BEIJING -- Chinese auds won't be seeing "Rush Hour 3" on the bigscreen, thanks to a decision last week by government censors, but that doesn't mean the pic won't be popping up soon on other screens all over the nation.

Hollywood's future in China is taking shape not in the country's cineplexes but in thousands of smoky, dimly lit Internet cafes all over the country.

It's a vision likely to send uneasy chills through studio execs.

Typical is the view in one cafe, located up a dirty stairway in a decrepit building off a main street in eastern Beijing: About 60 computer screens fill the gloomy room, and at 5 p.m. on a typical day most of them are in use.

At one sits a teenage boy, his hair fashionably dyed, his cigarettes, cellphone and car keys arranged carefully next to the keyboard. A typical cafe multitasker, he's clicking away in the "World of Warcraft" vidgame on the right side of his screen while in an upper corner, he chats with his girlfriend via webcam. And on the left side of his monitor, in another small window, plays "The Devil Wears Prada" -- a bootleg copy, streamed from an illegal download site.

And that's the challenge for Hollywood: The boy and other Chinese consumers enjoy Hollywood's product, but how do you get them -- or the cafe owners -- to pay for it?

The young man is just one of the 60 million Chinese who use Internet cafes to meet their online needs, according to official data. That represents 37% of China's 162 million Internet users. China has about 113,000 licensed cafes, but there are many more that operate illegally.

Cinemas, by contrast, remain a niche market, with about one screen per 430,000 people compared with one screen per 8,000 people in the U.S.

In the West, an Internet cafe is where backpackers go to check email. In China, it's where kids too poor to afford PCs go to kick back and play videogames, chat with their sweethearts and watch movies downloaded off the Internet. Internet cafes are the new places to catch a movie. "You can even smoke," exults one young man.

Last year, China's Ministry of Culture began requiring Internet cafes all over China to set up a unified online content platform. When the platform is fully operational, the cafes will be fully under the control of the government, which in theory will help thwart piracy. Downloading a film in a cafe, legally, is expected to cost 2 to 3 yuan (between 26¢ and 40¢), with the studios getting a cut.

But right now, most content is free. "It's very easy to find any movie," says one cafe visitor, who estimates that 20% of users come to the cafes to watch a movie.

"Nearly all of the movie-watching that goes on in Internet cafes, as far as we have observed, is of illegal downloads," says Mike Ellis, senior VP and regional director for Asia-Pacific for the MPA.

Not surprisingly, China's richest cities -- Beijing, Guangzhou and Shanghai -- are the largest hubs of illegal online film viewing, with annual averages of 16.9, 16.3 and 15.8 films per person, respectively. But folks in the provincial towns and villages are watching, too.

Internet viewing handily beats TV. In a survey by the China Youth Daily and Sina in January, more than 80% of youngsters say the Web is their primary source of entertainment, ahead of TV, at 66%.

China's largest videoplayer software supplier is Baofeng.com, which offers the free application Baofeng Video. Its research shows that China's Internet users watch an average of 15 films a year online, vs. just .04 films per person in the cinemas. Users watch films by downloading them free or by accessing cafe libraries, which are replenished overnight in off-peak times to save on bandwidth.

While there are regular crackdowns on Internet cafes, such efforts just tend to drive them underground into ramshackle facilities in private homes.

Under strict government licensing rules, cafes are required to log all customers, take note of their ID cards and monitor what websites they're looking at, but in practice, these requirements are difficult to enforce.

Even authorized cafe operators face hurdles. In 2004, the Nasdaq-listed China Unicom was looking to become the country's biggest chain, through partnerships with such service providers as Shanda. But after investing millions of dollars in fitting out cafes, the venture was forced last year to close more than 2,000 outlets, blaming "unreasonable inter-network settlement standards between China Unicom and China's fixed-telecom operators." The fixed-line companies, which also run online facilities, simply priced them out of the market.

But there are some positive signs for Hollywood.

After a case was filed by the MPAA, a Beijing court ordered Sohu Internet Information Service Co., a subsid of the Chinese portal Sohu.com, to pay $140,000 in damages to the studios and apologize for making more than 100 movies available for illegal download.

And the studios are getting in on the technology themselves, negotiating with the likes of BestTV, the Internet Protocol TV (IPTV) unit of Shanghai Media Group, to have their pics distributed online in China through a video-on-demand model. The service would give rights-owners multiple revenue streams, including royalties, a share of the fees for every user request and a cut of the advertising embedded in the movies.

How that will go down in the Internet cafes remains to be seen. But many observers believe that if regulations are enforced and users forced to pay for authorized movie downloads, they'll just light up another cigarette and pay their quarter.

© Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.

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