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Summary:

The Motion Picture Association of America released statistics today saying that Chinese theatrical revenue grew 35 percent to nearly $2 bill…

The Motion Picture Association of America released statistics today saying that Chinese theatrical revenue grew 35 percent to nearly $2 billion last year, making China the world’s third biggest film market behind the U.S. and Japan. More quietly, though, a U.S.-based upstart VOD distributor, YOU On Demand, might be emerging as an even greater force for U.S. studio profits in China.

Much attention has been paid to last month’s relaxation of trade restrictions in China, which increased the number of American films that can enter the country each year for theatrical play from 20 to 34, while upping their revenue splits from a paltry 13 percent to a slightly better 25 percent.

However, under the direction of former professional wrestler Shane McMahon — who cut his global media teeth working as an executive under his father, World Wrestling Entertainment impresario Vince McMahon — YOU On Demand is on a trajectory to become an even more lucrative revenue stream for U.S. movie suppliers in the emerging market they view as having the most potential.

The New York-based company — which is in the midst of seeking a listing on the Nasdaq — made headlines last summer, when it signed Warner Bros. to the first ever VOD deal in China. Just within the last month, YOU On Demand has announced similar agreements with Disney (NYSE: DIS), Lionsgate (NYSE: LGF) and Magnolia Pictures, and more big U.S. studio partnerships are expected to be announced soon, a company spokesman told us.

YOU On Demand is just getting started in terms of infiltrating the vast Chinese consumer market, but growth prospects appear promising.

YOU On Demand entered China under a 20-year exclusive contract from the government to run national VOD services. Like other foreign companies entering the Chinese market, its’ doing this via a joint venture — in this case with the Chinese broadcaster CCTV-6 and its pay-TV arm, China Home Cinema. Through that partnership, YOU On Demand’s VOD service is already in 3 million Chinese cable homes equipped with digital set-top boxes via carriage deals with four local cable systems. It is the leading transactional VOD service in China, controlling about 88 percent of the market.

By the end of 2012, YOU On Demand expects to be in 12 million homes with additional cable deals in place. YOU On Demand currently charges consumers anywhere from $1 to $3 per movie rental, but hopes to evolve that to $3 to $5 as more Chinese consumers get used to legally paying to watch American movies. Meanwhile, the company is playing both ends of the business-model spectrum, with plans to also launch a Netflix-like subscription VOD service sometime later this year.

YOU On Demand has been able to entice American studios with a “anything is better than nothing” proposition, given the traditionally rampant piracy of U.S. video content in the region. Going forward, the company projects sizable revenue for its U.S. partners, who provide their video content on a revenue share basis under which they control a majority interest.

This split, of course, beats the 75-25 arrangement the Chinese government has agreed to for U.S. theatrical releases in the country. Also, U.S. VOD suppliers aren’t subject to the same 35-movie-per-year quota that they endure on the theatrical side.

BTIG Research analyst Richard Greenfield in a blog post Wednesday: “Whether or not YOU on Demand remains the leader in transactional VOD and can successfully enter the SVOD business in China, the Chinese VOD/iVOD and SVOD ancillary revenue market should be an increasing focus of global media investors over the next couple of years.”

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  1. Very interesting.

    1. I’ve been living in China and traveling to a number of the major China cities and I’ve never heard of this company. I subscribe to digital cable and I can’t find its service on the menu. I also know that as recently as last year, the most successful VOD service was a Hangzhou based government entity called Wasu… I went to it’s Chinese website to check out the service and it seems to be partnering with Jinan AFT (a local and not national arm of SARFT).

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