China is acting blatantly protectionist in an industry that's hugely important to the US

Key Points
  • The Hollywood blackout is implemented during limited periods of the year in China to turn the spotlight on domestically-produced films
  • This year's annual summer blackout coincided with the commemoration of the founding of the People's Liberation Army on August 1
China is acting blatantly protectionist in an industry that's hugely important to the US
China is acting blatantly protectionist in an industry that's hugely important to the US

Blockbusters like "Dunkirk" and "Spider-Man: Homecoming" may have received the thumbs up from moviegoers around the world this summer, but they aren't yet making any waves in China.

That's because of China's annual "Hollywood blackout," which is when the country initiates an undeclared ban on the release of all foreign films during specific periods of the year.

A summer tradition of sorts, the blackout usually takes place during the lucrative holiday months when students go on vacation. The blackout also tends to be enforced during China's week-long Lunar New Year national holiday in the first half of the year.

While the Hollywood blackout is unofficial, the absence of foreign films scheduled for release in the country around the middle of July to late August this year suggests the regulation is already in effect. Neither a representative for China's Ministry of Foreign Affairs nor its State Administration of Press, Publication, Radio, Film and Television immediately replied to a request for comment on the practice.

$134 billion in U.S. wages

How China consumes — or doesn't — American entertainment is of major importance to the U.S. film and television industry, which is the world's largest and supports around 2 millions jobs in the country with a reported $134 billion in wages. Although box office growth decelerated in China in 2016, Reuters calculations showed the country contributed $1.8 billion in revenues to the 20 highest grossing Hollywood films. For comparison, all U.S. box office sales stood at $11.4 billion in 2016.

And while it is challenging to determine whether the blackout significantly decreases Hollywood blockbusters' revenues on the mainland, the most obvious impact is the delay in China release dates for some major films.

I suspect (the blackout) keeps the Chinese film industry buoyant, which then allows its players to have more negotiating power with Hollywood.
Felicia Chan
senior lecturer at the University of Manchester

One of the affected films this year is Marvel's "Spider-Man: Homecoming," which is slated for a Sept. 8 release in China, according to movie review site Douban. That's around two months after the film's July 7 U.S. debut. The movie has reportedly grossed more than $633 million globally.

Other foreign films, such as war drama "Dunkirk" and science fiction " Valerian and the City of a Thousand Planets" are expected to be screened on the mainland more than a month after their releases stateside.

Typically, major Hollywood pictures open on the mainland either on the same date as in North America or slightly after their U.S. releases, according to The Hollywood Reporter.

While there is little official documentation available on the Hollywood blackout, the Chinese government first enacted the regulation in 2004, China Market Research Group Principal Ben Cavender told CNBC.

OBOR will affect movies too: Zhang Yimou
OBOR will affect movies too: Zhang Yimou

The action had been taken to give the Zhang Yimou-directed "House of Flying Daggers" a boost at the local box office and was a new form of regulation compared to the foreign film quota, which had been in existence for much longer, said Cavender.

Naturally, the blackout serves to boost the performance of domestically produced films in the mainland market as competition from foreign titles is reduced.

Data from research firm EntGroup showed that local titles like "Wolf Warrior 2," "The Founding of an Army" and "Brotherhood of Blades 2" dominated the Chinese box office in the week that ended on July 30. The only Hollywood film on the top-grossing list is "Despicable Me 3," which had been released in China on July 7, likely before the blackout on foreign film releases began.

In comparison, five foreign films occupied the top-10 spots in the week that ended on June 25 — before the Hollywood blackout.

Success for domestically produced titles, however, is not guaranteed even when the foreign competition is removed.

The trend in historical box office records show that, when there is no ban in effect, the one or two foreign films released in China tend to absorb up to 90 percent of revenues from ticket sales during a given week, Cavender said. In comparison, when the blackout is enforced, several domestic films tend to share relatively even portions of the market.

The blackout is sometimes framed as an ideologically driven piece of regulation, but its existence is likely linked to more pragmatic thinking. That could include giving China-made films more of a chance to be seen, according to Felicia Chan, a senior lecturer at the University of Manchester.

"I'm not sure if 'preventing too much Western influence' is an argument any more at the Chinese box office, given the numbers Hollywood blockbusters are hitting in China ... I suspect (the blackout) keeps the Chinese film industry buoyant, which then allows its players to have more negotiating power with Hollywood," Chan added.

'The Founding of an Army' 

This year, there's an additional dimension to the summer Hollywood blackout: the 90th anniversary of the founding of the People's Liberation Army on Aug. 1.

Given the occasion, most domestically produced films released the week before the event at least paid lip service to themes such as patriotism and self-sacrifice. To illustrate: Even though audiences might have flocked to the cinema for its well-choreographed fight scenes, the plot of action flick "Wolf Warrior 2" revolved around a Chinese special forces agent who comes out of retirement to fight American mercenaries.

Actors Zhu Yawen, Liu Ye and Huang Zhizhong attend a press conference for "The Founding of an Army" in Beijing, China.
VCG | Getty Images

The state-backed "The Founding of an Army" ー a historical epic set in 1927 about events that led to founding of the PLA ー was described in glowing terms by Xinhua as an inspiration to local youth across the country. The film is the final installment of the "Founding of New China" trilogy.

While official coverage of the film by the Chinese media was positive ー a moviegoer told Xinhua that it motivated young people in China to "strive for (their) Chinese dream" ー media outlets outside of the mainland adopted a different tone. Notably, the South China Morning Post called the film "tone-deaf" in its review, and others deemed it a propaganda film.

In addition to the blackout in place, cinema chains in China were reportedly directed by media regulators to screen "Founding" on a minimum of 45 percent of their screens for the film's opening day, The Hollywood Reporter said, citing sources.

Despite those extra regulations, "Wolf Warrior 2" beat "Founding" at the box office, taking in $142 million in its opening week. The latter grossed just $28.9 million, data from EntGroup reflected.

Why foreign studios aren't running scared

Still, even the ad hoc nature of the Hollywood blackout is unlikely to spook foreign studios from wooing Chinese audiences.

While the specter of piracy remained — Chinese moviegoers could turn to less-than-legal means of watching films yet to be released on the mainland — foreign production houses are, by now, largely accepting of the blackout.

The appeal of the market centers on a shift in behavior in the world's second-largest economy. Over the last two years, Cavender said, consumers have gradually transitioned from aspirational consumption to focusing on experiences.

That is, activities like going to the movies now make up major budget items for Chinese consumers, Cavender said, adding that they're more willing to spend if there are quality movies.

How Hollywood plays into US-China's trade ties
How Hollywood plays into US-China's trade ties

Among foreign firms' strategies to navigate around the blackout are big budget Western studios putting out films that tend to be viewed best in cinemas. Cavender cited the Christopher Nolan-helmed "Dunkirk" as an example of a film Chinese moviegoers would likely prefer seeing on the silver screen.

And while foreign studios are thought to be in the dark regarding the exact dates of the blackout, it has happened long enough for executives to have a rough gauge of its timing.

The bigger issue foreign studios faced now has less to do with regulations and more to do with business arrangements, according to Cavender.

Profit distribution is one of those issues: Foreign studios face the prospect of receiving less than their fair share of revenues if Chinese cinemas aren't upfront in reporting their box office hauls.

"It's less a matter of government policy and more of (business) negotiation," Cavender said.