Again, this is jointly posted with China Law Blog.

Part 1: ‘The Ancient History of the DVD’ is  here.

Part 3: ‘Forget it, Jack, it’s Chinatown’ is here.

Although we initially approached piracy an intellectual property issue, we ended up spending a lot of time on the determinants of price and availability in legal markets, and so on questions of media ownership and market structure.  And when we looked at these, it was clear that the structural issue that mattered most was the extent to which legal and cultural barriers sheltered domestic studios and distributors from Hollywood.  Outside India and China, there were very few successful domestic film industries.  Once vibrant examples—in Europe of course, but also Mexico, Russia, and Japan—had become marginal in their home markets and inconsequential abroad.  There are many reasons for this decline.  Hollywood’s mastery of widely-accessible spectacle is a big part of it, of course.  But so too is the advantage of operating from a rich home market, with stronger investment infrastructure and the ability to amortize production costs.  So too is its much more effective control of the rest of the system, from saturation advertising, to the control or manipulation of distribution networks, to the capture of legislation, trade negotiations and state subsidy programs, to an ability to capitalize on the economic volatility of developing-world economies, which has periodically decimated local film industries.  The Hollywood studios do all of this better than anyone else.  Whether Transformers 4 is any good or not is very unlikely to matter.

What is the role of piracy in this context?  It depends.  Where the international studios control domestic markets, piracy represents a marginal loss to the studios (and to their local partners) and, conversely, a welfare gain to consumers.  We would argue that the studio losses are small as there is no real effort to serve these markets at affordable prices.  And that the welfare gains are significant as seeing Hollywood movies becomes an important form of symbolic participation in global culture.

In India and especially in China, with its quotas and censorship barriers, the situation is more complicated.  There, piracy has a secondary function as a channel for brand development, educating Indians and Chinese in the norms and values of Hollywood.  Enforcement in this context is double-edged.  Would Hollywood have benefited in the past decade from stronger enforcement and diminished exposure of its films outside the few legal theatrical venues?  We think probably not, but it’s hard to say.  And that’s the point.

Aggressive enforcement should also, in theory, be a dilemma for the US government, which has an interest in cultivating channels of communication that bypass government censorship. Jinying Li has also written extensively about the role of the pirate market as a distribution channel for independent Chinese films, which are routinely denied exhibition.  The relationship between illegal copying and freedom of expression in these contexts is a close one because both depend on uncontrolled communication.  This overlap has made US policy hopelessly contradictory (or maybe just cynical) on enforcement, with the State Department calling for a free and open Internet while the USTR advocates Internet monitoring and filtering.  Chinese policy is at least more coherent, with paranoid control of Internet communication balanced by tolerance of the piracy-friendly growth models of many Chinese Internet companies.

As interest shifts to Internet piracy and enforcement, DVD piracy has become a legacy concern, useful mostly in setting fantasy baselines for profits against which loss claims can be made.  In this spirit, the USTR’s 2013 Special 301 report reproduces MPAA complaints that the Chinese home video market underperforms compared to the US.  The commercial interest in reinventing the DVD cash cow is clear, and will probably be advanced, increasingly, by Chinese monopolies looking to raise prices.  But as a matter of either Chinese or American public policy, why care?

Even as the DVD bubble pops, Hollywood theatrical revenues climb, at home and abroad.  The Chinese theatrical market leads the list, growing roughly 30% annually in recent years.  Production, in theory, is robust: China made over 600 feature films last year, comparable in numerical terms to Hollywood.  So taking seriously copyright’s main purpose as an incentive for creators, one might ask: where is the problem in need of an enforcement solution?  Where is the evidence that piracy is undercutting production?

On the contrary, the bigger problem for studios in both China and the US is probably overproduction.  The new Hollywood-blockbuster-dominated global exhibition market just doesn’t need that many films.  Single blockbusters can occupy 60-80% of Chinese screens, or 10-15% of more plentiful US screens.  For all the investment in production, only around a third of Chinese films saw domestic release in 2012. For Hollywood, the new 34-film quota may be an optimal solution that keeps attention focused on its big bets.

Everyone understands the Hollywood solution to these new market conditions.  On the production side: fewer, larger blockbusters, supported by ad campaigns that can dominate global media attention. (For what it’s worth, I think the studios have barely started to understand what this means for US overproduction.)  On the consumption side: a push for stronger IP enforcement at all levels to squeeze out some extra profits at the margin.  In 2012, Hollywood took 50% of Chinese ticket sales for the first time, based on only 20 releases.

There are, of course, bumps along this road.  In early 2013, unexpectedly poor returns for a few American action films triggered a round of anxious speculation about what Chinese audiences want, driven by fear that at some point the formula will stop working.  But genre fatigue, unexpected fads, and breakout local hits are part of the blockbuster engine. If it was a closed loop, it would fail, like the didactic state cinema it often competes with.  In the long run (which may be measured in months rather than decades), I expect that the question of what Chinese audiences want to matter about as much as what Brazilian, Russian, or South African audiences want.  Which is to say, not very much.  A hypothetical 80-20 US-China ticket sale split would put China in the middle of the international pack, well ahead of most developing countries.  Chinese audiences may not get what they want, exactly, but they’ll probably give a passing imitation of wanting what they get.