China’s New Tune Encourages U.S. Entertainment Industry

BEIJING —  A Tower Records on the Great Wall? The Forbidden City Virgin Megastore? HMV in the PRC?

While such fantasy scenarios are still a long way off, China’s imminent accession to the World Trade Organization has U.S. companies preparing to move into one of the last areas of China’s potentially lucrative entertainment market still off-limits to foreigners: distribution of music and videos.

Currently, foreign firms can license Chinese partners to produce entertainment products in China but are shut out of distribution and retailing.

To take advantage of the opening, U.S. firms will have to wrest market share away from bootleggers. According to industry insiders, pirated products claim at least 90% of the entertainment market in China, and high customs taxes put legitimate products out of reach for many Chinese consumers.

But U.S. entertainment marketers are optimistic that, by increasing the number of imported titles, cutting middlemen out of the distribution chain and introducing Western retailing techniques, they can begin to turn the tide in their favor.

In September, U.S. entertainment firms were encouraged when Culture Minister Sun Jiazheng said in New York that China will allow foreign investors to set up joint-venture stores to sell music and videos directly to Chinese consumers, a market worth an estimated $7 billion annually.

Sun did not say when the market will be opened, but the pledge is in line with China’s commitment to open the retailing sector to foreign investment once it joins the WTO.

Despite piracy and other problems here, Western entertainment industry executives have welcomed China’s pledges, noting that they open the door, at least in theory, to a massive market.

“The market potential is tremendous,” said Sam Ho, assistant Asia-Pacific director for the Motion Picture Assn.’s international arm. “According to Chinese government statistics, there are more than 30 million CD players in the country. If there’s that much hardware, then the software demand is going to be great.”

Ho said Sun’s remarks seemed to signal a new phase. “In the past, you could do things in China but not speak about them publicly,” he said. “The message now is that the door is open.”

In China, most music and video stores are small one-room storefronts. Only four stores in China have more than 10,000 items for sale, tiny by industry standards, according to the official Press and Publications News. Music titles are too few to be divided by artist. Special displays of new products are rare. The Western music section often consists of a few Michael Jackson, Kenny G or Yanni discs.

According to official statistics, China produces about 200 million compact discs and cassette tapes annually, slim pickings for the country’s more than 60,000 retailers.

China’s system for distributing audiovisual products is an antiquated network of publishing houses licensed by the government. The houses control the quantity of titles, which are distributed by wholesalers.

With the market for legitimate products in a slump, about half the publishing houses operate in the red. Revenue dropped from $217 million in 1997 to $144 million last year, according to figures from China’s Press and Publications Administration.

In a move to protect government publishers and strike at bootleggers, China in March began requiring companies to get government approval to sell audiovisual products through the Internet.

By contrast, black-market purveyors, with their marketing savvy and efficient networks for selling pirated music and movies, are the envy of legitimate firms. “Their distribution channels are much better than ours,” said a Hollywood studio’s China-based manager, who requested anonymity.

Western executives familiar with the Chinese market caution that distributing and retailing such products in China will be tough.

“There are some significant hurdles in the retail business,” said Frank Martin, president of the American Chamber of Commerce in Hong Kong.

“Anyone getting into this market must know it’s going to be a competition between legitimate enterprises and pirates. The problem is endemic, and the [Chinese] government has a long way to go before they get control of it.”

Stuart Fraser, Hong Kong-based commercial director for HMV Media Group Ltd.’s retail operations in China and Southeast Asia, said his company had found not just pirated products in China, but last year in Guangzhou, it even discovered a pirated HMV retail outlet.

“Color schemes, logos, you name it--even the carrier bags and cash receipts were pirated,” Fraser said.

Although Chinese authorities moved quickly to shut the store down, the experience underscored the dangers of the mainland market. Fraser said HMV found out about the store only after a British diplomat living in the city called to complain that he had never gotten an invitation to the grand opening.

“It’s a major problem in our industry, but it’s much more difficult in China than in Hong Kong,” Fraser said.

“We’re hoping the WTO will make the Chinese work harder on this and, if they do, I’m sure the foreign investment will come.”

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Times staff writer Marshall reported from Hong Kong and special correspondent Kuhn from Beijing.