China Law Blog

Dan,

Thank you for pointing out the flaw in my "business model"

I was simply pointing out the flaw in the business model of a 3 USD DVD in China and a 20USD DVD in China... and you backed that up when you correctly pointed out I would be out of a job from the 5 USD DVD shop.

Per a conversation I had with someone in the industry in Shanghai, they are not looking to lock these down by dubbing voices over.

All Roads Blogger

All Roads,

If they are not going to dub out the English, count me in as your US based partner on this, but we will need to move fast.

I had a client/friend who once made over $500,000 in one quick arbitrage deal. He owns a helicopter company on Sakhalin Island. Right after the fall of communism in Russia, Sakhalin had no matches. Moscow lacked food. My friend flew a half dozen helicopters loaded with fish to Moscow and returned to Sakhalin loaded down with matches. Voila, $500,000 profit.

Who's got the helicopters?

what about the minor detail that these will be region 6 dvds and contain EULAs prohibiting their use anywhere except mainland China?

Dan:

I recently purchased a legit DVD...but first, I have a dirty little secret to share: I am really into the Harry Potter series! I read nearly the entire set of books over the October holiday here and loved it. True escapism!

So the next logical thing was to watch the movies...which I then wasted a ton of time doing, release by release. I tried to find legit DVDs of them but all I could find was the ones at my local DVD store ("Of course they are legal, Mr. Kent...would I sell you an illegal DVD???").

However, I could not find a good copy of the latest movie until I saw it at my local RT-Mart, all bright and shiny in its Totally Legal Display and Packaging. I excitedly bought it and brought it home...only to discover that it was, indeed, in Chinese. My Chinese is not bad so I could muddle through it. However, I still don't know how to say "Dementor" in Chinese and "老百姓" seems an odd translation for "Muggle".

But at least I got all that out of my system and am back to being a contributing member of society. Mostly.

Thanks for tracking this!

Kent

An interesting approach.
When I was in Shanghai this past summer I heard about a similar initiative by Microsoft. Fed up with being on the losing end of IP enforcement battles in developing nations, MS decided to flood the market with very affordable versions of its popular software applications.
I think the strategy relies partially on a psychological component, hoping that people who grow accustomed to operating within the legal framework will be more hesitant to step outside it in the future.
Sounds like techno-dumping to me. . .

http://www.iht.com/articles/2007/04/19/business/msft.php

I would say that they are a step too late for Chinese audiences, who do not consume DVDs (pirate or legitimate) anymore.

See:
http://www.plus8star.com/?p=71

While they are playing with this idea, South Korean and Japanese consumers have moved on to consuming their video content on their mobile phones. This will start soon in China.

Well, at least the studios are consistent...

You'll also need a pal/ntsc DVD player or tv even if you get a region free disc.

I'd stick with the matches.

Sorry, but in my naive little mind and probably without having thought this through from a global long-term business perspective, but I am 100% against these companies giving 'subsidised' software and DVD's to China, and other 'developing' nations. These companies have shareholders and a responsibility for generating profits (and growth) and are expected to manage profits and expectations of the shareholders. By literally giving away products in China then they must be forced to keep the prices higher in the USA (for example) in order to subsidise sales elsewhere. Sure there's an argument - and probably a very good one - for getting a foot in the door now for promises of a good ROI later, but I still don't buy it. I also don't buy that they're doing this to try and stop piracy - piracy only really affects them if they are losing revenue and if they're saying that people can't afford to buy the product at the real cost, then they're not losing revenue since there is no market. This is a country that's talking of putting a man on the moon and building a space station within one generation (oh, that old chestnut again) - if the people can't afford to spend RMB22 on an original DVD then boo hoo, they probably can't afford to buy a DVD player then, can they?

I saw on the news a couple of weeks ago, some students complaining that they couldn't even afford the RMB20 for a latest book that was released in China so they preferred to download copies from the internet them to their PC or laptop. Damn, must be very, very, very cheap laptops and PC these days.

It's not that people can't afford to pay 3 or 4 dollars for the media that they want - they're just so used to paying less that it'll be hard to break the habit. In the meantime, this space age nation will still sit back and cry the 'we're a poor developing nation' sympathy card. My ass, put your hands in your pockets and pay your way if you can afford it. If you cant, then don't buy it. I'd really like to buy a top end Lexus but I just can't afford one - may they'll start to sell them cheaper here so we can all have one.

Rant over - back to my little world now.

All Roads: I thought you ran a successful company in China. Are you really resorting to selling DVDs back into the American market?

On a more serious note, this could actually squeeze the "high-end" black market places that already charge 15 kuai a DVD. They tend to cater to the foreign audience and more reliably have shows that Chinese people might not like/get (Curb Your Enthusiasm, Scrubs, 30 Rcok etc). For 5 kuai more wouldn't you rather have a more reliable product. On the other hand, the fakes all work in the US, so that could counteract the effect.

cbi,

Well, I would certainly want to check that out before I buy $300,000 in DVDs from All Roads. But, how come every DVD I have purchased in China have worked just fine in the USA?

Gosh Kent, if that constitutes your "dirty little secret," your life is either really boring or you are smart enough to lead us to believe it is. Either way, I find the whole Harry Potter/grown man thing a bit creepy.

Chad,

Interesting point. I think you are right.

Paul Denlinger,

No way am I trading in my new 50" plasma for a mobile phone. I am in the middle of Broken Flowers right now and will probably watch the second half tonight. Should I watch it in HD on my 50" or on my blackberry? One is not going to replace the other, though I will note that I recorded the movie with my DVR and I do not have it on DVD at all.

