Hollywood Moves on China No Matter What SEC Probe Finds

Hollywood Moving on China No Matter What SEC Probe Finds
James Cameron ’s 2009 “Avatar,” the top-grossing movie in history with $2.78 billion in global sales, took in $182.2 million from Chinese audiences, according to researcher Box Office Mojo. Photographer: Nelson Ching/Bloomberg

Hollywood studios are moving ahead with plans to make and sell movies in China, a sign the industry’s push to expand in the third-largest film market will proceed without being slowed by a federal inquiry.

News Corp., owner of 20th Century Fox, this week bought a stake in Beijing-based Bona Film Group Ltd., a movie producer and distributor. DreamWorks Animation SKG Inc. Chief Executive Officer Jeffrey Katzenberg and Robert Iger, Chairman and CEO of Walt Disney Co., this month reaffirmed initiatives in China.

Hollywood’s interest in China has grown with the country’s plan to build state-of-the art theaters and upgrade its film industry, moves that would also help fuel studios’ local theme-park and live-entertainment businesses. The country is letting in more foreign films, sharing ticket sales more equitably and encouraging ties to local producers. Reports last month of a U.S. Securities and Exchange Commission inquiry raised the question of whether studios’ progress would be interrupted.

“It’s hard to slow anything down in China,” said Dan Mintz, CEO of Beijing-based DMG Entertainment, which is working on “Iron Man 3” with Disney, the world’s largest entertainment company. “Of course, you are careful about doing business and who you are doing business with.”

The SEC sent letters to studios seeking information about dealings with certain officials, and possibly inappropriate payments, according to people with knowledge of the matter.

Studio officials decline to discuss the inquiry, some citing confidentiality rules. The letters were sent by the SEC in March, the New York Times reported earlier.

SEC spokeswoman Florence Harmon also declined to comment.

Anti-Corruption Measures

Studio chiefs are moving forward because they’re confident strict anti-corruption policies are being followed, said Michael Perlis, a former Securities and Exchange Commission attorney now with Locke Lord LLP in Los Angeles.

“I am sure senior management, by and large, assumes they’ve got procedures in place and they’re being complied with,” Perlis said in an interview. “That doesn’t necessarily mean they are.”

Disney’s decision to co-produce the Marvel film, announced in April, attests to Hollywood’s willingness to stake some of its biggest projects in China, one of the world’s fastest-growing markets. Box-office sales there increased 35 percent to $2 billion last year, according to the Motion Picture Association of America, the industry’s lobbyist.

“China is a top priority for us,” Disney’s Iger said on a May 8 conference call with analysts and investors.

Chinese Market

Disney, based in Burbank, California, operates a theme park in Hong Kong and is building another in Shanghai.

With the right film, the Chinese market can be lucrative. The government in February increased the number of foreign films it lets in each year to 34 from 20, according to the MPAA, and studios will get 25 percent of the box-office receipts, up from 13 percent previously.

James Cameron’s 2009 “Avatar,” the top-grossing movie in history with $2.78 billion in global sales, took in $182.2 million from Chinese audiences, according to researcher Box Office Mojo. As of May 1, a 3-D version of his 1997 blockbuster “Titanic” had collected $134 million in China since it was released there on April 10, according to Fox, the international distributor.

The film-finance community, which lends to producers based in part of foreign distribution contracts, is starting to take China more seriously.

‘Top Three’

“China used to be a zero in terms of forecasting,” said Jeff Colvin, a senior vice president and head of film finance in Los Angeles for Comerica Inc., the largest U.S. lender for independent movies. “Now it can be a top-three market after the U.S. and U.K.”

This week, Rupert Murdoch’s News Corp. said it was buying a 19.9 percent stake in Bona Film, sending the company’s U.S.- traded shares to a one-year high.

Bona Founder and Chairman Yu Dong said in April he was interested in making “Avatar 2” with Fox. Cameron told the New York Times in an interview published May 5 that he was exploring co-producing the movie’s sequels in China. The May 14 statement issued by Bona and New York-based News Corp. didn’t mention specific projects.

DreamWorks Animation said in February it will form Oriental DreamWorks, a Shanghai-based joint venture to develop entertainment projects in China that will include theme parks and live productions.

The company will own about 45 percent of the venture, with the rest held by China Media Capital, Shanghai Media Group and Shanghai Alliance Investment Ltd.

Hollywood Math

Generally, studios’ internal rules for doing business outside the U.S. are about as strict and sophisticated as any in the U.S., Perlis said. Even so, The SEC historically has been suspicious of Hollywood accounting methods, he said. That suspicion may have contributed to the decision to open the inquiry he said.

“The SEC has routinely been suspicious of Hollywood because their view is that Hollywood plays by its own rules,” Perlis said. “There was always the sense that cash didn’t find its way to where it should have.”

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