In the late ’90s, when the global media conglomerates were at their peak, the people who ran their studios in Hollywood discovered that there was a limit to how much American pop culture the rest of the world would consume. It wasn’t long before they started making movies and TV shows in Mandarin and Hindi.

SEINFELD, MAD ABOUT YOU, JUST SHOOT ME—in recent years, Sony’s Columbia TriStar has produced some of the smartest, hippest sitcoms on television. This year it has high hopes for Chinese Restaurant, a new series about a young Chinese woman in Los Angeles and the multi-culti crowd at her struggling Beijing Garden Restaurant. Of course, the show isn’t really shot in the sprawling Chinese suburbs of L.A., any more than Seinfeld was filmed on the Upper West Side of Manhattan. No, Chinese Restaurant is actually being shot on a soundstage in Beijing by 39-year-old Ying Da—and the actors are speaking Mandarin Chinese. Don’t look for them on NBC either: Chinese Restaurant premiers this fall on 100 television stations across China.

“We thought the Chinese could use a few laughs,” quips William Pfeiffer, the 38-year-old Con­necticut native who heads Columbia TriStar’s television operations in Asia.

What Pfeiffer really thought was that it was time to stop relying on American exports and start tailoring the studio’s offerings to local tastes. This wasn’t part of Hollywood’s plan, of course: The world was supposed to keep consuming Baywatch episodes as eagerly as it does Big Macs and (at least until recently) Cokes. But as the studios morphed into global entertainment conglomerates, with cable and satellite operations and music and publishing interests the world over, they started to discover some­thing no one ever expected: a limit to the appeal of American pop culture—just as the international market became crucial.

In the 1970s, recalls Pfeiffer’s boss, Sony Pictures Entertainment Chairman John Calley, “you got 30% of your income from inter­national. Now it’s almost the reverse.” Not coincidentally, Sony last year became the first global company to go into foreign-language film production, when Columbia TriStar set up shop in Germany at Babelsberg, the long-dormant Potsdam studio where Fritz Lang shot Metropolis. Sony execs figure English-language pictures still command nearly 80% of the world’s box office—but for how long? “When you’ve got that kind of market share,” worries Columbia TriStar film chief Ken Lemberger, “you can only go down.”

In television, that’s happening already: For two years running, the big news at MIPCOM, the global television sales fest at Cannes, has been American series being pushed out of prime time by the local stuff. Network hits like E.R. are still big, but the fledgling satellite and cable companies that bought American shows wholesale a few years ago, outfits like Canal Plus in France, are now billion-dollar enterprises with the resources to fill their evenings with local programming. “As the European mar­ketplace continues to mature, you won’t find a lot of American series in prime time,” says Andy Kaplan of Columbia TriStar Television.

This is bad news for the Hollywood studios, which have been relying on international sales to make up the difference between the $1.5 million or so that it costs to produce an hour-long drama episode and the $1 million a U.S. network will typically pay for it. But in the emerging markets of Asia and Latin America, where the big media conglomerates own channels instead of just selling to them, they have even more at stake. Sony Entertainment Television in India, Time Warner’s HBO Olé and HBO Brasil partnerships in Latin America, News Corp.’s Star TV in Asia—these companies have sunk billions into pipelines for delivering entertainment, partly to exploit the millions of hours of American movies and television shows they own. Blockbuster Hollywood movies are still a huge draw worldwide, but most audiences prefer local TV shows—and if that’s what they want, that’s what they’ll get.

At least there’s a model: the music industry. In some countries, as much as 70% of CD sales come from local performers, yet five global companies—Sony, Warner, Universal, Bertelsmann, and EMI—dominate the local scene as effectively as they deliver the international hits. That gives them two revenue streams—exports and local artists. “Twenty years from now, that model is going to proliferate across the spectrum of things we do,” says Time Warner President Richard Parsons. Doing it right, he adds, “is probably the biggest challenge facing the company.”

Yet so far, only Sony and News Corp. have committed themselves in a big way. They’re placing their biggest bets in Asia, where startup costs are enormous, the regulatory environment is unpredictable, the advertising market is as yet undeveloped—and audiences are measured by the billion. “Everybody’s losing money in Asia,” says Merrill Lynch analyst Jessica Reif Cohen. “But it’s just a matter of time.” The key to Asia is Hong Kong, the hypercapitalist Anglo-Chinese metropolis that rises like a sci-fi mirage from the steamy waters of the South China Sea. Which is why you find Pfeiffer, the Sony executive who developed Chinese Restaurant, on the 32nd floor of I.M. Pei’s Bank of China Tower there, directing television operations that stretch from Australia to Saudi Arabia.

