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Crunch looms in China's struggle for hearts and eyes

Beijing faces major decisions on foreign movies and local media content

HONG KONG -- Toward the end of November, Beijing announced that it plans to construct a $2 billion film studio in the southwestern city of Chongqing, in Sichuan Province. Meanwhile, privately and quasi-privately owned Chinese media groups are rushing to purchase stakes in Hollywood studios, and local venture capitalists are investing in entertainment both at home and abroad.

As China's middle class continues to swell, entertainment has become big business. But as the importance of the sector grows the struggle between the government and the private sector for eyes and hearts is becoming ever more intense. Complicating the jockeying is the upcoming expiration in February of an agreement in place since China joined the World Trade Organization in 2001 that gives the government the right to restrict imports of foreign films.

For years Beijing has fought to retain control of both hard news and the soft power that the media command. Now though, its influence is waning. Few people read the People's Daily or watch CCTV, the main state-run television broadcaster, and the most popular movies are not those emerging from government-controlled studios. Instead mainlanders get their news from Tencent and Weibo, while entertainment content comes increasingly from Tencent and Alibaba, along with groups such as Dalian Wanda and Li Ruigang's China Media Capital.

Yet Beijing's goodwill remains critical in virtually every economic sector -- and especially in the media. The state exercises significant control over content, including movies and television as well as news, and it is easy to fall foul of the government.

The likelihood of a serious clash between the private sector media and the government is the subject of intense -- though whispered -- debate in China. It matters because the extent to which non-state providers of entertainment are allowed to flourish will say a great deal about how much room Beijing will grant entrepreneurs, and how the Chinese economy will evolve.

For the moment, Beijing seems to be giving its media moguls a certain amount of freedom. These groups are using their massive market power to create and buy content, whether at home or abroad. And in doing so, they are establishing new templates that rely heavily on the internet, especially when it comes to distribution.

In the eyes of China's media entrepreneurs, the Hollywood model -- in which the costs of promotion and marketing often exceed the cost of producing films -- makes little economic sense. By contrast, television and the internet are far more rational. For example, Neil Shen, head of the venture capital firm Sequoia Capital China -- and possibly the single most impressive Chinese venture capitalist -- is looking to invest in production companies that can generate content for all types of delivery. He believes that internet services are far more compelling market opportunities than movies.

Name game

Both the smallest startups in China and the mightiest (or most cash-strapped) Hollywood studios are benefitting from the spending boom. Two years ago Shen invested in a very young cartoon company called Anna Comics in Beijing, whose content is distributed online through Weibo. At the time, the valuation was a mere $5 million or $6 million. Today, that company is worth $400 million.

But rather than ignoring Hollywood, Chinese media players wish to change it. Donald Tang, who established Tang Media Partners earlier this year with money from CMC, Tencent and the Chinese film studio Huayi Brothers, believes that within 10 years two of the six major U.S. studios will have Chinese names.

One of the main incentives that Hollywood has had to partner with Chinese interests is to evade restrictions on access to mainland viewers. If there is enough local content, then Hollywood gets around the limits on the import of foreign films. But it isn't clear what will happen when the existing agreement on the import of foreign films expires in two months' time. There has already been considerable sparring on the issue between Beijing and Washington.

In 2007, the U.S. successfully brought a complaint to the WTO that certain restrictions China was maintaining on foreign films violated the commitments Beijing made in 2001, says Greg Frazier, who worked for the Motion Picture Association of America and was involved in the WTO complaint. In 2012, the two governments reached an agreement to settle the case under which China was permitted to keep its film import monopoly in exchange for allowing more foreign films into its market (upping the number from 20 to 34) and for allowing foreign studios to keep more of the revenue from films shown on the mainland.

Frazier believes that if the agreement isn't extended, "presumably circumstances revert to pre-2012 agreement terms: The number of films allowed into China snaps back to 20, and China is out of compliance with the original WTO case and subject to potential trade sanctions," he says.

Meanwhile, media players on both sides of the Pacific will be holding their breath to see whether Beijing decides to tighten its controls on content or relax them.

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