Five years ago, Guo Yuezhou, the CEO of Zoke Culture, China's leading video/DVD distributor, was inundated with requests from his friends for free DVDs of new films.
But in the past few years, the requests have dried up. These days his friends are using the internet to watch movies, both illegally and legally, and Guo saw an opportunity.
'My friends are not particularly technological or computer nerds,' he explains. 'I thought, 'If they are doing it, you can imagine how widespread it is to watch movies online.''
With 210 million internet users in 2007, up 53% on 2006, China is now second only to the US's 215 million, according to China's Internet Network Information Centre (Cinic). Of these Chinese netizens, 160 million are wired for broadband.
By the end of 2008, it is estimated the number of web users in China will reach 321.9 million - half the global plugged-in population.
According to the Cinic, 90% of China's web-users are accessing entertainment content or information.
The speed of China's online development, not to mention rampant DVD piracy, means the digital delivery of films to home computers is beginning to leapfrog the video/DVD window.
A new generation of entrepreneurs has spotted a huge opportunity to beat the pirates at their own game, offering legal downloads of films to China's burgeoning middle class for as good as free (and literally for free in the case of Quacor.com) and securing lucrative deals with local and international rights holders.
Before 2004, all of China's film download services were illegal. Li Luyang, president of Quacor.com, estimates that between 2006 and 2007 this improved so only 90% of the online movie sites were illegal. This is slightly better than the 93% piracy rate in the video/DVD sector.
Significantly, in the past year, the Chinese authorities previously relaxed attitude to copyright theft seems to have changed. Several production companies and new-media distributors, including Huayi Bros and Edko, have successfully sued illegal film download sites.
Last year, Sohu.com was ordered to pay $150,000 (rmb1.08m) to five US studios - Twentieth Century Fox, Warner Bros, New Line Cinema, Columbia Pictures and Universal - for illegally making 10 US films available to download.
'We want to let overseas companies, especially Hollywood studios know that if they license to legitimate companies like us, we'll try very hard to protect their intellectual property rights because it's to our benefit too,' says Li.
Almost all the legal film sites now have a department dedicated to intellectual property rights (IPR) protection and there is a network of more than 50 IPR lawyers across the country. 'In fact, prosecuting an illegal website might be easier than locating an illegal DVD factory or warehouse,' says Zoke's Guo.
He began to acquire new-media rights, in addition to his usual video/DVD rights, from China's major film and TV production companies about 18 months ago. He handles deals for many popular film-streaming and downloading sites such as BBVod.com, Youdu.com and Tudou.com.
The legitimate websites now making feature films available for download include Beijing Netmovie Co, Youdu, BBVod, Jeboo as well as Quacor. Several portal sites, including Sina and Baidu, offer video-streaming services, but not usually of films.
The DVD sector is taking the hit. 'It's been dropping more than 50%,' says Guo. 'Two years ago we could sell 2 million discs of a movie. Now we could barely shift a million.'
At present, according to Li, who buys film rights directly from the producer, the cost of new media rights to a film are about 30%-50% of its DVD rights. 'But the price gap will be smaller in the near future,' he warns.
Sinking the pirates
Low prices, convenience and unlimited entertainment viewing services are the reasons film downloads are catching on with the Chinese public. What is more, the legal download sites are undercutting the pirates: $0.15-$0.30 (rmb1-rmb2) to download a film or $2.80 (rmb20) a month for unlimited films, versus $0.70-$1.40 (rmb5-rmb10) for a counterfeit DVD on the streets.
The majority of China's internet users have a monthly income of less than $420 (rmb3,000). In the battle against the online pirates, the legal sites use improved quality as their biggest weapon.
Beijing-based production outfit Huayi Bros Pictures reports an increasing interest from download sites such as Netmovie.com. More than 15 companies approached Huayi Bros for internet, Iptv (internet-protocol television) and mobile distribution rights for last year's hit film, Feng Xiaogang's The Assembly.
'Digital distribution has become a new source of revenue for film companies. More and more of these internet companies are willing to pay high prices for our movies,' says a Huayi Bros marketing executive.
Last year, Netmovie spent $13.9m (rmb100m) purchasing film rights, according to Lai Fung, president of Netmovie.com.
It is also one of the companies attracting the attention of international venture capital companies. Last year, Steamboat Ventures, Walt Disney's venture capital arm, invested in four Chinese video websites and companies: video-sharing site 56.com, video advertising company CTS Media, Netmovie and UUSee, another internet TV platform.
Previously, Netmovie also received start-up investment from International Data Group (IDG), a Boston-based technology media group which invests in many Chinese and Asian technology firms.
For now, the legal websites offer mainly Asian films and TV programmes from China, Hong Kong and South Korea.
Netmovie provides content from Korean broadcaster SBS, Hong Kong broadcaster TVB and Hong Kong producer Mei Ah Entertainment. BBVod has output deals with Sony Pictures Entertainment, MTV and Hong Kong broadcaster ATV, and also buys local films on a film-by-film basis.
Jeboo has released two local blockbusters: Chen Kaige's The Promise and Feng's The Assembly. Quacor took rights for Jiang Wen's The Sun Also Rises, and hundreds of French films picked up via Tang Media.
Typically, deals run exclusively for one or two years. All are eager to acquire Hollywood titles and say they are in talks with the US studios.
But a further challenge looms. In January, China's Ministry of Information Industry and State Administration of Radio Film and Television, the two government bodies charged with regulating internet business and broadcasting in China, jointly announced a plan to restrict video websites such as YouTube and only allow state-owned firms to offer internet video services.
Legal sites may have to stop offering short films or sell short-film content to state-owned sites.
It is seen as a new regulation to prevent sexually explicit, violent and politically sensitive material being posted online. At press time, details of the new ruling had not been announced.
'We are still observing how the new regulation will be implemented and how it will influence the market,' says Zoke's Guo. Significantly, he says he has no plans to shift entirely from video/DVD to online distribution.
'We believe regulation is good for the environment and will only affect websites of illegal or pirated contents,' says Quacor's Li, a sentiment echoed by Netmovie's Lai. 'As long as we have the legitimate contents, we won't worry about having no place to show the contents. After all, content is king.'