The Chinese film industry regulator State Administration of Radio, Film, and Television ("SARFT") issued a set of new guidelines to promote the harmonious development of film production, distribution and exhibition (the "Guidelines") on November 29, 2011.
The Guidelines provide certain suggestions on how box office receipts and advertising revenues should be shared among the different industry players and how theaters should be operated. Specifically the Guidelines have the following suggestions:
- Theaters should, in principle, share no more than 50% of the box office receipts from a first run exhibition;
- Annual theater rental should not exceed 15% of its annual box office revenue;
- If any theater wishes to join a theater circuit, the minimum franchise cooperation term between the theater and a theater circuit should be 3 years; and if during the cooperation period, the theater wishes to join another theater circuit, then it could only do so if more than 50% of the total equity interest of such theater is being acquired by the second theater circuit, AND if the first theater circuit consents; and
- The theater operators, as oppose to the film producers, should have the right to display advertisements before the exhibition of a film and the advertising revenues should belong to the theater operators.
Even though the various industry operators are not mandatorily required to follow these Guidelines, it would not be surprising if SARFT decides to codify these Guidelines in the near future. The Guidelines have the following impact on the film makers and the theater operators:
- We understand the current practice for the split of box office receipts between film makers and theater operators (including theater circuits) is around 43% and 57%. The Guidelines lift the revenue share for film makers. However, if the theater operators obtain the right to the advertising revenue generated from the exhibition of the movie, then the theater operators will be able to make up the loss from the box office receipts.
- If a theater circuit plans to acquire a theater in the future which has joined another theater circuit through a cooperation contract (which would need to be at least 3 years under the Guidelines), the acquiring theater circuit would need to obtain the first theater circuit's consent, and this may constrain the ability of the acquiring theater circuit to roll out its theater network quickly.