PFEIFFER CAN REMEMBER WHEN THERE WAS no McDonald’s in Katmandu. That was 16 years ago, when he’d just moved to Tokyo after B-school at Stanford. He was working for Disney at the time; then, in 1992, Sony hired him to scout business opportunities for Columbia TriStar, its then-floundering Hollywood studio. The biggest opportunity was in India, where there was little competition and a newly liberalized foreign investment policy. From modest beginnings—a dirt-floored Bombay office lit by a single bulb that went dark whenever a monsoon hit—Sony has become a powerhouse, producing 33 hours of Hindi-language programming a week and beaming it not just to India but also to Africa, Britain, North America, and the Middle East. Reif Cohen notwithstanding, Pfeiffer maintains that Sony Entertainment Television, the Hindi-language channel he launched in 1995, actually makes money.

After getting established in India, Sony launched the mostly English-language AXN Action satellite channel across Asia. Last winter it became sole owner of Super TV, a Mandarin-language channel that reaches 77% of the 5.1 million homes in Taiwan. Sony also produces or co-produces some 35 hours of Mandarin-language programming a week, much of it for Super TV—from City of Love, a prime-time Taiwan soap, to a revivified Charlie’s Angels starring a trio of willowy Chinese babes who chop-sock it to bad guys from Shanghai to Kuala Lumpur. (Recently canceled, alas, is Feng Shui Talk, an hour devoted to the proper management of energy flow.) But the real news is that Super TV gives Sony the potential to go after the mainland’s 305 million television households via satellite, instead of just selling shows like Chinese Restaurant to existing terrestrial stations. “China is a market we’re very respectful of,” says Pfeiffer. “We’re certainly interested, if we’re allowed in, in entertaining the people.”

China is also a market News Corp. has been in since 1993, when Rupert Murdoch bought Star TV from Hong Kong billionaire Li Ka-shing. News Corp. has poured money into Star—more than $1 billion to date, according to Reif Cohen of Merrill Lynch—but has yet to see a profit. High on its list of missteps was an early attempt to blanket Asia with English-language channels. “They have a big footprint,” says a former Sony executive, “but their first thought was, We don’t have to localize.”

Star’s only real success story to date is its Mandarin-language Phoenix channel, a three-year-old partnership with two Hong Kong companies. Along with X-Files reruns (in English), Phoenix offers a frothy mix of locally produced sports, news, and talk shows, featuring everything from movie star Ke Shou-liang’s daredevil leap across the Yellow River to the effervescent political coverage of newscaster Sally Wu. A niche player with enviable demographics, Phoenix claims an audience of 170 million educated, upscale viewers, most of them in Beijing and the prosperous southern city of Guangzhou. Last year it even won praise from Premier Zhu Rongji.

Unfortunately, Star is still subject to the vagaries of Chinese officialdom. It has emerged from the deep freeze that followed Murdoch’s early description of satellite broadcasting as “an unambiguous threat to totalitarian regimes everywhere”: Phoenix’s chairman has close ties to the Chinese military, and this summer Murdoch married a young mainland native, Wendy Deng, who had been Star’s liaison with Beijing. But none of this seemed to matter when the government announced last spring it would start enforcing a ban on the unauthorized reception of foreign TV, including Star. Since most Chinese viewers outside Guangzhou pick up Star from unauthorized cable operators or from their own illicit dishes, this was bad news.

The crackdown was heavier in Beijing than in the south, and Chinese officials soon had more pressing problems to worry about. But advertising is a problem even without such headaches: According to A.C. Nielsen, only $5.3 billion was spent to advertise on Chinese television last year. That’s still a 45% increase over the year before, and spending should pick up further once Nielsen dispenses its PeopleMeters in major urban markets this fall. Although Phoenix has managed to attract blue-chip advertisers like Nokia and Procter & Gamble, the goal at Star overall is to move away from ads and into pay TV—and it won’t be able to do that without official government approval.