Tim,

Problem with the matches is that the price differential is no more. I just remembered my big arbitrage deal. I was 16 and living in Istanbul when a friend of mine was coming to visit from the States. I told him to come with two pairs of the cheapest, most American looking jeans he could find. He came with two $5 pairs of Mavericks from K-Mart. I sold those two pairs at the covered bazaar and then used the proceeds from that sale to buy a beautiful lambskin winter coat. Total cost $10. Life is Good.

PiPi,

You raise some very interesting points.

1. I agree with you that every fake DVD is NOT a lost sale of the real thing.

2. If the studios are making a profit in China (however small), can you say those of us outside of China are subsidizing anyone?

3. Is it fair?

4. How does/should this compare with drug sales?

5. You make a good point about "affordability."

Josh,

So is it right that the fakes work in the US, but the real thing does not? Why is that? Protection I guess?

Dan - ok, maybe 'subsidising' the sales could be a bit of an extreme take, although I don't agree that subsidising is limited to where goods are sold at less than profit. If a companies business model - that returns profits to investors - is based around an expected %age profit margin, then you could argue that as long as they are making (example) 10% net, then they're doing okay, but to make the same net profit, then they'd need to be putting out the DVD's with lower costs. Since the majority costs of a DVD are in the production costs of the movie and then add production, marketing, distribution etc, then they really can't be 'making' the DVD much cheaper for the China market - although I admit maybe marketing and distribution costs will be cheaper here and the retailer will probably expect a smaller markup in value, but probably not margin.

Assume simplistically that they sell 5000 units in the States and make $5000 profit - if they sell 1000 units in China, will they make $1000 profit? Since they'd expect to make $6000 on unit sales of 6000, then it's likely that they'd need to make $5500 profit in the States and $in China - hence the China sales are subsidised by people in the States having to pay more. Maybe not at the same time period in the life cycle of sales, but you can be sure that they're not going to reduce the selling price as quickly as they would normally since they still need to maintain profits. Ok, so that's a very bad and simplistic example, but you can see how I'm thinking, I think.

CLB: So is it right that the fakes work in the US, but the real thing does not? Why is that? Protection I guess?

I expect this is due to region coding. The fakes aren't region-coded, whereas the real thing will have China's region code, which isn't the same as the American one. Bottom line, US DVD players won't recognize legit Chinese DVD's.

Forget DVDs and jeans. I paid a year's rent in grad school by selling Taiwan jade and agate I brought back after a couple of years there. Crosses, Stars of David, bangle bracelets, earrings, that's the ticket. The only complaints I ever got were from people who didn't like the green patina left on their necks by the cheap chains they thought were gold-plated. $5 for high-class jewelry and they still griped; can you believe it? Give a guy a break.

Because the pirated DVD's are not region protected. But they don't all work in the States. If your DVD player cannot convert PAL to NTSC than some of the DVD's wont work as well.

Also, the quality of pirated DVD's are not always good and more expensive players have a difficult time reading the discs. That's why everyone in China buys local dvd players because the high-end players won't work with all discs.

Man, I've been here too long....

PiPi,

Yes, it's an opportunity cost thing. Maybe.

Zhang Fei,

Than I take the 5th.

Todd Platek,

What can I say, got to respect someone who worked so hard for that Walden University degree.

Tim,

How much do the "local DVD players cost?" I ask this because it appears All Roads and I will need to offer these too.

Josh

while I am no where near as successful in China as your former boss, I am doing alright.

My "business plan" was just a quip to show how ridiculous the pricing is and that someone will find a way to arbitrage this.

Perhaps I need to stop relying on off the wall business ideas to draw out my points, and I am glad that PiPi was there to highlight some of the flaws of this program.

I am not against anyone making money, and I am not against anyone spending it. The studios think that they can charge 20USD in the US and 3 USD in China, and all I am saying is that on a fundamental economic stand point it doesn't make sense.. and that does not even take into account the fact that US consumers are going to wake up and wonder why they are paying 17USD in margin.

There is a way to develop a market, and there is a way to protect it. The studios are historcially behind in both area and I think this pricing strategy is just another example of that.

So spot on Pipi.

and Dan.. the PO is in the mail!

All Roads,

I'll have my people talk to your people.

DVDs should cost more in the US though. At my local Target, employees start at around $9.50, with some pretty solid benefits. I figure their cost to Target is around $17 per hour. Compare that to the Chinese workers making around $17 per week. Then add in the rent, etc.

My favorite chocolate is Vlarhona from France, which costs double in Paris what it costs in Seattle, mostly because of Paris's high rents, and France's high wages. Similar dynamics I would think on the DVD front.

Dan--

I agree with you, but I suspect that you and I are not in the demographic advertisers salivate over (18-35) and who are the trendsetters for new tech nology adoption.

Let's hope that they have full-wall HDTVs for us at the nursing homes in a few decades' time...

Actually, stateside, I can download a firmware flasher region-free my DVD player.

Further, aren't DVDs extremely cheap to produce? I recall they're about a dollar each, up from 16 cents for a CD. Add packaging, distribution, and it's perfectly possible to break even or make money out of volume.

Wrong. It was Lasalle U., discovered on the inside of a matchbook cover. :-)) (Funny thing is, the diploma said Columbia U.; now that's really good value.)

Paul Denlinger,

They had better. I wanted a Blackberry Pearl, but chose not to get it when I realized I would need my reading glasses to read the screen. Deal breaker.

Instr,

Take out the licensing fees and I would guess making a DVD is more like 16 cents, not a dollar. Anyone?

Todd L. Platek,

Cali or NYC?

CLB,

Just an FYI: Time Warner has been selling legitimate DVDs at ~USD3 at dozens of shops in Beijing for many months.

Cheers, Boyce

Looked like a "u", not "o", in the name. Let me check again.