[A2k] Wall Street Journal: Hollywood Upstages Beijing

[Thiru Balasubramaniam]

http://online.wsj.com/article/SB125008679464026013.html

     * AUGUST 13, 2009

Hollywood Upstages Beijing
WTO Hands China Its Biggest Defeat in Trade Battle Over Movies, Music,
Books


By JOHN W. MILLER and PETER FRITSCH


While China has made sporadic efforts to round up pirated U.S. goods,
such as these DVDs last year, American media companies are hopeful
that a ruling Wednesday by the World Trade Organization will make it
easier to distribute and protect their wares in the world's most-
populous country.

The World Trade Organization handed China its biggest defeat yet in a
long-running battle over how American books, movies and music are
distributed and protected against piracy in the world's most populous
country.

Wednesday's 460-page ruling could help break open the tight controls
that have crippled the ability of filmmakers, musicians, videogame
designers and other artists to widely market their creations at
reasonable prices.

The WTO ordered Beijing to stop forcing U.S. owners of copyrighted
material to deal with only government-controlled distribution
companies, a drain on logistics and costs. Both the U.S. and China can
appeal the ruling.

China's Ministry of Commerce said Thursday it will seriously evaluate
the panel's report and won't rule out the possibility of an appeal.

"The U.S. won on some of its key legal claims," said Simon Lester,
founder of WorldTradeLaw.net LLC, a Washington consulting firm. "What
remains to be seen is how China responds, and whether these legal
victories can be used to improve sales for U.S. products."

China, said the judges, had broken a promise it made upon joining the
WTO in 2001 to offer relatively open access to foreign mass-produced
art. According to WTO rules, member countries can't discriminate
against imported goods. The WTO told China to "bring the relevant
measures into conformity with its obligations under those agreements."

The ruling comes as President Barack Obama faces a tough test
regarding the U.S. trade relationship with China. Next month, Mr.
Obama must rule on a recommendation by the U.S.'s International Trade
Commission to impose import tariffs of up to 55% on Chinese car tires.
The United Steelworkers union brought the case against Chinese tire
exporters, arguing that a flood of imports had cost union jobs.

Such a decision is fraught with political risk: Side with the Chinese
and disappoint organized labor; or side with labor at the risk of
possible retaliatory trade measures from the Chinese. Mr. Obama must
make that decision barely a week before he hosts Chinese President Hu
Jintao at a summit of 20 developed and emerging economies in Pittsburgh.

Currently, the government has a monopoly on the distribution of a wide
array of media content, from film to books and music. The WTO ruling
attempts to break that up by allowing other companies to disseminate
content as well.
[blockbusters]

Film executives say the state-run distributor, China Film Group Corp.,
had been one of the biggest barriers to making money in the country.
It takes a hefty cut of the box office and charges the studios high
fees for film prints and other distribution costs, according to
industry executives familiar with the Chinese market. That means the
studios only receive a small percentage of a film's overall box office
in China. If other distributors are allowed to operate, they could
increase competition -- and drive down the cut that distributors take
of the box office.

"The ability of the Hollywood studios to distribute more freely will
likely increase the marketing dollars available to promote their films
and should lead to better box office," says Richard Gelfond, chief
executive of IMAX Corp., which does a considerable amount of business
in China. "Ultimately, this should be good for the overall exhibition
business in China."

Motion Picture Association of America Chairman and CEO Dan Glickman
said breaking the distribution monopoly could lead to greater market
access and could help counter China's rampant piracy of Hollywood
productions.

"In spite of all the restrictions we face, there is no shortage of
U.S. filmed entertainment in China," he said. "Unfortunately, far too
much of it is pirated, benefiting neither the legitimate Chinese
businesses that are tied to, and profit from, showing U.S. movies nor,
of course, the U.S. companies that are playing by the rules."

The WTO also told China it must let foreign companies sell music over
the Internet, in what could help Apple Inc. and its iTunes music-
downloading business.

Despite the size of the Chinese market, it has long been one of the
least-profitable places for Hollywood studios to distribute movies.
Only 20 foreign films a year are allowed in theaters, a cap which
remains despite the WTO ruling. For example, Warner Bros.'s
blockbuster, "The Dark Knight," wasn't allowed into China last year,
even though it shattered U.S. box-office records.

Given that the six major studios release around 150 to 200 films
annually, the 20-picture limit could blunt the impact of the ruling
for Hollywood. "If you're looking for a fourth-quarter bounce to
earnings, it ain't this decision," said Greg Frazier, executive vice
president and chief policy officer at the Motion Picture Association
of America. The Hollywood studios declined to comment on the ruling,
referring questions to the MPAA.

The three-judge panel ruled in favor of China on some minor points,
including preserving the rights of the two state-owned movie-theater
companies and protecting the government's right to censor foreign
films to some extent.

U.S. trade officials declared a major victory that will allow U.S.
companies to one day avoid the extra costs of dealing with a state-
owned distributor. U.S. Trade Representative Ron Kirk called the
ruling a "market opening" that would benefit "American workers and
companies." He said it would allow "legitimate American products" to
"get to market and beat out the pirates."

WTO decisions always depend on the political willingness of the losing
country to change its laws to comply. That said, China has become more
involved with the WTO and is unlikely to ignore the ruling. But trade
experts say it could come up with a compromise that fails to satisfy
the U.S. In that case, Washington would have the right to impose
retaliatory tariffs on Chinese imports of goods, such as TV sets and
bicycles.

A spokesman for the WTO declined to comment on its ruling.

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Thiru Balasubramaniam
Geneva Representative
Knowledge Ecology International (KEI)
thiru@keionline.org


Tel: +41 22 791 6727
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