Chinese theaters are shortchanging U.S. film studios, MPAA audit finds

Some Chinese theaters are shortchanging U.S. film studios whose movies are shown in the world’s most populous country, according to a person familiar with an audit conducted by the Motion Picture Assn. of America.

The MPAA, which is the lobbying arm for the six major movie studios, hired accounting firm PricewaterhouseCoopers last year to audit ticket sales from China amid concerns over the accuracy of reported box-office statistics coming out of the country.

The audit found that the Chinese ticket sales from 2016 were underrepresented by about 9%, amounting to roughly $40 million in lost revenue, according to the person with knowledge of the study, which has not yet been made public. The audit examined the business of a small portion of Chinese theaters and extrapolated the findings to account for the country’s entire marketplace.

The schemes employed by the theaters included underreporting the number of tickets sold to screenings and not disclosing showings of movies, according to the person familiar with the audit who was not authorized to comment publicly about the findings.

China Film Group, the state-backed distributor of most films in the country, has been shown the results of the audit, the individual said, but has yet to comment on the findings.

The MPAA declined to comment.

The audit comes ahead of planned negotiations between the Office of the U.S. Trade Representative and its analogous Chinese entity. The talks will center in part on a potential expansion of the quota that allows for U.S. films to be shown in China. Under the existing revenue-sharing pact, which was finalized in 2012, 34 movies from foreign studios can be shown each year in China. U.S. studios receive 25% of the box-office revenue from those pictures.

China is the second-largest film market in the world, behind the U.S. and Canada, and boasts more than 40,000 movie screens. According to MPAA data, China’s box office grew about 4% last year to $6.6 billion.

That actually represented a slowdown from explosive growth in recent years; the drop-off has been attributed in part to a weak film slate and the drying up of discounts from online ticket sellers such as Alibaba Group.

Still, the country is important to the success of major studios’ movies, which are sometimes tailored to appeal to Chinese audiences. Over the years, distinct versions of films including “Looper” and “Iron Man 3” have been created for China.

In some cases, U.S. movies perform better in China than they do domestically. “Transformers: The Last Knight,” the latest film in the Paramount Pictures action franchise, grossed nearly $120 million in China in its opening weekend, nearly triple the Michael Bay movie’s tepid $45 million stateside bow in June, according to Box Office Mojo.

Paul Dergarabedian, senior media analyst for data firm ComScore, said the Chinese market is “vitally important to the success of individual movies.”

Some films, he said, “often are able to become hits rather than misses when the China component is figured into the box-office equation.”

Ahead of the release of the findings of the audit, which were first reported by the Wall Street Journal, Chinese authorities had already signaled a willingness to examine and crack down on the potential distortion of box-office data provided by companies operating there.

In 2016, the Beijing-based distributor of the Mike Tyson-starring martial arts picture “Ip Man 3” was barred from releasing films for a month after an investigation found the company had inflated the film’s opening-weekend box-office tally by nearly $5 million, the Times reported last year. Pumping up the film’s theatrical take allowed its producers to boast about the outsized success of the project.

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