Dan Harris at China Law Blog invited me to write a post about the launch of the Chinese translation of Media Piracy in Emerging Economies. There is no China chapter in the report, but of course there are numerous China connections and parallels. Here’s an attempt to explore those connections, in three parts. Part 1 sets up the pricing argument that will be familiar to MPEE aficionados.
Part 2: What Everyone Wants, gets into film exhibition and market protection.
Part 3: Forget it, Jack, it’s Chinatown, discusses the politics and future of Hollywood in China.
Our headline finding is pretty simple: developing-world piracy is driven by high media prices, low incomes, and cheap digital technologies—and has not been significantly impacted by scaled-up enforcement. This is the sort of statement that’s obvious in most developing countries but that is still off limits in most international IP policy conversations, which are driven by the big copyright trade associations—the MPAA, BSA, IFPI, and so on. As a result, we have a policy debate focused single-mindedly on strengthening enforcement. But in our view, if you’re really concerned about piracy, you need to ask which of those other things will change: prices, incomes, or cheap tech? “Income” is a fine long-term answer in some countries but the realistic short-term answer—the one that rights holders can actually do something about—is “prices.” Let’s take the example of DVD piracy.
DVD piracy is waning in 2013, but for most of the 2000s it drove the IP enforcement debate, due in large part to the efforts of the Motion Picture Association of America (or MPA outside the US).
The MPAA ramped up its international enforcement efforts in the mid-1990s in anticipation of the launch of the DVD. This effort played out on several fronts, from the implementation of technical measures like region coding, to mostly successful lobbying for anti-circumvention laws that criminalized the breaking of DVD encryption (this is the 1998 DMCA in the US and 2001 amendment to the Copyright Law in China), to expanded reporting on piracy rates and losses.
Year after year, the MPAA and the IIPA, the umbrella copyright trade group that lobbies the USTR, came up with loss figures and attributed them to a failure of enforcement—to weak laws, inadequate policing, protected organized crime groups, lack of judicial and popular education efforts, lack of special IP courts, and so on. By 2005, the MPA claimed a 95% rate of movie piracy in China, with losses of $280 million (IIPA 2005). Such numbers were fairly typical for large emerging economies. They were also ballpark estimates at best and based on assumptions designed to maximize loss claims, such as the notion that a pirated copy always represents a lost sale. Criticisms of these claims fell on deaf ears in the US. MPAA reports informed the IIPA, and IIPA reports were recycled, sometimes verbatim, in the USTR Special 301 report, where China made a perennial appearance on the ‘Priority Watch List.’
This enforcement-centered worldview was very popular with the USTR and Congress, but in our view did very little to explain piracy. In particular, it ignored the obvious relationship between the illegal and legal markets. Between 2000 and 2005, the price of DVD players dropped from around $250 to $25—almost entirely due to the expansion of Chinese production. By 2006-2007, household penetration of DVD players exceeded 50% in all but the poorest developing countries, including, in our study, South Africa, Brazil, Russia, and Mexico. By 2005, there were over 65 million DVD players in China, and many more older VCD players—the pre-DVD tech that Panasonic dumped on the Asian market ahead of the DVD launch.
In the midst of this massive global expansion of the DVD player market, the studios made no significant effort to expand the legal market for DVDs. When we conducted our primary research in 2008-2009, new release DVDs were selling for $14-$15 or more in all but a couple of the countries we looked at. The six major studios operated a de facto pricing cartel, which also encompassed the major domestic producers. High prices meant that legal availability was concentrated in a few central districts and wealthy neighborhoods. It meant that available stock was usually limited to a narrow range of global hits.
In our view, global DVD piracy is the story of this widening gap between the infrastructure for consumption and the tightly constrained legal market supply. Pirate vendors, not the studios, moved in to address the new middle and low-income consumers. Globalized Hollywood advertising campaigns drove the demand. In most countries, this situation persists today.
The exceptions to this pattern were China and India, where top tier films on DVD were available for 2-4 dollars. Why? Paramount and Warner Bros. got a lot of media attention for their low price experiments in China in the mid-2000s, but they were following the Chinese studios, not leading them—and not willingly.
In our view, price differences reflected market structure. India and China were the only countries where film production, distribution, and exhibition was controlled by domestic companies—not the international studios. In India, domestic film accounted for 95% of the market, roughly inverting the ratio found in other developing countries such as Russia, Brazil, and South Africa. China, of course, maintained control through state ownership, a quota system for foreign films, and restrictions on foreign investment.
In both countries, domestic studios lowered DVD prices to compete with the pirate market in 2005-2006. In China, the US studios followed suit because they were desperate to stay relevant to the Chinese market. The lure of the next billion consumers resulted in exceptional pricing concessions, not limited to DVDs. As online services emerged (and merged), top-tier online movie rental prices remained well under $1. The 2011 Baidu search engine settlement with the major record labels resulted in a blanket license to offer free MP3 access to half a million songs to Chinese Internet users. Elsewhere, $1 per-song pricing remained the global norm, tracking Apple’s deal with the labels in the US. Even Netflix has retained US pricing as it expands into developing countries (for access to weaker catalogs).
Chinese and Indian studios could drop DVD prices because, unlike the Hollywood studios, they didn’t reset production budgets and revenue projections around the DVD bubble—around the very recent assumption that studios could double profits through DVD sales. Chinese and Indian companies could treat home video (and the DVD in particular) as a market to build rather than protect. For the global studios, the rational strategy was to protect the profit centers—the high-income, high-priced markets—rather than engage in complex forms of price discrimination that could undermine the perceived value of the DVD in the US and Europe. For domestic Chinese and Indian studios, the case for building domestic markets through lower prices was much clearer. Such strategies didn’t eliminate piracy, of course, but did creating a basis for rapid growth and gradual legalization of the market. As my colleague Jinying Li argues, Chinese DVD pirates compete today mostly on quality rather than price, beating the cut-rate products offered by the studios.
But the DVD is the past. What about the future?