Hollywood Cheated of Millions at China Box Office, MPAA Audit Finds (Report)

PricewaterhouseCoopers has discovered that ticket sales in China were underreported by as much as 9 percent last year.

Chinese cinemas have been skimming millions in ticket revenue from the Hollywood studios, an MPAA audit of the country's massive theatrical film market has found.

According to a Wall Street Journal report published early Tuesday, PricewaterhouseCoopers, investigating on behalf of the MPAA, has discovered that ticket sales in China were underreported by as much as 9 percent in 2016, which amounts to at least $40 million in missing revenue for the six major U.S. studios.

International film studios are currently entitled to a 25 percent share of box-office revenue in China, and the U.S. studios' films officially grossed $1.87 billion there last year — which leaves a take-home of about $470 million.

With China expected to surpass North America as the world's largest theatrical market sometime in the next five years, U.S. studios have grown increasingly reliant on strong returns from the Middle Kingdom to prop up the global performance of their biggest tentpoles. For example, both Universal and Paramount's biggest movies this year — The Fate of the Furious and Transformers: The Last Knight, respectively — earned more in China than in North America.

But Chinese cinemas have been known to employ various tactics to game the system. The MPAA's auditors found incidences of fraud during their inquiry, including unreported screenings, under-reported audience sizes and ticket sales miscategorized as concessions, the Journal's sources, which were unnamed, said.

The MPAA's member studios have long been concerned about skimming in China. Under mounting pressure from the lobbying group and U.S. trade officials, China secretly agreed in 2015 to allow the first independent box-office audit to take place within its borders, sources told The Hollywood Reporter at the time. That investigation finally got underway this past summer.

PWC reviewed Hollywood's 29 biggest movies released in China in 2016, and investigated 125 screens run by 27 different cinema chains in cities large and small across the country, the Journal's sources close to the auditors said. The results were then used to generate estimates for China's 43,000-plus screens, which is the world's largest count.

The exercise is understood to be just the first of more MPAA audits to come.

The Hollywood audits are involved in the ongoing renegotiation of the U.S. film industry's terms of doing business in China. A prior five-year trade agreement — which covered everything from how many U.S. movies China accepts into its cinemas to what share of revenue Hollywood studios are entitled to take home — expired in February. Officials from the two nations are now at work on a new agreement, with the U.S. side pushing for greater market access and a fairer playing field, and the Chinese looking to safeguard the development of their still-nascent domestic industry.

Beijing is known to share Hollywood concerns about the malfeasance within its multiplexes, as fraud cuts into the earnings of local studios, too. Earlier this year, Chinese regulators named, shamed and punished 326 local cinemas for cooking the books — the first major enforcement of a new national film law, which went into effect in March.