Liz Shackleton examines how China is racing ahead of other markets in terms of digital delivery of film.

Anyone who is puzzling over what the world will look like when digital distribution dominates all aspects of the film business, might want to hop on a plane and visit Beijing.

On a recent trip to the Chinese capital, I was struck by how far the country has progressed in the deployment of digital technology. Unlicensed content still accounts for the vast majority of downloads and streaming activity, but China’s internet pirates are starting to clean up their act as they chase after ad dollars and listings on the New York stock exchange. 

Companies such as Youku, Tudou and Ku6 – all local versions of Youtube, which is banned in China – are in talks to acquire movies from the US studios and claim to be employing hundreds of internet monitors to remove unauthorised content from their web-sites. When Youku, founded by former Sohu president Victor Koo, launched on the Nasdaq earlier this month, it raised more than $200m, at least $25m of which it plans to invest in content acquisition.

Smaller companies such as Union Voole and LeTV, which rely on subscription fees rather than ad revenue, are also acquiring legal content and developing set-top boxes to stream HD movies to television sets – the local version of AppleTV. 

In the theatrical space, China now has around 5,000 screens, of which more than 3,000 are digital and most of those are equipped to handle 3D. Almost 70% of the box office for this summer’s blockbuster, Aftershock, came from digital screens. “Digital is now the mainstream,” says Zhang Baoquan, chairman of digital exhibitor Time Antaeus. “We expect by the end of next year, China will be fully digital as more than 90% of box office will come from digital cinemas.” Even if he’s being overly optimistic, most pundits give it another two or three years before it becomes economically unfeasible to distribute film prints across the country. 

The reason China is racing ahead – in addition to its rapid economic growth – is that it doesn’t have the legacy issues of other markets. It didn’t have a huge cinema infrastructure before China Film started subsidising the costs of digital conversion, and most new cinemas come equipped with digital screens and projectors for 3D. The country also never had much of a DVD market and younger people are not interested in watching the government-controlled content on TV. Some broadcasters have tried to introduce compelling programming – such as Hunan TV’s Super Girl singing contest – but on the whole young people are in the habit of searching on the internet for what they really want to see.

The issue of windows and the vested interests they protect is also not a big problem in China, as there is no need to shatter what never really existed in the first place.

Of course, the new online players are not squeaky clean and there are many potential obstacles that could damage their business. It’s a competitive field, which is driving up content costs, and they also have to spend heavily on bandwidth and manpower. And although they’ve been cooperating with government agencies, regulation remains a grey area and there are no assurances that state-owned companies won’t muscle in and try to dominate this burgeoning industry.

But there are many factors in China which could make it the world’s first territory in which digital cinema and the internet become the most common channels to deliver films. The Chinese audience appears to want the social experience of cinema, but is also happy to watch movies on screens of all conceivable sizes. With 420 million internet users, of which 87% are broadband users, the critical mass is there to develop a wide range of content delivery business plans. Celluloid and DVDs may soon become a distant memory in China, along with courtyard houses and donkey-carts on the third ring road in Beijing.