As China’s economy, the world’s second largest, slows, international businesses working there across all sectors have been complaining that they are increasingly unwelcome by Beijing, as demonstrated by the shut down in April of Apple’s iBooks and iTunes movies, and the halt to a video service partnership between Chinese e-commerce giant Alibaba and Disney.
Earlier in June, American officials and European business executives warned China about what they characterized as an increasingly hostile business environment.
But Marc Ganis, co-founder and managing director of Jiaflix Enterprises, which helps Hollywood studios distribute movies in China, saw the early writing on the wall.
“We had a notion from our work over more than a decade in other areas with the government, that technology had advanced beyond the regulatory,” Ganis, a Jiaflix co-founder, told China Film Insider. “And we expected that the regulations were going to catch up to and then ultimately get ahead of technology.”
“You can’t own a website in China unless you’re Chinese,” Ganis said, noting a stubborn regulatory reality that is unlikely to budge anytime soon. “We’ve seen the direction. The direction is greater emphasis on Chinese content and Chinese concepts; and no branded foreign channels.”
Non-Chinese companies looking to exploit regulatory loopholes to get their content into the rapidly-growing market face a steep challenge.
That’s why, as other international companies, such as Western market leader Netflix, have struggled to gain entry into the China market, Ganis said Jiaflix slowly has been making inroads by teaming up directly with the Chinese government.
In June 2012, Jiaflix announced a joint venture to begin streaming the libraries of major U.S. studios to Chinese movie lovers on 1905.com, the web subsidiary of the state-run broadcaster’s China Movie Channel, or CCTV 6.
“Our intent from the outset was to create a platform and content that was completely consistent with the interests of the government,” Ganis said.
Just as the China Film Group holds the sole license to import revenue sharing movies for theatrical distribution, 1905.com is the sole entity with the license to import movies for digital distribution in China.
“Our feeling was to develop something that would have longevity—that wasn’t simply an entity for financial engineering or quick IPO or that kind of thing,” Ganis said.
But whereas international content providers have been given the cold shoulder, local companies including Alibaba’s YoukuTudou, Tencent’s QQ video and Baidu’s iQiyi seem to have been given more regulatory wriggle room.
In the four years that Jiaflix has been operating its video streaming service, those tech giants have piled into the industry, buying up imported films and TV shows to compete.
The appetite for imported fare is particularly strong in the country’s first-tier cities where moviegoers have pay for the movies but find theatrical releases are too few in number to meet their demand.
China allows only 34 film imports on a revenue-shared basis each year, a number industry watchers expect to increase in 2017.
The development of the industry is causing a sea change in consumer habits. In a country where piracy long has been rampant, there are signs that viewers are beginning to open up their wallets.
There were 28.8 million paid online video subscribers in the country by the end of 2015, according to Internet research firm iResearch Consulting Group.
Companies such as iQiyi and Tencent deserve a lot of credit for helping Chinese consumers get more comfortable with the subscription models through promotions and offering premium content, Ganis said.
Through its close relationship with China’s government, Jiaflix judiciously has stayed within both the letter and the spirit of the rules, thus far. This has not translated into steady revenue.
Although Ganis is coy about revealing exact numbers, he says revenue from the streaming service’s subscriptions (there is no advertising stream) is in the “single digits millions of dollars per year”
Part of the service’s strategy is to garner viewers with free content that attracts “tens of millions of viewers every month,” he said.
Now the company is preparing to launch a number of apps, for all available devices and platforms, to make the content even more accessible to online viewers.
The company’s low-key approach has enabled it to start offering services in other areas. In 2013, the company teamed up with Paramount to be its production and marketing partner in China on Michael Bay‘s Transformers 4.
In April 2015, the company said it would work with the China Movie Channel on a sequel to Need For Speed as a U.S.-China co-production to be filmed in China.
Jiaflix is involved in licensing for theme parks and family entertainment centers, and is planning to co-produce with a Chinese partner a big-budget action film soon, Ganis said.
Ultimately, Ganis says international companies must maintain a focus on the Chinese market year-round to really make headway. “You’ve got to work it 12 months of the year, not just when some of your 34 movies are out,” he said.
“Studios need to recognize—and some have—that China is not simply an ATM to take money out of.”
This article originally appeared on China Film Insider
About the Author: Fergus Ryan is a reporter at China Film Insider and previously worked as a journalist for the News Corp. publications China Spectator and The Australian