The man to make it happen is Gareth Chang, 56, a former Hughes exec who now heads Star and sits on News Corp.’s board. Square-jawed and open-faced, his steely gray hair in a brush cut, Chang could have walked out of a San Diego office park; in fact, he’s the son of a Kuomintang general. He escaped as a boy from Sichuan to Hong Kong, and now he’s in Hong Kong again. “You’ve got to understand the people involved,” he says. “It takes a formal and an informal interaction, a balance of the two. Westerners have a great deal of difficulty with this. I think that may be why Mr. Murdoch hired me.” Phoenix, he says, is already edging out of the red; as for Star itself, analysts estimate that losses have already been cut from $100 million per year to as little as $50 million. “It’s very possible that within two years’ time, Star TV will be profitable,” Chang says hopefully. “At least, that’s what I signed myself up for.”

LAST FALL, SONY MOVED BEYOND TELEVISION into film when it opened a Hong Kong office to produce local-language movies in Asia. Its first deal raised eyebrows in a city known for blowout action pics: financing and distribution agreements for a pair of films by Zhang Yimou, the mainland director whose Raise the Red Lantern was an art-house hit in the West. But the real surprise was that Sony would get into the market at all. Southeast Asia is still recovering from an economic crisis that threw millions out of work. China is notoriously short on infrastructure, with only one movie screen per 120,000 people. (The U.S. has one screen per 8,600 people.) Foreign companies aren’t allowed to distribute in mainland China or even to own copyrights—though they can share in the profits by setting up co-productions with Chinese companies, provided they give the government final cut. And piracy has eviscerated Hong Kong’s film industry.

In the early ’90s, Hong Kong was turning out more than 200 pictures a year. So intense was the appetite across Southeast Asia for its low-budget kung-fu fare that moviemaking briefly rivaled real estate speculation as the hottest business in town. Everybody got into the game, from pop stars to the triads, the organized crime gangs that ordinarily stick to drug smuggling and kidnapping. “It was a safe and incredibly heady investment vehicle,” says Barbara Robinson, Columbia’s new Hong Kong film chief, “without the downside that’s usually part of the movie business.” Then the economy collapsed, and people stopped going to theaters.

Observers put most of the blame on piracy, which has proliferated with the introduction of video CD players—cheap machines that play disks encoded with first-generation MPEG-1 technology. The MPA estimates that Hollywood is losing 90% of its potential Chinese market to pirates. But Hollywood has markets beyond Asia; Hong Kong essentially does not. Established Hong Kong studios like Golden Harvest and Shaw Bros. have sharply curtailed production. Independent filmmakers have been driven out of business. Even Wan Kuok Koi, alleged boss of the notorious 14K triad in Macau, was a victim: He bankrolled a picture about his own exploits called Casino and warned pirates not to touch it—to no avail. This year only about 40 movies will be made; 20,000 employees are out of work.

At least Sony is getting in at the bottom of the market. It’s also bringing new discipline to the development process: “Five years ago I wouldn’t have been able to ask a Hong Kong filmmaker to give me a script before he started shooting,” says Robinson, who spent seven years with a Taiwan film company before Pfeiffer recruited her to Sony. Robinson likes to talk about bringing stability to an industry that “really needs some long-term players,” and filmmakers are greeting Columbia’s arrival with relief. But this is not a humanitarian mission. The pictures Columbia makes are expected to make money on their theatrical runs, but their ultimate destination is the channels Sony beams across Asia—Super TV, AXN, the HBO Asia partnership with Time Warner. “Channels are big, hungry things,” Robinson explains, “that need to be fed with a lot of product.”

Sony gets one more benefit from going into the Hong Kong movie industry: For a minimal outlay of cash, it can be in business with actors and directors who could soon be making Hollywood blockbusters. Just look at its current film slate: Ang Lee, who made Eat Drink Man Woman and Sense and Sensibility, is in China shooting Crouching Tiger, Hidden Dragon in Mandarin, while at the other end of the budgetary scale, Luc Besson, who directed the stylish French thriller La Femme Nikita, is about to open a picture about Joan of Arc—in English. For France, they dubbed.

Which pretty well sums up the state of the industry: An American studio owned by a Japanese conglomerate hires the most commercial director in France to make Joan of Arc in English. What we’re seeing is the emergence of a two-tiered global system. English is the language of the international blockbuster, but lower-budget pictures can be made in almost any language for the home market, and a few—like Roberto Benigni’s Life Is Beautiful, which won three Oscars and grossed $222 million world­wide—will even become international hits. Hollywood, with its vast corporate resources, can call the shots in both tiers. All it has to learn is how not to reduce the world to cultural mush. As Pfeiffer says, “We take the best of their very rich culture and marry it with the professionalism and the polish of Hollywood.” He grins. “I like things to be different.” ♦