SEC asks Hollywood studios about deals with China

David Brancaccio Apr 25, 2012

David Brancaccio: After year of limiting foreign films to 20 a year, the Chinese in recent months have been easing some restrictions. Now there’s a report that federal authorities in the U.S. have asked some American movie studios about whether they’ve had to grease the wheels with cash as they try to break into the Chinese market.

The news agency Reuters says the Securities and Exchange Commission has sent what are called letters of inquiry to Dreamworks, Disney and NewsCorp’s 20th Century Fox and others asking about improper payments, if any.  It’s not clear if the studios are aware of any bribery, but it’s clear the feds are trying to crack down.

Micheal Corty is an analyst with Morningstar covering the big movie studios. Mr. Corty, good morning.

Micheal Corty: Good morning.

Brancaccio: What’s all this about? There are allegations here of possible corruption when it comes to how movie studios branch out in China?

Corty: Yeah. We’re speculating here in terms of what brought about the inquiry, but essentially, Dreamworks and Disney recently have reached agreements with the Chinese government for joint ventures, to essentially have film businesses and movies made in China. For perspective, these media companies have been trying to get into China legitimately for a long time. Obviously in China, piracy is rampant. But all U.S. media conglomerates really want to get into that China market, and they’ve really been thwarted because China has their own designs on creating their own media companies at some point.

Brancaccio: If they could crack this market, this would be the big one for them though.

Corty: It would be; there’s a lot of conditions on that in terms of controlling what content is shown, how the economics are shared. I think these U.S. companies are willing to take lesser economically at the start in hopes of gaining better economics in China over time.

Brancaccio: But if in the fullness of time this investigations show that money changed hands in an inappropriate way, this could be a big problem — I mean, look at the story The New York Times had about Wal-Mart just the other day…

Corty: Sure. Yeah, I think I would distinguish these stories here. That’s a story that happened a long time ago with Wal-Mart and they essentially tried to cover it up. And you could argue that Wal-Mart might have had an advantage given their size. Here with China it seems like they’re open to all these different media companies, so this is all speculation.

But one thought I had is that obviously, if more U.S.-based businesses that want to do open business in China legitimately, I think there are some right concerns how just how these deals got done. Because that’s not going to be media companies over time — it’s going to be other businesses wanting to go into China as well.

Brancaccio: Michael Corty is an analyst with Morningstar. He keeps a close eye Dreamworks, Disney and 20th Century Fox. Mr. Corty, thank you.

Corty: Thanks for having me.


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