The Securities and Exchange Commission (SEC) is investigating whether major Hollywood studios have bribed members of the Chinese government to get a leg up in the country's fiercely competitive movie market. The SEC is pursuing the probe under the Foreign Corrupt Practices Act (FCPA), which bars U.S. companies from making illicit payments to foreign officials. Reports of the investigation are shedding light on the often opaque business deals that proliferate in China, and could become an embarrassment for the Obama administration, which has pushed China to give Hollywood greater access to its markets. Here, a guide to the controversy:
Which studios have been implicated?
The SEC has sent letters of inquiry to at least five Hollywood studios, including 20th Century Fox, Disney, and DreamWorks Animation.
Why is Hollywood so keen on China?
Hollywood sees China, with its massive population and a rapidly growing middle class, as an irresistible source of revenue growth, particularly at a time when fewer Americans are going to the movies. China has about 6,000 movie theaters, which is expected to climb to 40,000 by 2040. By 2015, movie revenue is projected to reach $5 billion.
Why would studios bribe Chinese officials?
The problem is that China allows only 34 foreign movies to be shown in its theaters per year, meaning studios have to compete for precious few slots. The SEC investigation suggests that some studios possibly took shortcuts to win approval for their movies.
How is the Obama administration involved?
Under Obama, the SEC has ramped up its investigations of FCPA violations while simultaneously urging China to open up its movie market to U.S. studios. When Chinese Vice President Xi Jinping — who is widely expected to be the country's future president — visited the U.S. in February, China was screening only 20 foreign movies per year. The expansion to 34, which requires that the 14 additional movies be shown in Imax or 3-D formats, was reportedly negotiated between Xi and Vice President Joe Biden. China also agreed to let U.S. companies keep 25 percent of box office proceeds, up from 15 percent.
Is Hollywood engaging China in other ways?
Yes. DreamWorks Animation, for example, is teaming up with Chinese companies on a $330 million venture to create Oriental DreamWorks, which will produce family-friendly movies. The plan is to try to mimic the success of Kung Fu Panda 2 in China, where the cartoon raked in some $100 million. Disney is filming parts of the next installment of its Iron Man franchise in China, and the movie will also be financially backed by a Chinese company.
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