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Instant replay?

China’s latest crackdown on DVD pirates looks familiar—and fake


This story originally appeared in the October 9, 2006 edition of Business China, published by The Economist. Download a PDF version of this story here.


In September when six major international studios joined forces to launch court proceedings against two Beijing retailers accused of selling pirated versions of their films, some observers said the move signified a forceful shift in Hollywood’s intellectual-property-rights (IPR) campaign in China. But the legal action was not a first—the Motion Picture Association (MPA) says in 2002 and 2003 it initiated ten such civil cases in China, all of which were settled or ruled in favour of the plaintiffs. It was clearly, though, the studios’ way of testing China’s renewed pledge that improvements have been made to protect intellectual property. Earlier in September Wen Jiabao, the Chinese premier, was quoted as saying, “China’s IPR protection efforts will carry the full force of steel, and it will definitely not be something that is soft as bean curd.” However, Hollywood is not convinced and is “calling the Chinese government’s bluff”, says one analyst.

Walt Disney, Paramount, Sony, 20th Century Fox, Universal and Warner Brothers are the studios involved in the two separate suits, which together include 37 allegedly pirated titles. The studios are asking Rmb500,000 (US$63,291) per title plus legal costs in damages. Copyright holders, though, have generally been reluctant to resort to court action because judicial penalties enforcing anti-piracy statutes in China are almost as uncommon as genuine DVDs of Hollywood blockbusters. Even when they are handed down, punishment is rarely severe. Thus, regardless of the outcome of the latest suit, no one expects film piracy in China to end any time soon. Some estimates say as many as 95% of the CDs, VCDs and DVDs in China are pirated. According to the MPA, its studios lost US$1.2bn in 2005 due to piracy in the Asia-Pacific region, with China the major offender.

Now one studio, Warner Brothers, is taking a different tack. As well as hiring expensive lawyers, it is trying to win over penny-pinching Chinese film buffs by aggressively promoting a market for legitimate films. In 2004 Warner became the first Hollywood studio to set up DVD operations in China, a joint venture with China Audio Video, known as CAV Warner Home Entertainment. In early 2005 CAV Warner began distributing DVDs in China, with an emphasis on getting new films to consumers as quickly as possible and keeping prices low. Selected Warner DVDs were released in China long before they hit store shelves in the US and, in the summer of 2005, the studio even tested a simultaneous release in cinemas in the US and on DVD in China of a little-known film, The Sisterhood of the Traveling Pants.

Cardboard packaging
Meanwhile, Tony Vaughan, CAV Warner’s managing director, says his division has got pricing for China “about right”. Most of its DVDs cost between Rmb22 and Rmb36, depending on the amount of special features included (prices for pirated discs start at around Rmb6 on the streets). He says Warner’s market research has shown that China’s white-collar consumers are increasingly willing to pay more for guaranteed quality. In April, however, Mr Vaughan put the pirates on notice, releasing some DVDs in simple cardboard packaging for Rmb12. Still, only three Warner films have been released at Rmb12 so far. And the studio has only about 300 titles on sale in China. Thanks to Chinese laws limiting the number of foreign films allowed in the country, it is impossible to compete with the pirates, many of whom carry 300 titles in a single suitcase.

Indeed, most observers doubt that Warner or anyone else can make real progress against piracy unless China opens its market wider to foreign films. “The maintenance of the theatrical exhibition quota, combined with the frequent imposition of ‘blackouts’ on the theatrical release of foreign films and the restrictions on home-video distributors compared with pirate retailers give movie pirates a tremendous market advantage,” explains Mike Ellis, an MPA spokesman.

But with all the sound and fury from foreign studios, it is easy to overlook the fact that the biggest victims of China’s pirates are the country’s own filmmakers. The MPA estimates that the film industry in China loses US$2.7bn per year in potential consumer spending. Because of piracy, Chinese filmmakers cannot expect a long box-office run or favourable home-video distribution deals. The problem has got so bad that Chinese filmmakers cannot even trust domestic television stations—some 1,500 pirated Chinese films are shown on local stations each year, the Chinese Movie Copyright Association said in August. A successful film-maker in China is someone who can sell films outside China but, given all the red tape, that does not happen often. “Film-making is not really a profitable business in China,” reckons Philip Lee, a Hong Kong-based movie producer whose credits include Fearless, Hero and Crouching Tiger, Hidden Dragon.

Early release
One domestic success story this year was Crazy Stone, a crime comedy, which happened to be the first release from Warner’s new film-making joint venture in China. Warner released Rmb10 copies of the DVD for the critically acclaimed low-budget film just 12 days after its box-office opening. In cinemas, Crazy Stone, which was made for US$400,000, has grossed more than US$3m to date, the third highest take this year for a domestic film. Mr Vaughan would not provide sales figures for the Crazy Stone DVD, but says the early release was “absolutely a success”. Mr Lee does not doubt that, but cautions that “such a successful case would not really help the independent producers from making profits”, because no independent producers enjoy Warner’s “favoured position” of being able to co-ordinate both the cinema release and video distribution on its own.

China began its latest “100-day intensive crackdown on piracy” in late July, one month after Crazy Stone hit the screens. Several government agencies are reportedly involved in the campaign, from the public security ministry to the culture ministry. The vice director of the State Press and Publication Administration has promised a “stern lesson” and “strict penalties” for those dealing in the illegal audio-video trade. Headlines in the state-controlled press dutifully trumpeted millions of pirated DVDs seized, dozens of underground factories destroyed, tens of thousands of shops and street vendors raided, and thousands more fined or shut down. Even a 24-hour “anti-piracy hotline” was set up so citizens can snitch on street vendors selling counterfeit DVDs.

Some analysts see such campaigns (this is not the first 100-day crackdown) and the media hype surrounding them as nothing more than blustering propaganda. Says David Scott, an analyst with London-based Screen Digest: “China’s anti-piracy activities and seizures of counterfeit goods are frequently given high profile in the state-run media, but as yet the problem of piracy continues pretty much unabated.” Clearly, the problem is too massive to be handled in short, isolated bursts—even if China’s anti-piracy authorities are earnest in their efforts.

Curious gap
Consider the curious gap between the combined production capacity of China’s 774 registered DVD/VCD manufacturers and actual sales of legitimate discs in the country. Sales of legal discs accounted for less than 18% of those manufactured by licensed companies, according to a recent Chinese Academy of Social Sciences study on the impact of film piracy on the Chinese economy. In August, Zhang Xinjian, a culture ministry official, admitted, “we are not optimistic about the overall situation on fighting piracy.”

Most industry observers say unless sweeping policy changes are made, the pirates will continue to flourish. In addition to opening the domestic film market, Chinese authorities should implement stricter laws, issue clear sentencing guidelines and shift from meting out administrative to judicial penalties. According to Michael Yeung, a brand protection specialist at Hill & Associates, a Hong Kong-based risk-management firm, special laws and penalties have been put in place this time. For example, those caught selling more than 5,000 illegal discs are to be sentenced to three to seven years in prison, and vendors with 100 pirated discs are to be fined Rmb10,000-50,000 and have their licences taken away. After the campaign ends, however, it will be back to the original vague and ill-defined rules, Mr Yeung predicts. Indeed, in recent days there was nothing to suggest that it was not business as usual at your correspondent’s neighbourhood DVD shop, which was still stacked with pirated films.

03.13.2007, 5:25 PM · Stories