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China's box office is back thanks to piracy crackdown

Good news for Hollywood studios but 'Star Wars' flop reveals challenges ahead

Actors dressed as storm troopers arrive for the China premiere of 'Star Wars: The Last Jedi' at the Shanghai Disney Resort in Shanghai, China in December 2017.   © Reuters

DALIAN, China -- After coming to a screeching halt in 2016, the Chinese box office is back. Annual ticket sales returned to double-digit growth in 2017, helped by new rules that purge pirated movies from the internet, leaving no other option but to go to the movies for new releases.

"I was able to watch any movie for free online just a short while ago," said a 24-year-old company employee who works in this city. When she was in school, pirated Hollywood titles could be viewed after a simple search.

But now, all that remain are fee-based streaming sites on which the newest films are unavailable until a month after their theater release date. The woman said she had little choice but to pay to see the latest releases on the big screen.

Cinemas have become a popular recreational destination for China's expanding middle class. Until 2016, box-office receipts had been climbing by 20-50% annually, according to data from EntGroup, a Chinese research firm. The rapid growth had put the country's movie market on track to outstrip the leading North American market.

But the boom then evaporated, with ticket sales growing only 3.7% in 2016 and sales actually shrinking 7% in the first quarter of 2017, the first such decline on record. The reversal was blamed on a lack of good domestic films, cheaper tickets, diversified entertainment options -- and rampant internet piracy.

People print movie tickets from a machine at a cinema in Tianjin, China.   © Reuters

The recovery in ticket sales is good news for Hollywood. China has become a major source of revenue and a "safety net" for U.S. studios that can recover their production costs even if an expensive film flopped in their home market.

Michael Bay's "Transformers: Age of Extinction" (2014), for instance, was largely considered an under-performer in the U.S. selling $245 million in tickets. Yet, it became the-then highest grossing movie of all time in China, raking in $320 million. Globally, it earned $1.1 billion in total, easily making up for its production budget of $210 million.

Hollywood's growing reliance on the foreign box office, however, brings a new set of challenges. Western movies can struggle if Chinese audiences fail to relate to the storyline. The Star Wars franchise found that out the hard way this week when the much touted "The Last Jedi" was pulled from most Chinese screens after just two weekends. Following a relatively weak opening weekend of $28.7 million, ticket sales tumbled 92% to $2.4 million in its second Friday-Sunday period.

The nostalgic references to the original series were lost among the young Chinese cinema-goers. Luke Skywalker standing on an island? China was just one year out of the Cultural Revolution in 1977, when the first Star Wars film was released. 

Removing pirated films

Chinese authorities took action against piracy in March last year by putting into force the Film Industry Promotion Law, passed under the banner of safeguarding copyright. As well as punishing individuals and companies that leak movies onto the internet, it empowers government censors to actively remove pirated films from the Chinese web.

Movie theaters have also been working to shore up sales. Dalian Wanda Group, China's largest theater operator, built two modern cinemas in Beijing last year that employ the latest in sound and image technology aimed at providing an experience that cannot be gained from watching online videos.

Chains such as CGV, a South Korea-based multiplex giant that operates in China, offer free food and phone charging for people who sign up for memberships. Others also draw moviegoers with campaigns granting deep discounts.

After the 2016 hiccup, Chinese theaters managed to attract 1.62 billion viewers in 2017, a jump of 11% from the previous year. Box office receipts bounced 15% to 52.3 billion yuan ($8.12 billion).

A thriving, restricted market

Although China's movie industry is picking up, there are some indications that the one-party state will not fully open up its market any time soon. For one, the stated aim of the film promotion law is to maintain the unity and dignity of the state, and to protect Chinese history from "distortion." The language justifies tighter censorship.

China also imposes a quota of 34 films per year from foreign distributors. Nonetheless, non-Chinese films accounted for nine of the 15 hits that earned more than 1 billion yuan last year. Homegrown features generated 52% of the revenue, down 4 points from 2016.

With the size of the North American movie market staying flat from 2016, Hollywood studios are pouring resources into jointly producing movies with Chinese companies to skirt the import quota. Foreign films whose distribution rights are picked up by Chinese distributors are also exempt. 

And following the recent Star Wars flop in China -- despite "The Last Jedi" being the number one film in the U.S. last year -- studios are expected to move to movies with more action and less dialogue to cater to the Chinese and other international audiences.

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