Since the start of its JV, Warner's strategy for physical media in China has been to compete directly with the pirates by offering legitimate discs as soon as possible after theatrical release and at the lowest possible prices. In 2005, when the average price of a DVD in the US was over $14 according to IHS Screen Digest data, CAVW began releasing so-called 'silver' DVDs - usually dubbed versions with no value added material (VAM) - often a couple of months after the movie's US theatrical release for Rmb 22 ($2.65 at the time). A 'gold' SKU (including additional languages and VAM) was then released soon after the US DVD release at a price of Rmb 28. VCDs (without extras) cost just Rmb 16. The studio even experimented with releasing the silver version day-and-date with the US theatrical release (e.g. 2005's The Sisterhood of the Travelling Pants). However, Chinese pirates were soon compressing up to five movies on a single DVD and selling them for just Rmb 5 each ($0.60 at the time). Since then, prices for legitimate DVDs have fallen to as little as Rmb 14 ($2 at today's rates), but the pirates are always one step ahead.
Despite the best attempts of the US majors, the lack of a modern distribution infrastructure combined with the rigorous and slow Chinese censorship process and the widespread availability of counterfeit product, often boasting better packaging than the legitimate discs, ensured that mainstream consumers never embraced the concept of legitimate video product. Meanwhile, the low prices and resulting cheap paper covers often used for legitimate DVDs made it increasingly difficult to position them as an aspirational product for wealthier Chinese households.

Hopes that high definition would help boost packaged media were also dashed when both Blu-ray (which launched in China in 2008) and its cheaper, locally-developed rival CBHD failed to generate any real traction. Our research indicates that the vast majority of discs 'sold' on either format were actually distributed through hardware/software bundling deals. Furthermore, we understand that most pirate product in China now carries the BD logo (although retailers make no pretence that the discs themselves are BD quality), further undermining the perceived value of the format.

Counterfeit product continues to dominate the Chinese video market but some sources report that overall demand for physical product is now declining rapidly, with even pirate stores closing down. The transition of Warner's physical business (along with those of Universal and Paramount/Dreamworks) to a licensee is likely to exacerbate that trend. CAVW's strategy was to actively promote the concept of packaged media and to that end it released some 400 titles in its first two years alone. However, market conditions in China mean that any licensee is likely to pick and choose the titles it distributes very carefully, potentially meaning no more than half a dozen titles each year from the major studios.

Meanwhile, however, demand for digital delivery of movies is growing rapidly in China, fuelled by rising expectations of quality (driven by the massive ongoing expansion in modern cinemas and the growth of HDTV sets and services) and the falling cost and increasing availability of broadband. Crucially, this trend is accompanied by increasing consumer openness to the concept of e-commerce. There is still significant resistance to online credit card transactions, but alternative payment systems, such as that developed by the Ali Baba Group for its online mall Tao Bao, are evolving. Prices for online movies are very low (Rmb 3-5), and conversion rates (from clicking 'buy' to actually paying for the content) remain well below Western industry norms (although we understand they are relatively high by local standards). However, the potential audience is vast; Tao Bao alone claims 150m members, meaning that even if only a tiny proportion of them ever buy, they might form the basis for a more profitable Chinese business model than has so far been generated by physical formats.