An advertisement of the movie Lord of War on Youku.com, a Chinese online video website. Some Hollywood studios began to provide movies to China's online entertainment platforms. [Photo / China Daily]

SHANGHAI - Hollywood studios are set to break into China's massive Internet market as domestic video sites scramble to screen US movies and dramas on their digital platforms, a move that could also curb rampant piracy.

Youku.com Inc's and Sohu.com Inc's online video platforms have already cut deals with The Walt Disney Co and CBS Corp to stream US dramas such as Desperate Housewives, Grey's Anatomy and Gossip Girl, with more such deals expected.

These deals are a lifeline for Hollywood studios that have struggled to make money in China due to persistent piracy and the country's quota system, which that limits the number of foreign movies screened in theatres to 20 annually.

"Major Hollywood studios have struggled to find a viable business model in the Chinese 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 users, and online video firms are competing for market share to win advertisers.

Ad revenue in the domestic online video market, which was virtually non-existent five years ago, is now estimated at 1 billion yuan ($155 million). This is expected to grow at double-digit rates for in the short term.

Online video providers such as Youku have also started pay-per-view (PPV) for some movies, providing a new source of revenue.

Analysts say it's still too early to assess these deals' financial effect on Hollywood studios, but they agree that this offers a long-awaited 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 China's Internet market and growing appetite for Western movies.

Avatar, James Cameron's blockbuster flick about an alien race, 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 films drew 44 percent of all 10 billion yuan in sales receipts in 2010.

Vincent Tao, chief executive of online video site China PPLive, which has a deal with News Corp's Fox Network, said Hollywood studios are 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 of course we need to get permits, but the online permits are much more flexible than the theatre quotas," Tao said.

Listed online video player Youku launched its Premium Channel in June, after signing a deal with Warner Bros Entertainment Inc's local joint venture to offer PPV 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 $17 million loss this year.

Warner Bros, Youku and Disney all declined to comment on the financial terms of the deals. Buying broadcast rights for a Hollywood series with 20 episodes costs about $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.

"We see many positive signs for the relationship to develop," said Jean Shao, a spokeswoman for Youku, who declined to comment on the contracts.

According to the latest research by the Motion Picture Association of America, China had a piracy rate of 90 percent, causing a total revenue loss of $244 million to its member companies in 2005.

"It's a significant win in terms of respect for intellectual property," said Michael Clendenin, managing director at technology consultancy RedTech Advisors .

Reuters