Cross posted on China Law Blog.

Part 1: The Ancient History of the DVD is here.

Part 2: Who Wants What is here.

I won’t pretend any expertise on Hollywood-China film politics, but it does sound like it would make for a fantastic dark comedy.  The story would certainly include the profit-sharing agreements whereby Chinese firms are the overwhelming beneficiaries of Hollywood’s growing popularity.  It would include the endless, conflicted efforts of government distributors and censors to damage the Hollywood golden goose in the name of Chinese culture, by suddenly yanking Hollywood hits out of theaters, releasing them on the same day, or bowdlerizing them into (even more) incoherent messes.  It would include the endless variety of Hollywood efforts to appease these capricious gods, whether by throwing Chinese actors into weird extra scenes for Chinese releases, stripping films of Chinese bad guys, launching joint ventures with Chinese princelings, or—allegedly—paying bribes for valuable exhibition slots, which the SEC is now investigating.  Although some Chinese players probably benefit by keeping Hollywood guessing, one should assume that such privileges will eventually find their price.

And they probably already have.  In 2012, the US and China signed an agreement that lifted the cap on Hollywood imports to include 14 more “premium” (i.e. 3D or Imax) films per year and increase Hollywood’s share of the box office from 17.5% to 25% (and 50% for co-productions).  Although the agreement is usually presented as consequence of the US’s 2009 victory at the WTO over China’s film restrictions, there are also many signs that Chinese intransigence has been at least partly bought off. The Chinese exception seems to be coming to an end, paved with sketchy deals.

The agreement is nominally a victory for consumer choice, but not for free speech.  Films must still clear Chinese censorship, as Django Unchained failed to do recently.  In practice, it means more Transformers 4 and Avatar 2 for the Chinese market, with a bit more fan service built in for Chinese audiencesIt means less likelihood of major studio involvement in films critical of the Chinese government, like Kundun or Seven Years in Tibet or, for god’s sake, the Red Dawn remake, in which the Chinese invaders were swapped for North Koreans.  Why invite reprisal from the censors in a boom market?

At another level, who cares? There’s less and less reason to view feature film as synonymous with culture in general or national culture in particular. Such assumptions echo the “cultural exception” at its most conservative and calcified.  There is so much happening outside those narrow channels, enabled by the collapse in production costs and the proliferation of Internet distribution channels.  There is so much more video culture within reach.  But Hollywood’s dominance has two consequences that we should worry about.

First, it matters who controls the direction of development of home and Internet video solutions, which—as theatrical exhibition is closed off—become the main channel for domestic video culture.  It would be a mistake to restore Hollywood’s leverage over this development. We know what that model looks like: expensive services geared toward high-income consumers, high secondary liability for web companies, consumer surveillance, and administrative (not judicial) punishment for infringement.  It’s increasingly unlikely that the studios will achieve these goals in the US and Europe, due to growing awareness of the associated costs to speech, privacy, and competition.  And so we shouldn’t wish them on China, despite the probable appeal of this vision to some Chinese studios and successful web intermediaries, their political patrons, and the surveillance state.

Second, the film business sits on top of a wider system of educational and commercial opportunities for creative professionals.  Some recent MPAA-funded research puts direct employment in Chinese film production and distribution at around 75,000 jobs in 2011, amidst a much larger broadcast, cable, and satellite TV sector. (It doesn’t mention that the studios are the main threat to those jobs.)   What if, in five years, Chinese films have something approaching 3% of the domestic market, as has been the case for Taiwanese films in Taiwan for most of the past two decades?  Frederic Martel’s brilliant Mainstream (available in Chinese but not English) describes a plausible outcome: a high-end American-dominated market devoted to hero archetypes, violence, and spectacle (Titanic and Avatar), and a domestic industry bifurcated into a state-subsidized sector producing niche films and documentaries, and a commercial sector producing low-end, localized TV series and movies—the telenovelas and slapstick comedies of 21st century China.

When I presented the Media Piracy report in Guangzhou, a student asked whether piracy was a Hollywood conspiracy to dominate the Chinese market.  This is fertile ground in China, where former president Hu Jintao encouraged the view that the “ideological and cultural fields are the focal areas of [Western] long-term infiltration.”  (His successor, Xi Jinping, appears to be much more accommodating, and was by most accounts instrumental in the new film agreement).  I said I saw no evidence of a deliberate strategy.  Unlike some software executives, who can be indiscreet about the role piracy plays in their business strategies, the studios maintain a solid and, for what it’s worth, I think genuine front of denial on the subject.

But that doesn’t mean it hasn’t worked.  Especially in China, piracy is part of the distribution, branding, and advertising system—not just a drain on it.  Given the spread of very cheap digital tech, the choice isn’t between widespread piracy and strong enforcement, it’s between high-price, high-piracy business models (potentially reinforced by Internet censorship and filtering) and low-price, medium-piracy business models (potentially reinforced by public support).  I favor the latter because, in the end, low-price, medium-piracy models have the best chance of de-escalating the enforcement wars and expanding the legal market.  I think we’ll get them in the US because the enforcement debate has been paralyzed long enough to allow for business innovation.  For the past decade, the Chinese government has made those business model choices.  In the next decade, it looks like the US studios will.