Organized Crime: Businessweek edition

(updated, April 9)

Sigh. I can see that engaging in this debate about organized crime and piracy means having to shoot down the same stuff  over and over.  You can look here if you want a detailed version of our take on organized crime and here for a more tongue-in-cheek version.  But to the business at hand: I was dismayed to read the recitation of industry talking points on the subject in this recent Businessweek story by Mike White.  This irks me in part because White interviewed me and I walked him through all the problems with the inflated claims.  Yet, here they are again.  That’s his prerogative, I suppose.  Here’s mine.

Lax enforcement and high profit margins have made trafficking in counterfeit DVDs a flourishing side business for drug smugglers and crime rings worldwide. Russian gangsters and Mexican drug cartels such as Los Zetas and La Familia Michoacana, Chinese gangs, and even former members of Northern Ireland’s Irish Republican Army have all piled in to the lucrative business in the past decade, according to Robinson. “The scope of organized crime in home-video piracy is enormous,” he says.

Much closer to the truth would be that they piled out of the business in the past decade as profit margins on pirated CDs and DVDs collapsed.  We see no evidence that DVD piracy is still a high margin business, nor does the story provide any.  Rather, our work documents that pirate prices have fallen dramatically as burners became cheap in the early 2000s and, more recently, as non-commercial internet-based file sharing began to displace DVD piracy.   In this context, Mexico has one of the most competitive pirate DVD markets documented in our study, with widespread, small-scale cottage industry production and retail DVD prices routinely under a dollar. Criminals, as we’ve noted more than once, now have to compete with free.

Are narcotrafficking gangs  like the Zetas and La Familia  involved in the DVD trade in Mexico?  It’s certainly possible and more than one story to that effect has circulated.  Indeed, I’m beginning to wonder if industry groups have begun to organize tours, since a very similar set of claims popped up in a recent Microsoft-planted story in the New York Times.  For our part, we note that our lead Mexico researcher, John Cross, found no such activity in Tepito, a Mexico City neighborhood specializing in pirated and counterfeited goods, when he explored these issues in 2005 and 2008.  Tepito has appeared regularly on MPAA lists of havens for the organized criminal DVD trade, and indeed the MPAA-funded RAND report about these connections, which gets referenced many times in this story, makes a number of serious mistakes on this front.

To be clear: our point is not that there is no involvement of larger criminal groups.  It is that they are minor players in an increasingly vast, low-margin, non-commercial world of copies.

So what about this “flourishing side business for drug smugglers and crime rings worldwide.”  The article doesn’t make a great case for this by saying that that the Zeta gang makes $1.8 million a month on pirated DVDs.  This could conceivably be true, though how the MPAA arrives at that number is unclear, and part of our problem is that the MPAA numbers are always, deliberately unclear.    But the larger point is that $1.8 million/month (let’s call it $22 million/year) is a miniscule sum in a pirate market that the MPAA says cost them $590 million when they last looked in 2005, back when household DVD penetration was well below its current level and there was virtually no broadband.  And that’s the most recent figure (and of course MPAA won’t share that study either).  This is the business said to be run, until his recent violent demise, by the Mexican “Czar” of DVD piracy, Gabriel Ayala Romero.  It’s worth noting that such sums are orders of magnitude below the estimated $8-24 billion the gangs realize from narcotrafficking.  The criminal DVD business certainly exists in some parts of the world, but it is a minor sideshow.

As for why there’s a lot of piracy in Mexico, White might have compared the massive penetration of cheap DVD players and burners in the past 6-7 years to the number of Mexicans who can afford the $20 DVDs sold by the studios.  There’s your piracy problem right there, and it’s not going to be solved by “urging Washington to negotiate tougher trade agreements and… forging direct ties with foreign law enforcement agencies.”  It certainly isn’t going to prevent the obsolescence of the cash cow DVD, or Hollywood’s various other problems for that matter.

Piracy is eroding these most lucrative sales at the same time the theatrical business is slumping. Box-office revenue is down 20 percent in the U.S. and Canada so far this year, according to Hollywood.com Box-Office. Sales of traditional DVDs in the U.S. are in long-term decline, falling 11 percent, to $14 billion, last year, according to the industry association Digital Entertainment Group.

Business is slumping in 2011, one could again note, after five years of record profits in domestic box office receipts. Is the cause piracy?  Michael Lynton, chief executive of Sony Pictures Entertainment, offers a different explanation: “So far there is just nothing terribly compelling about what we’re delivering as an industry.”  Enforcement isn’t likely to help that either.

For my part, I want to go on record  that Tron Legacy, at least, is not the “colossal failure of moviemaking” that some have called it.  It is a perfect movie to watch during the fugue state achieved on a 12 hour flight from Sidney to LA.  Perhaps that was the intended audience.

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ps.  I stand corrected.  Tron: Legacy made $398 million in theatrical release globally.  Production costs were estimated at $150 million.  Marketing at another $120 million.  So it’s a hit.  Not a Transformers 3 size hit, but still a hit.  I think that if I were a Disney exec, I would thank god every day to live in a world where such things were even remotely possible, rather than railing against Mexicans stealing Tron DVDs.

pps.  And corrected again.  Charlie Jane Anders has amended her review after seeing Tron a second time in 3D Imax: “while I still don’t think Tron Legacy was a good movie, I no longer think it’s a total disaster.”

ppps. Revisiting the Businessweek story, I’ve decided I’m being too gentle here (usually it goes the other way).  The notion that “International Gangs are Cornering the Market for Pirated DVDs,” the second lead, is simply false, including in Mexico.  Not even the RAND report, which is all about making this case, goes that far.  White himself told me that the other reporter on the job (apparently Nora Zimmet) had found no evidence of gang connections in an investigative visit to Tepito, which is important because Tepito has traditionally been the pirate DVD wholesale market for large parts of Mexico (and it features more or less permanently on the USTR’s list of ‘notorious markets’).

Ultimately, little of this is really about organized crime in its Zeta/La Familia varieties.  The larger purpose of stories like this one is to create a villain that can justify the passage of  stronger IP enforcement measures, such as the COICA bill currently being debated in the US House of Representatives.   COICA, in turn, is nominally about creating tools to shut down pirate streaming sites, but more generally about creating additional legal instruments that can pressure all the other Internet services used by consumers in the course of filesharing, including cyberlockers, p2p sites, social networking sites and, ultimately, search engines like Google.   So imagine the alternative headline: “Some Organized Crime Groups Struggling to Keep a Foothold in the Piracy Business Dominated by Your Kids.”  No wonder it didn’t get written.

More… Sigh.  As White channels the MPAA, so Zimmet channels the Business Software Alliance (BSA) in this piece on software piracy in Mexico.  Here, too, the usual canards are in play, including the insinuation of $600 million in losses to US business from Mexican software piracy (without actually saying piracy losses because the BSA gave up on that argument last year after a decade of criticism that people on Mexican or Russian or Brazilian incomes probably wouldn’t buy the $300 copies) and the description of the multiplier effects of these not-quite-losses on the Mexican economy.  My favorite part: Zimmet’s interview with a shady pirate who is providing all this illicit software to Mexican consumers.  Where does he get it?  The Internet.

 

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