With its huge broadband andmobile phone subscriber base, not to mention its ability to leapfrog entireepochs in the evolution of consumer technology, China is well placed to set trends in the distribution ofmovies over new media platforms. But as with the country's traditional media,high levels of piracy, censorship and patchy infrastructure are holding themarket back.

China has the largest mobile network in the world - around 420 millionsubscribers - and at last count had 123 million internet users of which 77million have broadband, according to the China Internet Network InformationCentre. It also has a young audience that is largely indifferent to the stodgystate-controlled offerings on terrestrial television and, due to import quotasand lack of distribution infrastructure, no legal access to a wide range offilms.

There have been some TVratings hits, such as Hunan Satellite TV's SuperGirl singing contest, but on the whole, younger audiences have turned enmasse to the internet and mobile phones for entertainment. The online gamesindustry is worth $650m a year and China's netizens are also spending their leisure hoursfile-sharing, blogging, surfing YouTube and using instant messaging servicessuch as QQ.

Therefore it's no surprisethat after being locked out of China's traditional media, global players such as NewsCorp and Viacom are now focusing their energies on wireless and broadbandplatforms. China still doesn't have 3G mobile phone and InternetProtocol TV (IPTV) services, but trials are underway, and both local andoverseas telcos, broadcasters and content companies are jockeying for position.

In June this year, News Corpsold half its stake in satellite broadcaster Phoenix TV to China Mobile andestablished a strategic partnership with the cell phone giant to explorewireless media business opportunities. More recently, Viacom's MTV Networks announceda content and advertising alliance with China's largest search engine Baidu, that enables users todownload 15,000 hours of video and music content from MTV and Nickelodeon.

But of course most of themovie content that is being downloaded in China is being done so illegally and for free which isdifficult to compete with. And while piracy accounts for more than 90% of theDVD market, a growing number of distributors are working hard to carve out alegitimate market through major retailers such as Carrefour and Walmart.Working against the odds, these upstart DVD distributors are keen to protect asmall but growing market and understandably see online distribution as athreat.

The regulatory environmentis also slowing down the roll-out of new media platforms. China has separate regulatory bodies for film and TV(SARFT), video (Ministry of Culture) and the communications industry (Ministryof Information Technology) and their conflicting interests complicate thelaunch of platforms based on convergence such as IPTV. Ironically however, thiscould also work in favour of content owners licensing to existing downloadsites, according to Media Asia distribution chief Jeffrey Chan.

"China has just set up newrules for copyright over new media platforms - so we can license within thisnew framework at the same time as doing separate deals for DVD - although thatmeans cannibalising rights from traditional media," says Chan. "This is greatfrom a sales point-of-view but the DVD distributors are not so happy."

Despite their protests, China has a growing number of movie download and streamingservices. Of the country's three major internet portals, Baidu (www.baidu.com) currently has the most moviesonline - including library titles from Hollywood and Korean studios - under a download-to-rentsystem. Sina (www.sina.com) is currentlystreaming around 15 movies, mostly Chinese titles such as Dragon Tiger Gate licensed from Beijing-based Polybona, althoughSohu (www.sohu.com) is so far only offeringtrailers.

There are also a number ofwide-band VoD sites emerging which are buying films from both local and foreigncompanies for streaming and download-to-rent. Shanghai-based BBVod (www.bbvod.net) has acquired local titles suchas Huayi Brothers' A World WithoutThieves and signed a deal with Sony Pictures Entertainment in September tooffer almost 100 movies online. Also based in Shanghai, Youdu (www.51tv.net)bought The Banquet from HuayiBrothers, and Beijing-based NuCom Media Group (www.nubb.com)has licensed Chinese-language movies CrazyStone and Phone Number 601 fromWarner China Film.

Another interesting trend isthe emergence of companies that are forming distribution networks amonginternet cafes, along the same lines as cinema chains. Chinese authorities haveissued licenses to several of these companies that are now acquiring movies fordownload through the chains. One of the most prominent, Netmovie (www.netmovie.com.cn), claims to have15,000 hours of legal film and TV content licensed from local producers such asChina Film Group and Hong Kong-based Media Asia.

The company, which attractedan initial investment of $4m from venture capital firm IDG last year, sellspre-paid cards to internet cafe users, who can watch a movie for as little astwo yuan. Netmovie takes 70% of revenues while the cafes take the rest. Themodel is a smart one for China where the internet population is nomadic as mostpeople can't afford a computer at home. It's estimated that China has around 130,000 internet cafes nationwide, ofwhich around 10,000 have already been organised into chains.

Meanwhile in Hong Kong, two local distributors, Mei Ah Entertainment and IntercontinentalGroup, have dipped a toe in the water by launching experimental download sites.But progress has been slow because the Hong Kong industry is preoccupied with fighting illegal downloading and has ashrinking but still significant DVD market to protect.

