(WSJ) Hollywood is being shortchanged by millions of dollars at China’s box office, according to a recent audit for the Motion Picture Association of America, say people familiar with the matter.
Auditors at PricewaterhouseCoopers LLP working on behalf of the MPAA concluded that ticket sales in China were underreported by about 9% last year, one of the people said.
That translates into at least $40 million in lost revenue for the six Hollywood studios that make up the MPAA, according to a Wall Street Journal analysis of last year’s box-office take. Box office data shows their films grossed at least $1.87 billion last year in China. Under an existing arrangement, the studios’ share was 25%—or about $470 million—of those receipts, the analysis shows.
China remains a bright spot for Hollywood, which is relying on its audiences to offset shrinking ticket sales in the U.S. The number of screens in China grew almost 25% last year to more than 40,000, as theater construction spread to second- and third-tier cities. Meanwhile, China’s box office is up 10% at $6.11 billion so far this year, according to analytics firm comScore. That compares with a decline of about 5% to $8.21 billion in the U.S. over the same period, comScore said.
The MPAA and its auditors presented the results last month to state-backed China Film Group, which distributes most movies in the country, the people said. China Film representatives were receptive, but said only a higher government authority could enforce stricter controls on theaters, according to the people. China Film is analyzing the results and will meet the parties again for another discussion later this month, they added.
China Film couldn’t be reached for comment. Offices in China are shut for a week-long public holiday.
The results come as the Office of the U.S. Trade Representative prepares for a new round of negotiations with Chinese counterparts to revise a 2012 deal that allowed theatrical distribution of at least 34 Hollywood films annually under a revenue-sharing agreement. Those talks could extend well into 2018, with the current deal remaining in place, one of the people said.
The person said the U.S. is seeking to increase its share of China’s box-office grosses from the existing 25% to 40%, in line with some other markets.
The MPAA hired PricewaterhouseCoopers last year to conduct its first audit in China after a provision for the audit was included in the landmark 2012 deal. However, it took about five years to hammer out a legal agreement for the audit. The MPAA and PricewaterhouseCoopers declined to comment.
Hollywood studios have long suspected their box-office receipts in China are underreported. The auditors reviewed 29 of the biggest Hollywood films released in China last year and checked 125 screens across 27 cinema chains in small and large Chinese cities, according to people briefed on the audit’s results. The results were then extrapolated to account for China’s more-than 40,000 screens, they said.
The MPAA plans to conduct future audits, including one for select films released in 2017, the people said.
Chinese regulators have been cracking down on box-office fraud and passed a law last year that included penalties for the behavior. Earlier this year, regulators named and fined 326 theaters for underreporting ticket sales. Since then, regulators have cited dozens more for the practice. Most of the theaters are either stand-alone operations or part of small chains in second- and third-tier cities.
Source: Wall Street Journal by Wayne Ma
