jingoistic film about a Chinese special forces operative in Africa.

I’m not going to wade into those waters except to note William Goldman’s aphorism that when it comes to the film business, “Nobody knows anything.” The phenomenal success of Wolf Warrior 2 was anything but a foregone conclusion. The first movie was a surprise hit, earning about $89 million, but it’s not like people were lining up Episode 1-style for a sequel. Back in May, Wolf Warrior 2 was pilloried online when it came to light that its trailer had lifted footage from X-Men: First Class. Moreover, Wolf Warrior 2 was released on the same date as the government-backed propaganda film The Founding of an Army, and the latter was allotted the lion’s share of screens.

This movie – this particular movie – couldn’t have come at a better time for China. Hollywood is in the midst of negotiating the terms of foreign (read: Hollywood) films’ market access to China. American studios find China’s protectionism exasperating on multiple levels, with the biggest complaints being (1) the quota system, which only allows 34 foreign films (largely US studio films) each year on a revenue-sharing basis (2) the low percentage of receipts allotted to the foreign studio (currently 25%) for such revenue-sharing films, and (3) the foreign studio’s inability to control the release date. The last point is more serious than might immediately be apparent – not only does the Chinese government determine when each film will be released (via a largely opaque process), it also imposes unofficial blackouts during which no new foreign films are allowed to be released.

Aside from discussions about WTO obligations and fair play, US studios’ best argument for expanding access to the Chinese film market has been an economic one: Chinese audiences want to see American movies (and don’t particularly want to see Chinese movies), and with thousands of new screens every year, Chinese movie theaters need movies people want to see. In other words, limiting the number of American movies hurts the Chinese economy.

Setting aside the fallacy that the Chinese government’s interests are aligned with those of Chinese theater owners, the success of Wolf Warrior 2 upends all of those arguments. Wolf Warrior 2 was released on the first day of a blackout period, and it is already the most successful movie in Chinese history. It is a Chinese-made movie, with purely (even exclusively) Chinese content, and Chinese theaters are raking in the money – and not having to send any of it overseas. The Chinese government will likely infer that Wolf Warrior 2’s success is not in spite of their protectionist policies, but because of them. And President Trump’s saber-rattling about a trade war isn’t likely to improve their attitude.

I certainly hope the U.S. negotiating team is able to make some headway, but U.S. studios and production companies shouldn’t assume anything. They need a backup plan, and right now the best one seems to be investing in and otherwise creating productions in China solely for the Chinese market. A number of studios and production companies are already going down this road, and I think it’s the smart play. Better to be an investor in the next Wolf Warrior than to be shut out completely.

China Due DiligenceLast week the news broke that Dalian Wanda, the powerful Chinese real estate developer and entertainment company, was selling off its half-built movie studio, a massive complex under construction near Qingdao.

It was the latest in a string of bad news days for Wanda, most of which have been precipitated by the Chinese government’s increasingly strict controls on outbound investment. Wanda’s $1B purchase of Dick Clark Productions fell through in March of this year. The chairman/CEO and the head of China operations of Legendary Entertainment, the film production company that Wanda bought in 2016 for $3.5B, both left this year and have yet to be replaced. Legendary’s recent films (with the exception of Kong: Skull Island) have tanked everywhere but China. Wanda quietly withdrew its attempt to fold Legendary into its existing film operations and list the reformulated company on a Chinese stock exchange. Wanda announced an ignominious sale of its theme parks less than a year after announcing Wanda was going to clean Disney’s clock.

And looming over it all, the Chinese government has made it clear – in increasingly public fashion – that Wanda’s ability to borrow money will be highly constrained.

Both Legendary and Wanda’s subsidiary AMC Theaters issued public statements in the past week that they were not dependent on Wanda for funding; the Western markets were not impressed.

No doubt many people in Hollywood are engaging in a bit of schadenfreude right now. Wang Jianlin, the founder and chairman of Wanda, is a bit like the LaVar Ball of Chinese entertainment (albeit with $30 billion more to his name). He was brash, but plenty of people wanted to do a deal with him when he had assets to burn and was talking about taking a stake in every major studio. Now they’re not sure what to think.

I don’t feel any joy at Wanda’s apparent retreat from the movie business, if that is in fact what’s happening. Yes, they’ve had substantial setbacks and remain highly leveraged, but Wanda is still a huge company and a major player in real estate development, which has always been its core business. It controls more movie screens than any other company in the world, and it still has a sizable film production division. Wang is a shrewd businessman and not to be underestimated. You don’t get to be the richest man in China without having a lot on the ball. Everyone thought he had overpaid for AMC Cinemas but the company has more than doubled in value since he bought it.

