Can the WTO get China to Open up to Hollywood?

Ask anyone in Hollywood who's exporting entertainment overseas; the international business is thriving everywhere but China, where the government limits foreign entertainment imports and piracy is rampant.

There's plenty of demand in China for American movies and television, but the US media conglomerates' hands are tied by a cap on 20 foreign films a year strict restrictions that they work only through government-controlled distributors.

But now, finally there's progress in Hollywood's push to enter China.

The WTO issued a 460 page ruling that demands that the Chinese government ease its restrictions, and among other things allow U.S. content companies to work with any distributors, not just those controlled by the government.

This is the biggest ruling to open up China's entertainment economy yet.

What does this mean for the movie business? The bad news is that the cap on the number of foreign movies allowed into China per year remains at 20. That's a huge problem for the six major studios - Disney, Sony, Paramount, Warner Bros., Universal and 20th Century Fox - which together churn out up to 200 movies a year. Here's a perfect example of how bad that cap on films is: "The Dark Knight," the biggest film in the US last year and one of the most critically acclaimed wasn't allowed into China. The WTO also ruled that China should continue to have the right to censor foreign films and protect the rights of the two state-owned theater chains.


But here's the good news: allowing additional distributors to enter the business will generate competition for the rights to distribute those 20 films, which should allow studios to negotiate for better terms. With just one local distributor Hollywood couldn't say no to the low percentage of ticket sales they're paid and the high fees they're charged.

This isn't just about Hollywood revenues, opening the door to more film distributors could impose a new capitalism within the Chinese entertainment industry. And while these new rules should generate new revenue for US companies, they're also about halting losses from piracy. More than $3.5 billion a year is lost to piracy according to the International Intellectual Property Alliance. Organizations like the MPAA are hoping that greater access to legitimate content will reduce the need to steal the content.

This WTO ruling is also good news for Apple : the organization told the Chinese government it has to allow foreign companies to sell music online. That could be a big score for iTunes, though if illegally downloading music is easy, we'll see how many people make the switch to paying for music, and how iTunes tweaks its service to serve this market.

The battle with Chinese regulators isn't over just yet. The timing of when China would be forced to ease its restrictions is vague; it could be another 20 to 60 days before the ruling is submitted for the WTO's official adoption. And the Chinese government says it hasn't ruled out the possibility of appeal. But it seems likely these changes, or some version of them, will be adopted as China becomes increasingly involved with the WTO. And if China doesn't comply the U.S. can always fight back with tariffs on Chinese goods. Next month the U.S. government faces a decision about whether to charge a tariff on Chinese tires as the U.S. trade commission suggests.

This isn't a silver bullet for the challenge of selling American intellectual property to China, but it's a solid start.

Questions? Comments?