Long shackled in China's market, Hollywood now sees opening

The US entertainment industry has long complained that sales restrictions and unchecked piracy are locking them out of China's vast marketplace. Movie studios are aggrieved that so few foreign films are screened. Booksellers dislike mandatory tie-ups with state-owned distributors.

In a judgment made public Wednesday the World Trade Organization (WTO) partly concurred. The WTO found that China's controls on the distribution of foreign books, films, and music violate trade rules. China said it may appeal the ruling, the latest in a series of disputes with the US, its largest trading partner.

Hollywood immediately hailed the ruling as a victory.

"The Chinese system for distributing US films to Chinese audiences is among the most restrictive and burdensome in the world.... This ruling represents a positive step in promoting the growth of legitimate US movies," said Dan Glickman, the chair of the Motion Picture Association of America, in a statement.

But Hollywood didn't get everything it wanted. While the WTO told China to open up distribution of home entertainment like DVDs, CDs, and books to foreign competition, which should put more money in US pockets, the WTO didn't disallow China's requirement that foreign studios work with one of two state-owned distributors, who can dictate terms for revenue sharing, or its quota on foreign films. Only 20 are allowed in a year, effectively protecting domestic studios and encouraging coproductions in China.

Music downloads did get a boost, though. The trade body said that foreign companies should be allowed to sell their content directly to Chinese consumers. Internet downloads of music, films, and television shows are hugely popular in China, but are almost invariably free.

Piracy dampens effects of ruling

The ruling won't necessarily fling open the doors to US entertainment companies, says Henry Gao, a law professor at Singapore Management University and a former WTO staffer. "Even if US firms can get involved in distribution services in China, will they be able to sufficiently exploit these opportunities?" he asks.

One reason why they won't, says Mr. Gao, is rampant piracy of films, music, software, and other copyright-protected products in China. Hollywood studios argue that they can't compete with counterfeit DVDs of the latest theatrical releases for $1 apiece. Music companies must also struggle to persuade Chinese consumers to buy their CDs – not pirated copies or free downloads.

This latest ruling doesn't address piracy. The US filed a separate WTO complaint over lax enforcement of Chinese laws on piracy, which the WTO partially upheld in a ruling issued earlier this year. The US has pushed for more criminal convictions of wholesalers in China and a stop to the resale of seized goods.

Yao Jian, a spokesman for China's foreign ministry, said Thursday that China was studying the verdict and would consider an appeal.

"The channels for foreign publications, films and audio-visual products to enter the Chinese market are extremely open," he said, according to the Associated Press.

US wants censorship separate from sales

For China, regulating the distribution of these products is about more than commerce. It also reflects the strict controls put on all news and entertainment for political reasons. China has argued that it needs to screen out offensive content and that it has the right to do so under international trade rules.

The US didn't challenge China's censorship system at the WTO. Instead, it successfully argued that such controls should be separated from sales networks, so that foreign companies can compete with government-run entities.

What galvanizes US studios isn't censorship but the tussle over who profits from blockbusters like "Transformers." In other countries, companies like Warner Brothers own their own theaters and get a huge slice of the box office profits. China has nearly 4,000 movie screens that attract middle-class consumers who can afford $10 a ticket.

But foreign companies can only own minority stakes in movie theaters in China, to the frustration of Hollywood executives. Gross box office receipts totalled $640 million in 2008, with foreign films raking in over one third. That total is up 30 percent on 2007, underscoring the industry's rapid growth, despite the competition from pirates.

Legal experts say the US will be disappointed by the pushback on some points, including the distribution duopoly for movies shown in theaters, and music censorship, neither of which the WTO said violated China's trade obligations.