But Wanda’s proposed studio in Qingdao never made much sense to me. I lived in Qingdao, and it is a wonderful city. But it has scant connection with the Chinese film industry, and little to recommend it as the site of the world’s largest studio. Wanda promised moviemaking on a grand scale, including enormous soundstages, multiple backlots, and a 40% subsidy for anyone making a movie there. But the reality on the ground never seemed to match the rhetoric, and few (if any) filmmakers not associated with Wanda or Legendary have filmed there.

What was the reality on the ground in Qingdao, anyway? My colleague Steve Dickinson (who spent nearly a decade in Qingdao) and I could never figure it out. The studio complex is almost an hour’s drive south of the city proper, with nothing of note in between but for a few factories. When we visited the site a few years ago, you would never have known that a huge film studio was being built. It just seemed like a pure real estate play: swarms of agents descended on anyone who got close, thrusting brochures for as-yet unbuilt apartment towers. Tour buses stopped by regularly and disgorged passengers who had no knowledge of, or interest in, the studio. And this was well after the glitzy announcement with Nicole Kidman, Leonardo DiCaprio, and John Travolta in Qingdao.

The Qingdao studio complex is now being sold to Sunac, another Chinese developer. Will the studio be completed by Sunac? Was it ever going to be completed? Who knows? Wanda certainly had the money to build it, and Wang loves movies. The ultrawealthy have a long history of bankrolling films, from Howard Hughes up to Megan Ellison. Perhaps this is just a strategic retrenchment. Wanda’s strategy with the Qingdao studio complex wasn’t much different from that of many Hollywood players: if you can’t sell the steak, sell the sizzle.

The recent headlines characterize Wanda’s troubles as if they were the result of poor business judgment. I don’t think that’s fair. This story isn’t about Wanda. It’s really a story about China’s reluctance to let foreign entertainment companies compete in a free market. Just look at what’s happening in Chinese movie theaters right now. A foreign movie blackout is in place, and the screens are being inundated with The Founding of an Army, directed by Hong Kong legend Andrew Lau (Infernal Affairs, which Martin Scorsese remade as The Departed) and starring a cavalcade of Chinese stars both young and old. If history is any guide, The Founding of an Army is guaranteed to do big business at the China box office, regardless of how many people actually see it. For the previous two movies in this series (The Founding of a Nation and The Founding of a Party), state-owned enterprises bought vast blocks of tickets for their employees.

One takeaway from all of this is that foreign entertainment companies (and even just foreign companies in general) need to be more careful than ever when dealing with Chinese counterparties. If the Chinese government interferes directly there’s little you can do, but up to that point you can do a lot to protect yourself. Just look at all the lawsuits being filed in Los Angeles against Chinese production companies – lawsuits which may be doomed to failure, because even if the plaintiff wins, the judgment won’t be enforceable in China.

Conduct due diligence. Make sure your contracts are written in Chinese and enforceable under Chinese law. Get an upfront payment so you can be sure the Chinese side can actually pay under the contract. And if something sounds too good to be true (like the 40% subsidy for filming in Qingdao), it probably is.

China CopyrightWhen I was growing up, I watched a lot of television. A LOT. I was a latchkey kid and every day after school my brother and I would come home and turn on KTVU and watch TV Powww! and Captain Cosmic shows like Ultraman. Ultraman, if you don’t know (Philistine!), was a Japanese science-fiction show that ran from 1966-67 but, much like Star Trek, circulated widely in reruns (leading to numerous remakes, spinoffs and movies) and had an outsize influence on subsequent sci-fi pop culture.

So when I read last week’s China Film Insider story about an allegedly unauthorized Ultraman film being produced in China, it felt like a personal insult. A Chinese fan-created Ultraman movie a la Axanar would be amazing, but the producer of this film, Chinese film company Blue Arc Animation, is just making a blatant ripoff.

Or are they?

Japanese company Tsuburaya Productions Co. Ltd., the creator of Ultraman, alleges that Blue Arc Animation has no right to make an Ultraman film in China. But Blue Arc contends that they got the rights from UM Corporation, another Japanese company. And UM Corporation contends that they own all foreign rights based on an alleged 1976 agreement in which Tsuburaya’s president Noboru Tsuburaya granted to Thai filmmaker Sompote Saengduenchai the exclusive, perpetual foreign rights to Ultraman. Sompote’s rights were then assigned to his son Perasit Saengduenchai, who in turn transferred them to UM Corporation, who in turn has licensed the rights to a number of companies all over the world.

