This is the final post in a series looking at developments in China’s digital ancillaries market. In this series we’ve seen that China’s ancillaries are still comparatively small despite explosive box office growth. In part 1, I looked at how China leads the world in online consumption and how China’s consumers prefer to use mobile devices to get online. In part 2, I discussed the online convergence of motion picture production and motion picture distribution in China. In part 3, I examined how China film production and distribution are converging in cyberspace.

In this post, I look at the underlying driver of digital ancillaries: the law of copyright in China. Yes, you heard right: the law of copyright in China.

The paucity of ancillaries, particularly from video on demand, has usually been blamed on rampant online piracy. In turn, piracy is usually explained by failures in China’s copyright law, particularly the low damage awards available to plaintiffs in copyright infringement proceedings in China. The reluctance of Chinese consumers to pay for downloads has been another factor contributing to low ancillaries relative to box office. China’s Internet speeds are another factor. For many reasons, until quite recently the only significant online income stream for home entertainment has come mostly from advertising sold on the download platform instead of from payments at the point of download. For more information on the advertising media spend in China see PWC’s recent report on that topic.

There are signs that China’s box office dependency is fading and that ancillaries are set to grow substantially in home entertainment. Chinese consumers are increasingly willing to subscribe to advertising-free premium services in which content sits behind a paywall. This is consistent with developments reported in other media sectors, including book publishing, where Chinese consumers are increasingly prepared to buy genuine titles imported legitimately by foreign publishers. The emerging middle class is apparently prepared to pay for the real thing as a matter of status or even vanity.

According to Eric Priest, the turning point seems to have come in 2009, when Coca-Cola and Pepsi were sued in China for contributory copyright infringement because their advertisements were associated with piracy on Youku. The case was brought by members of a group calling themselves the China Online Video Anti-Piracy Alliance.

Apparently fearing a loss of substantial advertising revenues in light of this case, Youku and other Chinese user-generated content sites began to take down pirated content and obtained exclusive licenses from a range of copyright owners. The argument is that this case, and others like it at the time, led to growth in online licenses for popular Chinese shows as well as American programs. There is no denying that license fees grew significantly during this period. Between 2009 and 2011, online license fees for some popular Chinese programs went from around $1,600 per episode to $300,000 per episode.

The point is that over a very short period of time, China’s much-maligned copyright system evolved to a point where it is capable of supporting positive outcomes for the film business online.

Speaking recently at Mipcom in Cannes, Sohu CEO Charles Zhang, who was also a key player behind the Coke/Pepsi proceedings, went so far as to say that China had resolved “90 percent” of its piracy. Though some no doubt view this number as an exaggeration, many would agree with Zhang’s reference to an “explosion in paid content” and conclusion that the “overall situation is very positive”.

Copyright improvements aside, the other driver of this growth in licensing fees is that online distribution does not fit neatly within the traditional categories of media regulation in China. As Clifford Coonan, writing for The Hollywood Reporter, sees it, online has “no quota system, fewer bureaucratic hassles (i.e., less pesky censorship) and far fewer logistical headaches (no need for a middleman in the form of a state-run distributor like China Film Group).” The online world challenges and evades censorship, especially in the micro-film space. Though China’s authorities may force takedowns, it is impracticable for them to censor or approve every program before it goes online in the first place. It will be interesting to watch the regulators resolve these issues with the online companies as the sector continues to grow.