TWX Time Warner Inc. New

By Ben Fritz and Shalini Ramachandran 

Rather than wait for China to open its doors to Hollywood, Warner Bros. is making a big play to take up residency in China.

The Time Warner Inc.-owned studio is in talks with China Media Capital, a state-backed investment fund focused on the entertainment industry, to form a joint venture that would produce local-language films, people with knowledge of the potential partnership said.

The expected pact is a show of faith that the world's fastest-growing major film market will continue to devour motion pictures, even as Wall Street sweats about growth prospects for the overall Chinese economy.

Hollywood studios have worked with partners in China to produce movies there in the past, usually on a one-off basis. The Warner deal, which is intended to make numerous films annually, appears to be the largest and most expansive of its kind.

It wasn't immediately clear how many movies the joint venture would produce or how much money each partner would invest. It's also possible that the recent financial turmoil in the country could make closing the deal more challenging.

Despite China's recent economic slowdown, the Chinese box office continues to expand at a rapid clip and local productions are taking a bigger share.

While total box office in China is up 43% so far in 2015 to $4.3 billion, ticket sales for Chinese productions are far outpacing those for movies coming out of Hollywood. Local-language movie grosses have risen 63% to $2.6 billion and imported movies are up 21% to $1.7 billion, according to research firm Artisan Gateway.

Among the top 10 movies in China so far this year, only four are Hollywood imports. The locally made "Monster Hunt" has grossed $346.2 million and is poised to surpass "Furious 7," which grossed $379.1 million, as the most successful movie ever in the country.

That trend, combined with China's import quota, makes a partnership to produce locally critical for any American film company looking to make more money in the country. The Chinese government allows only 34 movies to be imported per year on a revenue-sharing basis-- the only terms that major Hollywood studios will accept. The deal governing that quota runs until 2017.

Films made locally also qualify to keep a significantly higher percentage of box-office revenue than imported ones, which are capped at 25%.

Time Warner invested $50 million into China Media Capital two years ago, a partnership that led to the current discussions by Warner Bros. Chief Executive Kevin Tsujihara's team. The negotiations have been going on for many months, said a person with knowledge of the matter, due to the complications of forging deals and getting government approvals in China.

China Media Capital also invested in a joint venture through which DreamWorks Animation SKG Inc. is producing movies in Shanghai, including the coming "Kung Fu Panda 3."

Legendary Pictures LLC recently wrapped production on "The Great Wall" starring Matt Damon, the first movie under a partnership it formed with state-backed China Film Co.

Both of those deals are intended to make movies primarily in English for global audiences, in contrast to the arrangement Warner Bros. is pursuing.

As with most joint ventures Western companies enter in China, including Walt Disney Co.'s theme park under construction in Shanghai, Warner Bros. would be a minority shareholder. However, its executives are expected to play important roles in getting film production off the ground, bringing their expertise as China seeks to build its culture industry.

At a Time Warner investor day presentation last year, Mr. Tsujihara said expanding local-language production in China would be a priority for his film and television studio, known for the Batman and Harry Potter franchises as well as "The Big Bang Theory."

Write to Ben Fritz at ben.fritz@wsj.com and Shalini Ramachandran at shalini.ramachandran@wsj.com

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(END) Dow Jones Newswires

August 25, 2015 00:15 ET (04:15 GMT)

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