HOLLYWOOD studios are set to break into China's massive Internet market as domestic video sites scramble to screen United States movies and dramas on their digital platforms, a move which could also curb rampant piracy.
China's Youku's and Sohu's online video platforms have already cut deals with Disney and CBS Corporation to stream US drama serials such as "Desperate Housewives," "Grey's Anatomy" and "Gossip Girl," and more such deals are expected.
This represents a lifeline for Hollywood studios which have struggled to make money in China due to persistent piracy and the country's quota system that limits the number of foreign movies screened in theatres to 20 per year.
"Major Hollywood studios have struggled to find a viable business model in the China market and cooperating with China's online video sites for paid viewing of their content finally gives them a way to make money here," said Mark Natkin, managing director of Beijing-based consultancy Marbridge Consulting.
China is the world's largest Internet market, with more than 450 million Internet users, and online video firms are stepping up their fight to secure a bigger piece of the market share to win advertisers.
Advertising revenue in the domestic online video market, which was virtually non-existent five years ago, is now estimated to be worth 1 billion yuan (US$155 million). This is expected to grow at a double-digit rate for the time being.
Online video providers such as Youku have also started pay-per-view for some movies, thus giving them a new source of revenue.
Analysts say it's still too early to assess these deals' financial impact on Hollywood studios over the longer term, but agree that this offers a entry point for Disney and others to the world's second biggest economy.
For online video providers, buying international content is not cheap, with payments for licensing fees needed upfront. But it's well worth the risk given the rapid growth in the world's biggest Internet market and growing appetite for Western movies.
Avatar, James Cameron's blockbuster, was the highest-grossing movie in China last year, raking in 540 million yuan in only 15 days. Although they form a small percentage of movies screened, Hollywood movies drew 44 percent of all 10 billion yuan in sales receipts in 2010.
Vincent Tao, chief executive of online video site China PPLive that has a deal with News Corp's Fox Network, said Hollywood studios are now finding an avenue to expand into China though the regulatory landscape is still tricky.
"We want to introduce a lot of (Hollywood) movie content and we need to get permits but the online permits are much more flexible than the theater quotas," Tao said.
Youku, China's largest-listed online video player, launched its Premium Channel in June, after signing a deal with Warner Bros Entertainment's local joint venture to offer pay per view movies.
Under the three-year deal, Youku will add 400 to 450 Warner Bros movies to its line-up. The deal is the second major Hollywood deal Youku has signed in less than a year. Last September, Youku bought 259 episodes from Disney.
Analysts forecast Youku to break even next year after an expected loss of US$17 million loss this year.
Warner Bros, Youku and Disney declined to comment on the financial size of the deals. Buying broadcast rights for a Hollywood series with 20 episodes costs about US$300,000, according to a Reuters calculation based on available industry data.
Youku is contracted to buy at least another 259 television serial episodes this year from Disney with an announcement likely to come in September, a source familiar with the matter said.
In China, which has long been under fire from Western countries for widespread violation of intellectual property rights, it is often difficult to find legitimate Hollywood DVDs or CDs in shops.