Tsuburuya has consistently held that the 1976 agreement is a forgery, not least because Sompote didn’t even mention the existence of such an agreement until 1995, after Noboru Tsuburaya had passed away. The dispute has led to a number of lawsuits between Tsuburuya on the one hand, and Sompote and his successors in interest on the other. Back in the mid 2000s, Tsuburuya won several victories in Thai and Japanese courts, which seemed to bring things to a close, but not so much. The victories were only partial victories, and the key piece of evidence in Sompote’s favor is that the 1976 agreement, despite having a number of inaccuracies and other indicia of inauthenticity, was nonetheless chopped with Tsuburuya’s company seal. And so the litigation has continued. Most recently, UM Corporation sued Tsuburuya in a Los Angeles federal court on May 19, 2015, alleging copyright infringement, breach of contract, and intentional interference with contractual relations. I just checked the docket and the case, staffed by a number of big-firm LA litigators, is still going strong.

What does all this have to do with China? First of all, this should be a wakeup call for anyone with a Chinese entity who thinks they don’t need to know where their company seal is at all times.

Second, it’s an example of how NOT to license copyrighted content in China. What sort of due diligence did Blue Arc Animation conduct regarding the rights they were allegedly getting from UM Corporation? We have conducted due diligence on numerous film projects in China and our efforts have saved more than one high-profile project from guaranteed litigation over the source material.

Chinese courts are getting better and better about enforcing copyrights. The dispute between Tsuburuya and Blue Arc Animation hasn’t resulted in a lawsuit in China – yet – but Blue Arc Animation has to be wondering what, exactly they have gotten themselves into. Are the Ultraman copyrights registered in China under either their name or the name of UM Corporation? Do they have a licensing agreement with UM Corporation written in Chinese and enforceable under Chinese law? Is the licensing agreement registered with the Copyright Protection Centre of China? Unless the answer to all of these questions is “yes,” Blue Arc Animation will be hard pressed to prove that they have any rights at all. (And meanwhile, if Tsuburuya hasn’t already registered all relevant copyrights for Ultraman in China, shame on them.)

If you’re going to spend millions of dollars on a film project (or even just tens of thousands, as may be the case here), don’t buy a pig in a poke.

China copyright lawI spoke in Beijing last week at a conference on legal protection of sports broadcasts, organized by the National Copyright Administration of China (NCAC) and the United States Patent and Trademark Office. Other speakers included Chinese judges, Chinese and American lawyers and academics, sports league and broadcaster general counsel, and American and European IP officials. What follows is based on the speech I gave at the conference.

Copyright in sports broadcasts is not explicitly recognized in China by statute, though it has been recognized in some Chinese copyright cases. One of the ongoing debates in China copyright circles is whether explicit statutory recognition ought be given to copyright in sports broadcasts. Any such recognition would involve introducing a new class of copyright subject matter or the expansion of an existing class.

The introduction or expansion of a class of copyright subject matter is often rationalized as limiting free riding and providing an incentive to invest. In the absence of a clear sports broadcast copyright in China, one might therefore expect to find at least some evidence of market failure. However, a quick look at the business of broadcasting certain sports in China indicates a strong market — perhaps even a bubble.

Consider, for instance, Chinese Super League matches. China broadcast rights are, I understand, currently held by an associate of China Media Capital for a five-year term ending in 2021. Rights for the first two years were reportedly acquired for 300 million USD. Rights for years three, four and five were reportedly acquired for a total of one billion USD. In an indication this was a good deal for the head-licensee, Le TV committed to paying 414 million USD for a two-year sub-license, though Le TV subsequently defaulted and, as I understand it, the rights now lie with online TV service PPTV.

Now consider English Premier League matches. China broadcast rights are, I understand, currently held by Super Sports for a six-year term ending in 2020. These rights were reportedly acquired for 65 million USD. Note that this figure represents an assessment of market value made in 2013. For the three years commencing in 2020, PPTV has reportedly bid 700 million USD. This makes China the Premier League’s largest foreign broadcast market.

If these deals are any indication, the market is apparently already behaving as though sports broadcasts are protectable. But there is no proprietary foundation for this protection. The present foundation is contractual. The organizer of the game, a sports league, is the source of all rights in the game. The sports league relies on the “economics of exclusion” — the ability to monetize by controlling access to a sporting venue, in much the same way a theatrical exhibitor of a motion picture controls access to a movie theatre. In some cases, and in some courts, copyright protection has been recognized in China but a consistent jurisprudence has not emerged. The more readily available legal means of protection involve anti-unfair competition laws or the use of administrative or even criminal sanctions. Chinese tort laws and “related rights” laws are also invoked by rights holders when they fight piracy. Whatever the actual or potential legal redress for piracy may be, in assessing the applicable law in China it must be appreciated that a sports broadcast is always a special type of broadcast presenting unique challenges.

