Hollywood urged to look toward Web in China

Report says industry risks losing piracy war by not adapting

Related: U.S. claims victory in China piracy complaint

BANGKOK -- Hollywood studios must learn to use the Internet the way the Chinese do or risk losing the war against movie piracy, according to a new Wall Street report.

Though China's 1.3 billion people and 7.6% GDP growth are still "a powerful siren call" to media companies, piracy "makes it almost impossible for many players to make money with their traditional media models," Sanford C. Bernstein analyst Jeffrey Lindsay said in a note published Jan. 23.

Just days after Sony opened China's first Blu-ray Disc factory near Shanghai and the MPA touted the jailing of a Chinese man for selling fake broadcast licenses, Lindsay wrote that Hollywood risks becoming an industry stuck selling its product via badly outdated means.

After all, he notes, Blu-ray discs are being ripped off and sold in China's streets for a fraction of their $30 price tag, yet China's online games sector is on track to generate $3.5 billion in 2009, largely from adaptations of Kung Fu books and movies.

"Rather than agonize about ways to get the Chinese government to enforce Western copyrights, China should really be considered a test lab for new media models. The West can learn a great deal from the way the Chinese media players make money," Lindsay wrote.

If the report has one clear theme, it's that cyberspace must be the focus of distribution. Key to that strategy is reaching one of the country's most focused demographics, the several hundred thousand gamers who gather simultaneously across the country in online clans to play martial arts and fantasy adventure games on the Web.

"People these days increasingly seem to want to actually be in the movies themselves, which is really what online role playing games are all about," Lindsay writes. "The way forward once again is to recreate the live-movie experience but in cyberspace -- something the counterfeiters cannot replicate."

Lindsay suggests that Warner Bros.' "Harry Potter" franchise or any number of Disney library titles could yield gaming adaptations capable of providing "multiyear revenue streams that would attract literally hundreds of thousands of simultaneous online players."

Other suggestions include offering virtual screenings of movies via the Internet and charging for access by pre-paid card; or offering different versions of films with interviews and commentary from the stars.

Ultimately, Hollywood is dealing with a deep-seated cultural problem when it comes to the Chinese market, according to Lindsay, who offers a Cultural Revolution-era slogan as Exhibit A: "Is it necessary for a steel worker to put his name on a steel ingot that he produces in the course of his duty? If not, why should a member of the intelligentsia enjoy the privileges of putting his name on his intellectual product?"

In Lindsay's view, the death knell for China's weak attempt at IPR protection sounded in Nov. 2007, when the courts excused the search engine Abide from any liability for all the illegally copied music that could be found using its services.

At the consumer level, where it matters most for companies selling entertainment, China is only now trying to build a new legal framework. But, Lindsay writes, it's doing so "within a society that grew up in an era when property rights were meaningless."