In June, it emerged that the MPAA had hired an accounting firm to audit Middle Kingdom box office on a select number of films. This was the first time the Hollywood studios availed themselves of a clause in the longform agreement with China which gives them the ability to take their own look at the books.
A report by the Wall Street Journal today says PricewaterhouseCoopers has found ticket sales were under-reported in 2016 by about 9%. Citing people familiar with the matter, the paper said auditors uncovered irregularities such as revenue listed as concession rather than ticket sales, non-reported screenings and incorrect audience sizes.
It’s not clear which titles the audit looked at, but the WSJ says 29 were audited across a small swath of cinemas and screens with the result then extrapolated to account for the market’s more than 40K screens. The lost revenue in 2016 is estimated at about $40M for the majors. The MPAA is not commenting on the situation.
This is a delicate time for such news to come out, particularly given the negotiations between China and the U.S. Trade Representative on a new industry contract. It’s believed those negotiations have been shelved for the time being as China prepares for the October 18 National Congress of the Communist Party which will usher in changes among the top ranks. The film industry negotiations are expected to drag into next year, sources have told Deadline.
While box office manipulation has long been a major issue in China, the vast market has increasingly vowed to crack down on cheats. The decision to trigger the audit was a group call made by the MPAA’s member companies. While it’s a sensitive subject, the practice has happened in other markets and helps gain a better understanding of the exhibition and distribution sectors. In China, they’ve been historically murky to say the least. Per a 2016 Xinhua report, statistics indicate that at least 10% of all box office takings have been “stolen” in recent years.
Currently, Hollywood receives 25% of the box office on its films in China and would like to see that number increased as well as more transparency and flexibility over release dates; and potentially an increase in the number of quota titles (although there are schools for and against as PROC P&A costs rise).
The world’s fastest-growing market is a significant part of Hollywood economics. This year, box office is up some 10%. The Middle Kingdom had its own gargantuan smash in Wolf Warriors 2, while some 10 Hollywood movies have crossed $100M there.
Local players have been slapped for fraud and for giving away millions worth of tickets for “public welfare screenings.” In 2015, there were reports of box office being falsely goosed when moviegoers buying tickets to see Terminator: Genisys were sold entries to propaganda film The Hundred Regiments Offensive so that the coin would go into the local film’s coffers. Write-ins then allowed folks to instead see the film they initially sought. The state stayed silent on that one.
The MPAA and auditors are understood to have presented their recent results to China Film Group in September and its reps were receptive. However, per WSJ sources, they said only a higher government authority could enforce stricter controls on theaters. CFG, which has a commercial interest in box office itself as the main distributor of films locally, is looking at PwC’s findings and is due to report back later this month.
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