What’s holding back China’s movie industry?

As Chinese director Zhao Lin Shan, best known for his film “The Assassins”, puts it, “We have an imminent need for copyright protection, because creation, after all, is from our personal wisdom and understanding of life.”

On the surface it appears that China’s movie industry is extraordinarily strong, given that the country is building ten movie theatres a week and China’s box office revenues are expected to surpass the United States’ revenues in the next three years. However, does this unprecedented growth indicate a healthy film industry in China or is it just special effects?

Let’s take a closer look at the revenue structure of the industry and the role copyrights play.

Despite China’s rapid growth in box office revenues, revenue diversification is a problem for the industry. Around the world, film revenues come mostly from aftermarket sales: in the US, for example, only 30 percent of revenues come from the box office. But in China, 90 percent of revenues come from moviegoers attending the films at theatres. The reason revenue diversification matters is because it can stabilise an industry where one source of revenue has a dip – let’s say a snowstorm on opening weekend – the aftermarket sales can make up for that. However, in China, if those seats are not full, there is no revenue to support the industry because pirates abduct all aftermarket sales.

The development of China’s film industry is degraded by the diversion of more than half of its potential revenues - the aftermarket sales - to pirates. They are leaving a lot of money on the table. How can Chinese film industry compete globally if they are only receiving a small portion of potential profits?

The key to a healthier market is copyright protection.

The International IP Index, produced by the US Chamber of Commerce’s Global Intellectual Property Center, ranks economies on the protection of types of IP rights as well by industry. China’s copyright industry ranked 14th out of the 30 economies studied. However, throw in China’s second-to-bottom rank on IP enforcement and its overall score for the content industry drops to 23^rd. That kind of environment makes it extremely difficult for the creative content industry particularly – but any IP-intensive industry generally – to compete in a global economy. Music producer-turned-law professor Eric Priest compares China’s content industry to “extremophiles” – that is, animals that live in inhospitable habitats such as underwater volcanoes. While life exists, it does not represent the biological diversity that would be possible in a more hospitable environment. China’s creative community could be so much stronger than it is, but it must protect the IP of creative innovators.

Media box piracy or black set top boxes are the latest way pirates are adapting to avoid enforcement.

Media boxes are illegal circumvention devices and are thwarting efforts by the Chinese government and Chinese content providers to create a legitimate marketplace for licensed content online. Some come loaded with infringing content while others load illegal content upon hookup. In this way, pirates circumvent the law by loading or accessing infringing content after the media boxes have been purchased.

To address media box piracy, secondary copyright liability must include manufacturers and sellers who encourage the sale of media boxes for the purpose of facilitating access to unlicensed content, whether downloaded or streaming. Cross-border customs and cross-jurisdictional law enforcement cooperation could also provide an important vehicle for addressing illicit global trade in this area.

In China, the United States and around the world, creative individuals are full of fascinating and imaginative stories that will entertain us, educate us and build upon the human culture. Let’s protect these cultural treasures and send the pirates home empty-handed.

Ellen Szymanski (pictured) is senior director of international IP at the US Chamber of Commerce’s Global intellectual Property Center