What makes sports broadcasts special is that the viewer wants to watch a game as it is played at the venue from which the broadcast is being made. The replay or the highlights are not as valuable as the live feed. The threat posed by illegal downloads after a game concludes is minimal. From a technical perspective, a live broadcast of any kind involves the compression of pre-production and post-production into a seamless and immediate production. That production, and the broadcasting of it, must occur simultaneously. Incidentally, sports leagues report that the advent of hand-held live streaming technology is not a major threat to their businesses because the quality of the stream lacks the production values of a professional broadcast.

The unique challenge of a sports broadcast is that satisfactory relief from a pirated version must be swift. It must be pre-emptive (in advance of the game) or instantaneous (well before the game ends and, ideally, within the first quarter hour). In either case, only urgent injunctive relief can ever be entirely satisfactory. Non-urgent preliminary injunctive relief will not solve the problem, and damages and accounts of profits are insufficient remedies.

Even if sports broadcasts are accorded clear and consistent protection under Chinese copyright law, it is fair to say that uniform urgent injunctive relief (as opposed to preliminary injunctive relief) is still largely beyond the capacity of the Chinese legal system. Therefore, the recognition of copyright in a sports broadcast would not, of itself, solve the underlying need for urgent relief. Still, China’s legal system in its present form does allow rights-holders to tackle repeat offenders, and the large Chinese platforms are already mostly respectful of broadcast rights anyway. In many ways, the real challenges are presented by the smaller, and often ephemeral, pirate sites. Even if these pirate sites can be identified and located, the people behind them nearly always lack substantial assets and are therefore rarely worth pursuing. To be effective in the present environment a sports league (or its local partner) needs a team of Chinese-qualified in-house litigators who understand the piracy landscape and are capable of engaging in guerrilla warfare using technological as well as legal or administrative means.

Despite the existence of these other means, despite evidence pointing to a strong market, and despite the inherent limitations of an action for copyright infringement in China, there is little doubt that explicit statutory recognition of sports broadcast copyright would provide greater certainty and support greater market efficiency. This is especially so if this statutory recognition were given to a broad-based, technology-neutral right embracing traditional broadcasting as well as streaming.

Industry stakeholders are not resisting the recognition of such a sports broadcast copyright. There is apparently a broad consensus among broadcasters and sports leagues on the issue. There is apparently no division between foreign and Chinese interests on this point either. Nor is a sports game sensitive — it is not subject to the kind of censorship, quotas, and approvals processes applicable to motion picture or episodic content. Nonetheless, there is ongoing resistance to the recognition of copyright in sports broadcasts. Resistance has arisen, I understand, because recognition of copyright in sports broadcasts would require the NCAC to change its understanding of the meaning of a copyright “work” and the applicable standards of “originality.” Absent market failure this issue is perhaps not viewed as a major priority. Whatever the reason, until the NCAC resolves this and other current issues it cannot present a coherent solution to the State Council Legislative Affairs Office (SCLAO). The SCLAO is therefore not in a position to recommend final legislation to the National Peoples Congress. The discussion has been bogged down for nearly a decade. All the while, the sports broadcasting industry is getting further and further ahead of the law.

As an important source of or influence on China’s copyright law, the Berne Convention, with its focus on works and authorship, provides a frame of reference for a consideration of the underlying problem in China. China became a party to the Berne Convention in 1992. Berne sets a number of minimum standards applicable to works and authors. A broadcast right is among those rights that must be recognized as exclusive rights of authorization. Authors enjoy the exclusive right of authorizing the broadcasting of their works.

China’s current copyright law has been in effect since 2010. It too applies to “works,” which include, among other things, works of literature, art, natural sciences, social sciences, engineering and technology, which are created in certain “forms.” With the exception of computer software, these forms are limited to specific kinds of works enumerated in the law. The sixth form in the list is “cinematographic works and works created by a process analogous to cinematography.” The ninth and final form in the list is “other works as provided for in laws and administrative regulations.” The rights comprising copyright in these works include the broadcast right. China also recognizes related, neighboring or “small” rights in other subject matter including video recordings. The protection given to these other subject matter is lower than that given to works. The standard of originality expected of a video recording is much lower than that applicable to cinematographic works.

