A month or so ago, a reader sent me a link to a report on Media Piracy in Emerging Economies. I was immediately enthralled. The report, put out by the American Assembly at Columbia University, “is the first independent, large-scale study of music, film and software piracy in emerging economies, with a focus on Brazil, India, Russia, South Africa, Mexico and Bolivia.” It is based on “three years of work by some thirty-five researchers,” and it argues, rather convincingly, that industry lobbying efforts to stop media piracy have largely failed because “the problem of piracy is better conceived as a failure of affordable access to media in legal markets.”
The report lists out the following “major findings,” all of which are eminently relevant for China as well:
1. Prices are too high. High prices for media goods, low incomes, and cheap digital technologies are the main ingredients of global media piracy. Relative to local incomes in Brazil, Russia, or South Africa, the retail price of a CD, DVD, or copy of MS Office is five to ten times higher than in the US or Europe. Legal media markets are correspondingly tiny and underdeveloped.
2. Competition is good. The chief predictor of low prices in legal media markets is the presence of strong domestic companies that compete for local audiences and consumers. In the developing world, where global film, music, and software companies dominate the market, such conditions are largely absent.
3. Antipiracy education has failed. The authors find no significant stigma attached to piracy in any of the countries examined. Rather, piracy is part of the daily media practices of large and growing portions of the population.
4. Changing the law is easy. Changing the practice is hard. Industry lobbies have been very successful at changing laws to criminalize these practices, but largely unsuccessful at getting governments to apply them. There is, the authors argue, no realistic way to reconcile mass enforcement and due process, especially in countries with severely overburdened legal systems.
5. Criminals can’t compete with free. The study finds no systematic links between media piracy and organized crime or terrorism in any of the countries examined. Today, commercial pirates and transnational smugglers face the same dilemma as the legal industry: how to compete with free.
6. Enforcement has not worked. After a decade of ramped up enforcement, the authors can find no impact on the overall supply of pirated goods.
I was so intrigued by the report that I asked one of its lead authors, Joe Karaganis, to do a guest post touching on media piracy in China. The below is that post.
Dan invited me to write a post about the recent launch of the Chinese translation of Media Piracy in Emerging Economies—an independent, 6-country study of piracy I directed while at the Social Science Research Council. The report is free to download, in English and Chinese, under a Creative Commons license.
There is no China chapter, per se, but there are numerous China connections and parallels Dan thought would be interesting to China Law Blog readers. I’ll provide a brief overview, and then try to draw some of those connections.
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 contexts, which are still driven by the international copyright trade associations—the MPAA, BSA, IFPI, and so on. As a result, we continue to 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 lobbied 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. 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 most 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 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 Brothers 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 that went well beyond 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 iTunes-based song pricing remained the global norm. 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 never 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?
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 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. They do all of this better than anyone else. Whether Transformers 4 is any good won’t be the deciding factor.
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 net 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 benefitted 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.