Lowering the Pirate Flag: The New Legitimate Face of Entertainment in China
China's Youku and Baidu, considered major piracy outlets, have signed agreements with record labels, book publishers and American media producers that could clean up their acts.

Apple (NASDAQ:AAPL) has done the impossible: It has become a major success in China. The technology company’s iPhone and iPad are hits in the country where Microsoft (NASDAQ:MSFT) and so many others have failed. Most impressive is how Apple has found success while not falling prey to the widespread piracy and bootlegging that takes place in China.

Does its success presage a new era of prosperity for American companies looking for riches among a still-growing consumer class abroad? Is this the moment that electronics and entertainment companies — industries mixing more than ever thanks to Apple — find legitimate revenue streams in China?

Anything’s possible. If any product is bootlegged more than consumer technology like smartphones in China, it’s the media consumed on those devices. Now companies seem to be emboldened, hoping to turn a buck through new opportunities in the country. DreamWorks (NASDAQ:DWA), the animation studio and distributor behind movies like Shrek, has partnered with Youku (NYSE:YOKU) to distribute the Kung Fu Panda movies through its online portals. This will be the first time DreamWorks’ movies will be available in the country online.

At least, that is, legally. Before Youku became one of 2010′s most-hyped IPOs, the Chinese YouTube was notorious among entertainment and technology companies. Unlike Google‘s (NASDAQ:GOOG) heavily monitored online video website, Youku was barely policed and was a haven for pirated movies, music and television shows. In the past year, however, the site has signed deals with a number of content providers, including Disney‘s (NYSE:DIS) ABC.

Time Warner (NYSE:TWX) signed a similar deal to DreamWorks’ shortly after Youku went public in the U.S., offering limited-time pay-per-view viewing options of movies like 2010′s Inception. Warner Bros. kicked off a far more ambitious partnership with Youku in June. While DreamWorks is testing the waters with one of its family-friendly franchises, Warner Bros. opened an on-demand store with nearly 500 movies available, including recent hits like the Harry Potter series, as well as classic films. The partnership is more than an experiment; Warner Bros.’ contract with Youku won’t expire until 2014.

Will America’s entertainment businesses replicate Apple’s success in China? These partnerships with Youku are a start. Entertainment companies across a number of media are winning key battles in the war against piracy in China. The country’s search engine and media empire Baidu (NASDAQ:BIDU) recently signed agreements to pay licensing fees to record labels, book publishers and others after years of acting as a major piracy outlet online. These new legitimate outlets are still new, though, and time will tell if Chinese citizens will pay for movies, music and other wares or if a new pirate bay will open to replace the old.

For investors interested in Youku and its long-term potential, these partnerships are good news, too. Shares were trading above $25 after the announcement, climbing back up after a dismal August that saw the stock hit an all-time low of $19. Youku has strong entertainment partners in the West and a lock on video entertainment through Chinese citizens’ smartphones, tablets and PCs. Those factors surely put Youku on stronger footing, but they don’t change the fact Youku still has been reporting significant losses every quarter. Those losses are shrinking — the company saw a net loss of more than $4 million in the second quarter of 2011 compared to nearly $10 million during the same period last year — but not enough.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.


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