In this market, which hasless piracy and a more open regulatory environment, IPTV is fast becoming themedium for movie-on-demand services. Dominant fixed-line and broadband operatorPCCW has moved into the content business with its hugely successful NOWBroadband TV service which is the world's largest IPTV service with 654,000customers. It streams 118 channels on an "a la carte" basis to set-top boxes,including exclusive channels such as HBO and Star Movies, and recently added aVoD component NOW Select.

However, PCCW doesn't have astandalone business model for its on-demand content. Rather it charges anadditional flat monthly fee for access to the on-demand material on channelssuch as Star Chinese Movies and Mei Ah's movie channel. For example, customerswho are subscribing to Star Chinese Movies can pay an additional $2 (HK$15) amonth for access to around 100 movies on-demand, some of which are classics andsome current.

"We have to be carefulbecause we're streaming content and don't want to upset the content providersby building a new library that basically cannibalises their channels," explainsPCCW head of strategic market development Paul Berriman, who describes theservice as 'subscription-on-demand'. "Also this is our second time in thepay-TV business and during the first time, which was entirely on-demand, itbecame clear that telcos are not that good at acquiring, managing andprogramming fresh content. But the channels can give us pretty much everythingwe need."

In China, where IPTV services are being tested but haven'tyet been launched, content owners both local and foreign are proceedingcautiously with licensing library titles to wideband download and streamingservices. But it will take time for Chinese net players to win their trust. Atpresent, many otherwise legitimate companies are putting content on their sitesthat hasn't been licensed - or at least not from the correct party - and thereare concerns that Chinese platforms,

which are only buying rightsfor China, aren't using the DRM systems that limit downloadsto this one territory.

There have been horrorstories of web-sites offering a movie online with no more security than a signwarning users not to download if they live outside China. "We're sending them letters to explain," says MediaAsia's Chan. "Hollywood is moving towards downloads, so we all willeventually, and some sites we're working with are changing the way they behavebecause they want to attract venture capital."

Meanwhile, film sales companiesin the region are grappling with the same issues surrounding windows and thevalue and definition of rights that the rest of the global industry isconcerned with. Most are used to a licensing environment in which VoD and PPVare bundled with pay-TV rights but believe that the internet download-streamingwindow will encroach on the space currently occupied by DVD. In keeping withthis theory, definitions for internet rights - such as "download-to-rent" and "download-to-keep"- seem to mirror the existing definitions of video rental and sell-through.

Celestial Pictures' GordonCheung, who licensed video rights to the Shaw Brothers library worldwide, sayshe deliberately excluded VoD from these deals. "Our distributors were paying bigadvances so we didn't want to hurt their business," says Cheung. Now thesevideo deals are in place, Celestial is licensing the library to services suchas Singapore-based VoD provider Anytime and US-based online distributor JamanWorld Cinema, but the films will be made available after their release on DVD.

With the emergence of IPTVservices, internet rights are also being broadly divided into "closed" systems,that are delivered to set-top boxes, and "open" systems, accessible to anyonewith a broadband connection and a PC.

Anytime - which is licensedto operate in 14 Asia Pacific territories and has output deals with four US studios - currently provides content to closedsystems, but plans to also launch an open delivery system, most likely startingin Australia in the first quarter of next year. The new service,Anytime TV, which will use Intel's Viiv technology, is not limited to closed networksor set-top boxes, although it can be viewed on a range of devices - not justthe PC.

"We want to be the iTunes ofAsia," says Anytime president Craig Zimbalis. "People areworried about losing DVD revenue in the same way they thought home video wasthe end of cinema. But the overall pie is growing and this is the mostconvenient and efficient way to consume of all."

But for local salescompanies trying to navigate the new licensing environment, there are no easyanswers. Many sellers say they're trying to hold back internet rights wheneverpossible because they're not sure of their future value. "But it's difficult toexclude them if you're doing a mega deal with a US studio," says Emperor Motion Pictures CEO AlbertLee. "There are lots of grey areas but we recognise that in the future this maybe the most important way to sell films."

When it comes to their ownbackyard, local film sales companies have also recognised that the Chinesegovernment at least has the intention to build an efficient and secure digitalnetwork across multiple platforms to speed growth of its contents industries. China also has the largest and most effective legal andtechnological systems for internet censorship and surveillance in the world. Ifit exercised similar concern for digital rights management, it could become a worldleader in distribution of content over new media platforms.

But if the government getsit wrong, China will continue to be a black hole as far as entertainmentlicensing and legitimate revenue is concerned - albeit one that the rest of theworld is eagerly peering into.