After years of frustration with the Chinese government's severe limits on how many imported movies can play in its theaters, several prominent American film producers are cutting ambitious deals with Chinese firms that provide alternative routes into the country's exploding movie market.
Film finance and production firm Legendary Pictures detailed plans for its own China joint venture called Legendary East on Sunday, and other independent U.S. studios like Nu Image are actively seeking coproduction deals in the country.
Such moves give the firms, which don't have the clout of major studios like Warner Bros. and Paramount Pictures, better access to the lucrative Chinese market. The deals also offer filmmakers access to a potentially huge source of capital: Chinese investors, who face significant restrictions on sending their money overseas. However, partnerships in China also mean U.S. producers must work closely with the country's Communist government and its censors.
"There is a big difference between announcing a quick deal and forming a company in China with a solid business strategy and strong Chinese partners," said Skip Paul, of Centerview Partners who advised on the formation of Legendary East. "The key to success is tapping into deep relationships to help navigate the politics and culture."
The U.S. push into China comes at a critical time for Hollywood: With income from some longtime cash cows, including DVD sales, collapsing, China is one of the globe's biggest untapped revenue sources.
China's box-office receipts surged 64% last year to a record $1.5 billion, and they will likely bring in about $2 billion in ticket sales this year. By the end of the decade, industry experts predict China will grow from the world's No. 5 movie market to No. 1.
"I am more bullish on China than any other country in the world," said Rich Gelfond, chief executive of Imax, whose digital screens are in 48 theaters in mainland China, Hong Kong and Taiwan, with plans to add 129 more in the coming months.
The latest "Transformers" sequel has sold more than $159 million worth of tickets in China this summer, with "Kung Fu Panda 2's" Chinese gross at $92 million — more than the animated family film generated in France, Germany, Spain and Britain combined.
Even with those outsized performances, American movie companies are hardly sharing in the bounty thanks to China's rules on how box office receipts are shared — or not.
Foreign studios say they face an opaque approval process for getting their films into China. Last year, the Chinese government allowed only 54 foreign films into the country, and U.S. studios were able to share a percentage of box office revenue on just 21, according to research firm Artisan Gateway. Those coveted revenue-sharing slots are typically secured by the six major Hollywood studios for their big-budget releases; this year, the spots have gone to films such as "Thor" and "Fast Five."
The revenue-sharing calculus is complex, but it leaves an American film's backers with no more than 17.5% of all Chinese ticket sales, compared with the typical 50% in U.S. theaters. The huge Chinese gross for "Transformers 3" brought Paramount Pictures less than $30 million.
Thirty-two foreign films that played in China last year were imported under a different exhibition model in which their financiers received a one-time fee of just a few hundred thousand dollars and no cut of ticket sales — even though two such movies brought in more than $20 million at the box office. Some producers believe that as many as 50 foreign films may be allowed into China this year under the flat-fee program.
U.S. studio lobbyists and officials at the World Trade Organization have been pushing the Chinese government to relax its import restrictions but have so far been unsuccessful.
By partnering with Chinese-based companies in co-production and exhibition deals, American filmmakers like Legendary and Relativity are not subject to the import restrictions. Such agreements not only guarantee movies a release in Chinese, but they also can dramatically improve the percentage of box-office receipts the U.S. producers can collect — to about 40%.
Relativity, which made the thriller "Limitless" and the upcoming "Immortals," is working with two Chinese investment firms and state-owned Huaxia Film Distribution Co., the country's second largest distributor. Their new venture, called SkyLand, will produce Chinese movies and also invest in some of Relativity's upcoming English-language pictures.
"Our ideal is to make as many of our movies co-productions as possible … and for them all to get a release in China," said Kavanaugh.
SkyLand's backers include SAIF Partners, an Asian private equity firm with $3.5 billion under management, and IDG China Media, the Chinese arm of Boston-based technology and publishing giant International Data Group.