China to Movie Theaters: We’ll Pay You to Show More Chinese Films

Last 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.

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.