In China, the sports broadcast copyright controversy arises for two reasons. First, because a game of sport is not generally seen as a “work,” so there is no broadcast of a work when a game is broadcast. Second, because even if it is accepted (as it is in the United States) that a broadcast always requires the simultaneous making of a recording, any such recording is insufficiently original to be regarded as a cinematographic work. There is little disagreement on the first reason. The real debate is about the second reason. The competing considerations on this point have been ventilated in the leading Chinese cases. Basically, the debate boils down to whether modern-day live broadcasts, with their professional directors, multi-camera units and advanced editing techniques, are producing content sufficiently original to qualify as a copyright work. It seems obvious to anyone with even a basic understanding of the production process that sports broadcasts are a form of entertainment every bit as sophisticated and entertaining as motion picture or episodic content, the originality of which is already recognized in China.

It will be seen, then, that the minimum standards of Berne, as reflected in Chinese copyright law concerning “works,” are at risk of becoming impediments to the recognition or creation of other copyright subject matter. There is an opportunity here for China to go its own way over and above minimum standards.

Other nations have, of course, gone their own ways and I want to mention two that have found instructive solutions to the problem of “works”: The United States and Australia. Both are obviously common law countries. There are many others, including civil law countries. Incidentally, as a last resort, those who oppose grafting common law principles to the Chinese legal context are fond of saying that German law is the proper source of Chinese copyright law and German law is inconsistent with the common law point of view on the points at issue. The trouble is that claims of this kind are generally made without a German copyright lawyer on hand to clarify the point. A German copyright expert would obviously make a welcome addition to future panels dealing with this issue.

The United States became a party to Berne in 1989. US copyright law is concerned with protecting “original works of authorship.” The recognized works include motion pictures and other audiovisual works. In US jurisprudence, sports games are not “authored” in the relevant sense so they are not “works.” Even so, sports broadcasts in the United States are entitled to copyright protection. The key to their protection is that the broadcasting of a game is understood as always involving the “fixing” of an audiovisual work, and the fact that this fixing occurs simultaneously with a transmission does not matter. This elegant solution was applied in 1976 and obviously did not prevent the US from later joining the Berne Convention.

Australia became a party to Berne in 1928. Australian copyright law is concerned with protecting “works” and “subject matter other than works.” The scope of protection for subject matter other than works is lower than that for traditional works, but this has not stopped them being treated as full copyright subject matter. Subject matter other than works include sound recordings, cinematograph films, and broadcasts. Copyright in a television broadcast is the exclusive right to make a cinematograph film or sound recording and to re-broadcast or communicate to the public otherwise than by re-broadcasting. The maker of the broadcast is the copyright owner. In Australia, copyright protection applies to the signal itself. There is no need to stretch the definition of “work” to include a broadcast. There is no need for the broadcast to contain a work.

These two examples demonstrate how a nation can recognize a certain type of copyright without compromising the minimum standards of Berne or being strangled by a debate about originality standards.

The sports broadcast problem could be solved in China if broadcasts were recognized as involving the fixing of a cinematographic work, of a work created by a process analogous to cinematography, or even of a video recording. Alternatively, some form of recognition could arise within the existing category of “other” works or through the mooted inclusion of a new general category of “audiovisual” works. These solutions would involve minimal disruption to China’s existing copyright system. All they would require would be an acknowledgement that a modern sports broadcasts satisfies a minimum standard of originality. It would not be necessary for a game of sport to be deemed a copyright work. Ultimately, though, these solutions would need to embrace a broad-based, technology-neutral definition of broadcast and they would need to depend on continued improvement in the availability and efficacy of urgent injunctive relief for copyright infringement.

China CopyrightsOn Friday June 23, in collaboration with the National Copyright Administration of China, the United States Patent and Trademark Office will be putting on a one-day conference on legal protections for sports broadcasts. This event will take place at the Novotel Beijing Peace Hotel and run from 9:00 a.m. until 5:00 p.m. that day.

There is no charge to attend.

The leader of our China entertainment group, Mathew Alderson, will be speaking at this event. This event will explore the different ways countries protect the creative content of live events, with a particular focus on broadcasts of sporting events. As China continues to develop amendments to its Copyright Law, now is an opportune time for an in-depth discussion in this area.

The program will bring together US, Chinese, and European government officials, academic leaders, and industry representatives to discuss the importance of providing legal protection for sports broadcast programs, including the role of copyright protection, how sports broadcasts are currently protected in China, the United States, and the European Union, and international perspectives on the subject. Go here for more information on the event and here for more information on how to register or can just contact Ms. LIU Jia and provide her with the following registration information:

1. Your full name
2. Your organization
3. Your full position / title
4. Your email address

Hope to see you there.